• George was more concerned about inequality than were the conservative followers of Smith, and he recognized that private property could stand in the way of truly free markets. To remedy this problem, he proposed a tax scheme that would create a system of common ownership for land.
  • With few exceptions, mainstream economists of this era assumed that the prevailing design of market institutions was working about as well as possible. If markets “failed,” the theory went, moderate regulation, based on cost-benefit analysis, would pick up the slack. Questions about inequality were largely ignored. Economists believed that because markets generated so much wealth, inequality could be tolerated; a social safety net ensured that the worst off didn’t starve.
  • Globalization and international governance institutions have become favorite scapegoats, yet no other sustainable path for international relations has been proposed. Even the best-run governments of the most advanced countries rally around the mainstream technocratic approach of the past despite its many failures.
  • Although these thinkers—whose ideas we will explore in later chapters—lived in a world different from ours, they faced some similar challenges. The economic and political system they had inherited from the eighteenth century could not keep up with changes in technology, demographics, the globalization of the time, and the larger cultural environment.
  • Yet rising inequality does not reflect only diverging wages, but the shift of national income away from wages entirely.
  • The top panel of figure I.3 shows the share of US national income accounted for by “economic profits” above what would be expected under perfect competition, profits attributable to monopoly power. Such excess profits have risen roughly fourfold just since the early 1980s, in tandem with rising inequality and declining labor share.7 These profits are overwhelmingly claimed by the extremely wealthy.
  • “stagflation” (simultaneously high inflation and unemployment)
  • 12 And it is not only labor that is underused in today’s economy. Recent research indicates that capital assets are misallocated across firms as well, in the sense that capital is not employed by the firms, sectors, or cities that could make most valuable use of it.13
  • Right-wing populist movements appeal to historically dominant population groups that have been left behind economically relative to their expectations: the poorly educated, those who live in rural areas, and workers who have lost jobs because of international trade.18
  • Many of these domestic and international political conflicts relate to the difficulty of democratically resolving issues that pit the fundamental concerns of minority groups against the less pressing interests of majority groups. These issues have important economic foundations but are often formulated in social and cultural language that clearly marks the right-wing leader as being on the side of a particular group.
  • The heroes of our story, the Philosophical Radicals, came to prominence in the face of a constellation of woes closely related to those we are seeing today. They saw aristocratic privilege restraining markets as the problem. Their goals were to free markets from the control of feudalistic monopolists whose hoarding of land impeded productivity and concentrated wealth; to create political systems responsive to popular sentiment and able to resolve internal conflict; and to establish an international system of cooperation that would benefit the general population of countries and undermine traditional elites. This is precisely the sort of movement that our present crisis calls for.
  • A modern market economy—which combines government support for trade (contract and property law) along with government protection against abuses (tort law and regulation)—generates value far beyond the capabilities of a moral economy.
  • Yet any sophisticated, large-scale market depends on well-designed and well-enforced rules of the game without which rampant theft, constant breaking of contracts, and the rule of the physically strongest would prevail. These rules can be boiled down to three principles: freedom, competition, and openness.
  • Smith saw the markets blossoming around him as not only a productive force, but also a profoundly egalitarian one.
  • They understood that economic privilege and political privilege were two sides of the same coin and thus fought with equal vigor for competitive democratic elections through the expansion of the franchise and for open borders to international trade.
  • Those liberals who prioritized free markets and efficiency over equality formed the modern political “Right” and came to be known as libertarians in the United States and neoliberals in Europe.
  • Grain is the classic example of a perfectly competitive market. No producer of grain owns a large share of the market and thus no one producer can affect the price much. In addition, because so many millers, ranchers, and bakers buy grain, no one buyer can hold down its price by withholding purchases. All must accept whatever price the market offers them.
  • We claim that market power is omnipresent and intrinsic to the current institutional structure of capitalism and that it is one of the two dominant sources of stagnequality and political conflict.
  • Data, one of the most valuable commodities in the digital economy, are collected and monetized by companies such as Google and Facebook, but the users who create these data receive no direct compensation. A much-needed market in data simply does not exist. Our supposedly perfectly competitive market economy, so it would seem, is actually plagued by monopolized and missing markets.
  • Large-scale land development controversies receive public attention, but bargaining problems like those faced by developers affect ordinary people and small businesses every day and cause trillions of dollars per year of losses that are hidden from public view.
