The Nature of Money
Commerce is not a function of government, and if money had nothing to do with power, there’d be no need for much government involvement in commercial affairs. But money and status turn into each other so fast that regulation is essential to keep it in its place. That place, furthermore, is limited to things that can be sold. It’s not selling everything that can be turned into money. A few steps will show why this is so.
Money properly plays a role only to enable the transfer of measurable goods or services. Vegetables harvested, hours worked, court cases argued, or websites designed, these are things that can be measured and priced. Each of them also has intangible qualities, which can be what gives them their value as opposed to their price, but they do have significant measurable components.
In contrast, one has to struggle to find any way to measure those things which are mainly intangible, and any measurement never captures what’s important about them. It’s the usual list of all the things that really