  • Smith and other Radical reformers in Britain (such as Jeremy Bentham and James Mill) saw these privileges and traditions as barriers to achieving the most efficient use of property, or what came to be known as allocative efficiency.
  • Despite the early industrial revolution, workers’ wages in Britain remained flat from 1750 to 1850.3
  • Even after early reformers succeeded in eliminating many feudal restrictions on property, owners often refused to sell their land to people who wanted to put it to more productive use except at absurd prices, thus impeding industrialization.
  • However, a landowner can also be regarded as a monopolist because land is so often unique in its character and location.
  • As many economists have pointed out, creating large-scale enterprises consistently requires putting together a variety of moving parts, each controlled by a local monopolist.9 Entrepreneurs were frustrated by monopoly problems at every turn. If they tried to expand their factories, a landowner would hold out. If they tried to build a railroad, thousands of local politicians tried to extract a pound of flesh. Every small supplier of oil, coal, or parts would waste endless hours bargaining with them or trying to take advantage of them. Nobel Laureate Ronald Coase called these frustrations the “transaction costs of the market.
  • George’s land tax differed from today’s property taxes, which are charged at a low rate, usually 1–2%, but take as a base the full value of a home, which is usually determined by a government appraiser. On the one hand, George’s land tax would have been much higher: the full value of the rent one would have to pay to occupy the land.
  • Yet Georgism had some serious defects. Because the tax would expropriate all the value of land lying beneath any structure, it provided no incentive for possessors to invest in, or even care for, the land. This is the problem of investment inefficiency.
  • Factories are built from metal drawn from mines and, once built, may be monopolized just as much as land may be. Also, a factory cannot be easily moved about, and it may help develop a neighborhood, which increases the value of the land. This would have made it fiendishly difficult to distinguish between the value arising from the land and the value of the structures built on top of it.
  • His view was that most economic activity in capitalist economies took place in corporations and that a corporation is just a bureaucracy in which “management” at the center issues orders to various workers. From this vantage point, it was a small step to an economy in which each industry was dominated by one or two gigantic corporations, with government regulation to ensure that they do not abuse their monopoly power, an outcome not much different from the central planning of socialism.
  • Ludwig von Mises and Friedrich Hayek, who were students of the third marginal revolutionary, Carl Menger, pointed out the flaw in central planning: those who undertake it lack the information and analytical capacity to make the best allocative decisions.
  • People’s valuations are private information; the genius of the market is its capacity for disseminating this information from consumers to producers through the price system. Central planning, in contrast, results in massive misallocation of resources—the production of goods no one wanted—that was characteristic of real-world socialist economies like that of the Soviet Union.24 Moreover, centralization of the economy opened the way to political abuse, which Hayek memorably called the “road to serfdom.”
  • Most mainstream economists even today continue to assume that bargaining eliminates the monopoly problem.
  • an auction where all property—every factory, house, and car—is held in common and the right to rent and use it is constantly auctioned. The citizen who offers the highest bid (in the form of a rental payment) possesses the object until outbid by another citizen. Each factory, house, or car would have a standing highest bid placed on it, representing the rent that the current possessor agreed to pay to the government for using the asset. Anyone could beat this bid and claim the object. The money collected from rents is used to finance public goods (see chapter 2) and fund a social dividend.
  • They showed mathematically that the simplistic interpretation of Coase’s results will never hold except in the unusual case that the buyer and seller are both absolutely certain that the buyer values the asset more than the seller does. Otherwise there is no way for bargaining to overcome the monopoly problem and ensure that assets consistently flow to their best (highest-value) users.
  • A better approach is to find a way to balance the demands of investment efficiency and allocative efficiency.
  • We will call this approach “partial common ownership”—a halfway house between common ownership and traditional private property. Partial common ownership optimizes allocative efficiency and investment efficiency within a single property regime, as the common ownership can deter monopoly power while the private ownership encourages investment.
  • Under the Cramton et al. proposal, also known in legal circles as a Texas shootout, each person submits a bid for the value of the company and the higher bid wins. The winner must buy out the share of the other partner at the average of the two prices.
  • How did the Athenians determine which citizens were the wealthiest? According to Demosthenes, any member of the liturgical class could challenge any other citizen he believed was wealthier to antidosis or “exchange.”36 The person being challenged would have to either assume the liturgical responsibility or exchange all possessions with the challenger. The system gives everyone an incentive to be honest despite the burdens of the liturgy. If you falsely claimed to be poorer than the top 1,000 so as to avoid the liturgical burdens, then you could end up being forced to exchange your possessions with someone who is poorer than you are.
  • To enforce Georgist land taxation, China’s Sun proposed self-assessment.39 Normally, a homeowner pays a property tax equal to a percentage of the assessed value of his home, which is determined by officials known as appraisers. Under Sun’s system, individuals self-declare the value of their land and pay a tax equal to a percentage of that self-declared valuation, but the state could at any time take the land at the self-assessed price. When Chiang’s government, which saw Sun as the “Father of the Nation,” retreated to Taiwan, it implemented Sun’s scheme. Unfortunately, the government was rarely willing or able to take possession of undervalued land and the scheme largely failed.40
  • Harberger’s tax, later also proposed by the Nobel Prize–winning economist Maurice Allais, makes it costly to declare a high valuation and thus deter the purchase of assets. Therefore, it penalizes any attempt to exercise monopoly power over an asset.42 The higher the price the possessor demands, the more tax she must pay.
  • In fact, it can be shown that the size of the social loss from monopoly power grows quadratically to the extent of this power.
  • Because of this quadratic structure, it is always optimal to have at least a very small tax. For example, a 1% tax will hardly distort investment at all but can still significantly improve allocative incentives. The owner will self-assess with reasonable accuracy to minimize her tax bill, but she will not be deterred from making valuable investments in the property. It is typically optimal to set a moderate tax rate, below turnover rate, that balances these two forces.
  • We refer to this tax as a “common ownership self-assessed tax” (COST) on wealth. The COST on wealth is also the cost of (holding) wealth. “Common ownership” refers to the way in which the tax modifies traditional private property. The two most important “sticks” in the bundle of rights that compose private property are the “right to use” and the “right to exclude.”45 With a COST, both rights are partly transferred from the possessor to the public at large.
  • Second, and of far greater significance, consider the right to exclude. In the private property system, the owner keeps her property—which means keeping other people off her property—until she voluntarily sells it or gives it away (with some marginal exceptions). With a COST, the “owner” does not enjoy this right to exclude vis-à-vis anyone who offers to buy at the self-assessed price. In fact, any member of the public may exclude the current owner in exchange for this price. The lower the price, therefore, the greater is the extent to which the exclusion right is held by the public at large rather than the “owner.”
  • Furthermore, control of everything would be radically decentralized; a COST thus combines extreme decentralization of power with partial socialization of ownership, showing that they are, perhaps surprisingly, two sides of the same coin. Far from creating a form of centralized planning, the COST creates a new kind of market—a flexible market in uses, to replace the old market based on permanent ownership.
  • The possessor of an asset, such as a used car, often knows the quality of the asset better than a potential purchaser. The possessor may thus demand a high price for the car not only because she guesses the buyer may be willing to pay it, but also because a high price signals she is reluctant to part with it, a ploy to convince the buyer the car must be valuable.
  • Thaler found that people’s minimum willingness to pay to buy an object is usually lower than their minimum willingness to accept to part with it, even if they have never actually touched or used it. Even just owning an object in the abstract seems to make a person value it more.
  • Economists tend to neglect three other impediments to trade: laziness, incompetence, and malice.
  • The sharing economy—exemplified by Zipcar, Uber, and Airbnb—is helping to accustom us to temporary “possessing” rather than “owning,” and simultaneously consuming and selling (and hence setting a price on) the same product. However, a COST would change life radically, which is why it should be tested in limited public and commercial markets before being applied more broadly.
  • The most promising near-term application of a COST is to assets currently owned by governments and that have been or may soon be either sold off or leased to private citizens or businesses. Rather than sell off these assets permanently or lease them for fixed terms, governments could partially sell them under a license that included a COST-based license fee. The government would start by auctioning off the asset. The winning bidder would self-assess a price and pay a tax on that price. Anyone else could subsequently force a sale of the asset at the stated price.
  • But the monopoly problem has emerged in secondary markets: the companies that acquired the licenses at auction have been reluctant to sell them to higher-valued users.
  • Assigning Internet domain names and addresses is another natural application for such licenses.
  • For families in weak financial situations, such as those with negative equity in their homes or who are burdened with credit card or student debt, a COST would actually be a subsidy. Because the liability would be worth more than the asset, the individual would receive a net tax refund on her private assets, even before the social dividend. Effectively, a third of their net debt would be immediately forgiven.
  • Estimates based on current measured returns on capital imply that capital’s share of income in the United States is 30%, and that 40% of this wealth is held by the top 1%.
  • The most persistent distributive conflict in capitalist economies arises from the concentration of wealth. Because most of the returns to capital flow to the very wealthy, a broad distinction exists between those who live primarily off the returns to capital and those who live off their labor.
  • A COST would also encourage attachment to communities and civic engagement, which have sometimes been damaged by capitalism. A COST would not just broadly distribute present wealth, but also the increases in wealth that economic progress creates. As the economy grows, the revenues generated by the COST would be redistributed back to citizens, just as employees who own stock in their employers benefit when the employer’s profits increase. From Friedrich Engels to George W. Bush, commentators and politicians have argued that owning a share in the national capital stock, usually through the stock market or a home, could help stabilize politics and enhance support for policies that raise the value of the capital stock, a position supported by some research.
  • Yet the Athenians were aware of the dangers of majority rule. In one famous incident that occurred during the Peloponnesian War, the Assembly condemned to death a group of generals for failing to rescue survivors and recover the bodies of the dead after a naval victory off the Arginoussai Islands. Later, the Assembly was persuaded that a storm had prevented the generals from acting, and condemned to death the generals’ accusers.2 Events like these made many Greek thinkers deeply skeptical of democracy. They were concerned about the shifting passions of the mob and its susceptibility to demagogic leadership, as well as the disruptive power of the poor, who were in the majority, to redistribute wealth from the rich to themselves.
  • Most citizens find themselves, at one time or another, in a minority group of like-minded people: those with very important interests or preferences that are not shared by the rest of the population.
  • Federal judges are unelected and unaccountable to the public: this is what enabled them to advance minority rights in the first place, but it also put them in a precarious position in a country with strong democratic norms.
  • Yet the tradeoffs are so complex that judicial intervention often seems arbitrary. In many cases, judges appear to substitute their policy preferences for those of the legislature that enacted the law—a practice that has no justification in democratic or constitutional theory, and that is a thinly disguised form of rule by an elite.
  • The voting system is a straitjacket that throws out information. A vote can tell you only whether a person prefers one outcome to another, but not how much that person prefers the outcome.
  • Kenneth Arrow, a student of Vickrey’s, Nobel Laureate, and perhaps the most eminent economist of the twentieth century, would later formalize and generalize this argument in his famous “impossibility theorem,” showing that no voting rule in which individuals rank candidates could overcome problems of this sort.
  • Note, in contrast, that in market transactions it is possible for people to signal the intensity of their preferences for goods and services—by offering to pay more or less. This is an important reason why many economists believe that the price system allows efficient outcomes while voting does not.
  • One is strategic voting, the idea that in standard democratic systems, especially those like the US system based on plurality rule, voters tend to cast votes based partly on their desire to “make their vote count.”19 For example, in the United States, two parties prevail and voters are usually forced to support the winner of one or the other major party primary, even if they detest both candidates.
  • The most alarming example, however, was the rise of the Nazis. In his book The Coming of the Third Reich, historian Richard Evans observes that no more than 10% of the German public ever were strong supporters of the extreme right.21 Yet in the 1930 election, Hitler won an additional 10% from people who cast protest votes against a political system that they saw as corrupt and unresponsive to their needs, catapulting the Nazi party to a leading position as the major right-of-center party in the German parliament.
  • At each stage, Hitler enjoyed effective majority support from those remaining within the polity, so in some sense each purge was “democratic” even as it undermined the universalistic basis of democracy. This is the logic of political scientist Richard McKelvey’s theory of “majoritarian cycling”: majority rule with no check on the ability of majorities to exploit and repress minorities can easily degenerate into the rule of a narrow clique or even the dictatorship of a single person.
  • John Stuart went further, becoming the first member of Parliament to advocate women’s and eventual universal suffrage. Yet he too worried about tyranny of the majority, based in part on his fear that the masses of uneducated people would exercise political influence unwisely. He briefly advocated giving more votes to those with extensive education or strong interests in an issue, only to abandon this proposal as impractical because of the impossibility of determining who had this superior knowledge or interest.
  • Yet the logic of public goods is fundamentally different: rather than being allocated to the single individual who values them most, the overall level of public goods must be determined to maximize the total good of all members of society. In order for collective decisions about such public goods to bring “the greatest happiness to the greatest number,” as Bentham suggested, every citizen’s voice must be heard in proportion to how important that good is to that citizen. Standard markets will not accomplish this because those who care most will always be willing to pay more than anyone else.
  • Building on Samuelson’s ideas, economist and political scientist Mancur Olson argued that small groups of well-organized special interests can use expenditures, lobbying, and other forms of political action to persuade the government to act in their interest rather than for the public good.29 Much of the public ignores complex issues, like bank regulation, while the banks who can profit from government fund lobbying organizations that control the agenda. Many economists are cynical about collective decision-making because it seems so easy to manipulate.
  • The idea behind an auction, Vickrey realized, is not allocating the good to the highest bidder. Instead it is that each individual must pay an amount equal to the cost that her actions impose on others.
  • Similarly, in voting, you should have to pay for the harm you impose on people by outvoting them in referenda (or other types of elections) in which a collective decision is made. The amount you pay equals the amount by which your vote denies your fellow citizens the value they would obtain from the different outcome they would prefer.
  • They realized that the price individuals should pay for influencing public goods should not be proportional to the degree of influence an individual has, but to its square.
  • Another way to look at this is that, as Nils seeks larger reductions in pollution, his demands become costlier to others in two different ways. First, he is seeking a larger reduction in pollution, which straightforwardly harms others by preventing them from consuming electricity for which they would be willing to pay the cost (to everyone other than Nils). But, second, he is requesting the elimination of increasingly beneficial pollution-generating economic activity. While the costs and benefits of a slight reduction below A are perfectly balanced for those other than Nils, once pollution has been reduced by a bit, we start to approach more productive uses of electricity where the benefits significantly outweigh the costs. Thus, by seeking more reduction in pollution Nils is not just asking for more mitigation of pollution, but also costlier mitigation (at the margin).
  • It took another three decades before economists would see how these ideas could be used to design a voting system.
  • What’s important is not so much the total cost of each number of votes, but that the marginal cost of casting the next vote grows proportionally to the number of votes cast.
  • QV achieves a perfect balance between the free-rider and the tyranny of the majority problems. If the cost of voting increased more steeply, say, as the fourth power of votes cast, those with strong preferences would vote too little and we would revert to a partial tyranny of the majority. If the cost of voting increased more slowly, those with intense preferences would have too much say, as a partial free-rider problem would prevail.
  • A more fundamental issue QV raises is what notion of value or “happiness” it maximizes or should maximize. This brings us to a fundamental problem: how can we measure “the greatest happiness for the greatest number”? How is it possible to compare the happiness of one individual to that of another?
  • But more useful to political leaders in shaping their policy priorities are the battery of issue opinion surveys that try to measure public views and their intensity. The most common method is the “Technique for the Measurement of Attitudes” proposed by psychologist Rensis Likert in 1932.41 In a Likert survey, participants are asked to rate a variety of issues on a scale from “strongly disagree” to “strongly agree” or something similar. Participants can choose any point on this scale they wish. Unsurprisingly, in practice most participants in Likert surveys cluster to the extremes. Figure 2.2 shows an example. “Very strongly against” is −3 and “very strongly in favor” is 3, with more moderate opinions arrayed in between. The distribution of responses displays a characteristic “W” shape, with most participants clustering toward the extremes, some expressing indifference, and few in between. Most researchers agree that the W shape does not display the true distribution of preferences, which in reality is most likely a bell-shaped or normal curve.
  • QV offers a solution to this problem. Rather than allowing respondents to freely express any position they wish, a poll based on QV endows each participant with a budget of voice credits and allows her to spend the credits on the range of issues available as she wishes. We have patented the use of QV and related methods to solicit opinions digitally.
  • Participants start with a pool of credits and may use them to “buy” as many votes as they wish in favor of or against each issue. The cost in credits of votes is, of course, quadratic. While this relationship sounds abstract and complex when described mathematically, it is simple and intuitive for most users when engaged in this visual and tactile manner: participants see their credits dwindle at an increasing rate as they express opinions. Even math-phobes are able to navigate the system smoothly.
  • Two things are noteworthy. First, QV produces a roughly bell-shaped distribution, the sort of distribution of responses that characterizes most individual preferences. The QV results are thus much more plausible as a representation of population preferences than is the artificial W shape from Likert.44 Second, while Likert conceals the range of intensity of preferences by grouping all, or nearly all, of the responses at the extremes, QV reveals these gradations. QV shows, for example, the greater intensity of preferences for repealing Obamacare, compared to those for retaining it, which helped fuel the success of Republicans in the 2016 election.
  • Yet a growing body of evidence suggests these systems are badly broken. As noted above, almost all reviews cluster toward five stars, and a few at one star, making the resulting feedback biased and what statisticians call “noisy,” that is, not very accurate.47 Other online platforms, such as Facebook, Reddit, Twitter, and Instagram, gather limited information because they only allow “likes,” and other limited forms of response, rather than allowing participants to exhibit exceptional enthusiasm, or distaste, for particular content.
  • Representative institutions face the same problem of preference aggregation that exists in the referendum-style votes.
  • The survey application of QV does not allow a full expression of preference intensity because there is no way for participants who care about all the issues more than other people to reveal this fact. Some people don’t care much about politics, others care a lot. The latter group might be willing to give up something else they care about—money, for example—in order to have greater influence than the first group. But the survey doesn’t allow this.
  • But that understates the economic benefits. Despite centuries of progress, markets for public goods are hopelessly deficient. If we are right about QV, then it should bring markets for public goods in line with markets for private goods, with incalculable benefits for all citizens.
  • A political culture based on such a market mentality could give people a stronger sense of dignity and responsibility in politics.
  • Mercantilists believed that sovereigns should try to sell goods abroad while importing as little as possible, allowing them to accumulate capital, ideally in the form of hard currency.
  • During the late eighteenth century, many of the Radical thinkers we discussed in earlier chapters developed a new theory of trade. Bentham, Smith, and David Hume shifted the focus of economic analysis away from the interest of sovereigns in accumulating wealth and toward the desire of ordinary people to enjoy prosperity.
  • One reason for the emphasis of trade over migration was that in the eighteenth and nineteenth centuries, the gains from trade were far more important than the gains from migration. The reason is that while different nations went through periods of relative prosperity and decline, persistent differences in mass living standards across countries were unknown until the late nineteenth century.
  • Inequality across countries increased from about 7% in 1820 to about 70% in 1980.
  • Together these patterns imply that inequality across countries has gone from a relatively insignificant phenomenon in the grand scheme of global inequality, accounting for only a little more than 10% of global inequality in the 1820s, to being the dominant source of global inequality, accounting for two-thirds or more in the second half of the twentieth century and still today accounting for 60–70% depending on whose measurements you rely upon.
  • Theirs was a world in which migration did most people little good; ours is one in which migration can be a primary route to well-being and prosperity for most people in the world.
  • No one benefited from moving from one country to another if he or she was a proletarian or landless peasant in both. Second, migration was relatively unrestricted across countries, and controls upon it were scarcely enforced since there was little demand to migrate and because the primitive, risky, and uncomfortable nature of transportation at the time deterred all but the most desperate or ambitious.10 Third, free trade across countries could break the monopolistic control of landlords over crucial national resources, greatly enhancing national wealth and shifting its distribution from the feudal aristocracy to capitalists and laborers.
  • In Europe, migration between EU member states was institutionalized. Citizens were permitted to move to any member state for a job. But the law did not produce as much migration as was hoped. Linguistic and cultural barriers kept most people at home, and income differences between European countries were modest by global standards, reducing the incentive for migration.
  • There is a consensus that the economic gain from further opening international trade in goods is minimal. Studies by the World Bank and prominent trade economists find that eliminating all remaining barriers to international trade in goods would increase global output by only a small amount, 0.3–4.1%. For global investment, the most optimistic estimate in the literature finds a 1.7% increase in global income from the elimination of barriers to capital mobility.
  • It is thus natural that trade and migration should both benefit capitalists in wealthy countries and laborers in poor countries at the expense of laborers in wealthy countries and capitalists in poor countries.
  • Together these considerations mean that few native workers see large, direct benefits from high-skilled migration.
  • Workers in such areas see migration adding to economic vibrancy in other communities, but not in their own.
  • In an insightful 2010 lecture, the late Nobel Laureate Gary Becker proposed a simple auction-based system for migration: set a quota for migration and auction off the rights to enter the country to the highest bidder.30 The revenue raised by this Radical Market could be used to fund public goods or a universal social dividend, as we saw with common ownership of property in chapter 1.
  • Our proposal, which we call the Visas Between Individuals Program (VIP), would extend this system so that any ordinary person could sponsor a migrant worker, albeit with some adjustments to reflect the difference in circumstances, and for an indefinite period rather than a renewable three-year period.
  • For this system to work, the law must make two further adjustments. First, migrant workers must be permitted to work for below the minimum wage.
  • Second, immigration enforcement would need to be strengthened.
  • Many people may object to this system. Perhaps to some readers it is uncomfortably similar to indentured servitude, even though migrants would be free to leave at any time. Or perhaps it just seems exploitative. But our proposal is continuous with existing programs that are broadly accepted.
  • Localities should be allowed to put limited constraints on their residents’ use of the VIP program, akin to zoning regulations. We might predict that some communities will prefer a higher level of openness and impose no or few restrictions, while offering amenities that attract foreign migrant workers.
  • In this spirit, it might be natural to pilot VIP in a community that would act as a “special economic zone,” using the program as a way to revive a currently depressed area and to investigate its potential advantages and drawbacks without disrupting a whole community.
  • Workers are most vulnerable to exploitation when their employment options are limited or they operate as illegal immigrants, outside the protection of the law.
  • The migration systems in the UAE, Qatar, Kuwait, Bahrain, Oman, and Saudi Arabia (countries of the Gulf Cooperation Council, or GCC) are often criticized, but they tell an interesting tale. Where the United States has roughly nine natives for every foreign-born resident, the ratio in the UAE is reversed.
  • All of these countries have migration systems designed for the benefits of migration to be broadly shared among natives rather than exclusively accruing to a small group of geographically concentrated capitalists, entrepreneurs, and high-skilled workers.
  • Factories that have moved abroad could return, offering new jobs for natives, if abundant migrant labor were available, as a political party in Australia led by Nick Xenophon has argued in recent years.
  • In some ways, the effects of large-scale migration as we envision it would be similar to those of women’s entry into the labor force over the mid-twentieth century, as economist Michael Clemens argues in a forthcoming book, The Walls of Nations.34 Yes, women competed with men in the workplace, causing some dislocation and resentment. But because most men had close relationships with women, as fathers, husbands, brothers, and sons, they benefited from greater opportunities for women more than they were harmed at work and thus were reconciled to the additional competition. At the same time, while sexism persisted, a growing professional presence for women began to break down stereotypes and patriarchy.
  • Probably the most important concern is that VIP would increase inequality in host countries. Host country middle and working classes would benefit, while a new class of very poor (by American standards) migrant workers will form a new subordinate class, which might seem intolerable under liberal norms.
  • It would merely make more visible the inequality that is currently obscured by national borders.
  • Evidence from sociological and economic studies of migration indicates that when migrants have the option, most prefer temporary migration for work in circular patterns over permanent migration.
  • Third, while inequality within the United States might rise (reflecting the lower wealth levels of the foreign workers), both inequality among US natives and global inequality will decline.
  • Fourth, we need to acknowledge that we in the United States already have a subordinate class of low-wage workers—they are illegal aliens. Americans have exploited this class for decades, and it has for those decades been tolerated by the US government because of its importance for many industries.
  • In our experience, most people living in wealthy cities who consider themselves sympathetic to the plight of migrants know little or nothing of the language, cultures, aspirations, and values of those they claim to sympathize with. They benefit greatly from the cheap services these migrants offer and rarely concern themselves with the poverty in which they live.
  • These features give the impression that these institutions play no active role in guiding the economy.
  • Yet 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.
  • In 1890, Congress passed the Sherman Act to forbid (among other behavior) “combinations in restraint of trade.”
  • they also could spread the fixed costs of production over many more consumers because of their vast scale, resulting in lower prices, and eliminate local monopolies by buying up land and local business monopolies in what economists call “vertical integration.”
  • The original Clayton Act tried to stop concentration by prohibiting firms from buying the stock of other firms.
  • Yet, as Berle and Means pointed out, “ownership” of a corporation was very different from ownership of ordinary property. If you own your car, you both control it (by driving and parking it) and enjoy the right to profit if it is used by others (if you rent it or sell it). In the case of a large corporation, millions of owners exist. Who, in fact, controls it?
  • Nowadays, most people realize that stock ownership is beneficial only because it gives you the ability to enjoy gains in the market without paying attention to it.
  • The separation of ownership and control gives rise to what economists call “agency costs.” The agent—here, the CEO—does not necessarily act in the interests of the principal—the collection of shareholders. She might instead use the corporation to enrich herself (for example, by overpaying herself, causing the corporation to purchase a jet so that she can have access to it, and so on), or she might just be lazy. The development of stock markets gave investors the power to obtain liquidity, but the price to be paid was loss of control—agency costs.
  • The logic of shareholder capitalism suggests that investors wish to do as little work as possible while gaining a maximal stable return. Starting in the 1950s, economists developed financial ideas that came to be known as “portfolio theory” based on these principles.
  • The so-called efficient capital markets hypothesis emphasized that anyone trying to pick an “undervalued” stock is deluding herself.
  • The overall effect was that institutional investors, which controlled these funds, became the largest owners, and thus the largest controllers (at least in principle), of the major corporations.
  • finds that where institutional investors own substantial stakes in airlines, prices are higher for routes where those airlines compete than for routes where they do not. Overall, they find that airline prices are 3–5% higher as a result of the anticompetitive power of institutional investors. They
  • A simple but Radical reform can prevent this dystopia: ban institutional investors from diversifying their holdings within industries while allowing them to diversify across industries.
  • Under our scheme, institutional investors face a tradeoff. They can be small and fully diversified—within as well as across industries. Or they can be large and partially diversified—not within but only across industries.
  • 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.
  • Facebook, for example, pays out only about 1% of its value each year to workers (programmers) because it gets the rest of its work for free from us! In contrast, Walmart pays out 40% of its value in wages.
  • data are much more like capital than labor: they are a naturally available resource, harvested from the public domain (where they are freely available), and transformed into something useful only by the hard work of programmers, entrepreneurs, and venture capitalists who then deserve to own the data.
  • Adam Smith’s classic “diamond-water” paradox. Smith found it paradoxical that water was so valuable in use and yet had little value in exchange, while diamonds have such limited uses and yet have great value in exchange.
  • argued that the exchange value of a good is determined by the marginal value of the last unit of a good available, rather than the average value gained by its consumption.
  • We suspect something similar is true of ML. While additional data may not improve some services that have matured (like selecting movies you like), the same data may improve other services that are at an early stage (virtual reality, speech translation). In many cases the more complex and sophisticated services are more valuable. This is shown in figure 5.5, where the value gained by later services is greater than the value gained from earlier services. If this is true, then data may actually have increasing rather than diminishing returns, as more data allow for the solution of more complicated and more valuable problems.
  • Siren servers go to extraordinary lengths to hide the role of human data work in producing their “magical” services, to the point where efforts to expose this work have become something of a social movement among Internet workers’ activists,
  • For example, Google quietly subcontracts more than 10,000 human raters to give feedback on the quality of its search results in cases where organic user feedback is insufficient, yet it took investigative reporting to uncover this practice.
  • First and most basically, the market power (what economists call monopsony or oligopsony power) of siren servers means that any change to the market which causes users to be paid for their data will increase the siren servers’ costs.
  • Third, despite media accounts about the data economy, most users are still unaware of the value companies harvest from their data.
  • Several years ago, when Microsoft experimented with paying users for their data, large numbers of bots sprang up to exploit the system and extract large amounts of money without providing value to the company.
  • Marx claimed to identify a necessary tendency of capitalists to “exploit” workers by holding their wages below the value they generated. Marx argued that these labor practices created what his collaborator Friedrich Engels called a “reserve army of the labor” (that is, a class of unemployed) whose even more squalid condition would persuade workers to do anything to maintain their jobs.
  • It may be time for “data workers of the world (to) unite” into a “data labor movement.” A striking feature of the data labor market is that it is an international market, one that is almost completely unaffected by borders and government regulation. Once people awaken to their role as data laborers—obtain a “class consciousness,” if you will—organizations (sort of like unions) may emerge to supply data laborers with the means to engage in collective action.
  • We reject the assumed tradeoff between productivity and employment underlying the debate. Market power is fundamental to our view of the economy and market power simultaneously retards productivity and depresses employment. Hoarding of property away from its most productive uses creates unemployment but also reduces economic growth. Monopsony power, whether created by institutional investors or by natural monopsony in data economies, induces artificial unemployment to hold down wages and devalue work. Exclusion of the workers of poor countries from the opportunities in rich ones lowers global productivity and may reduce work opportunities overall by spurring automation. Anemic employment and low productivity growth result from institutional failure rather than changes in technology.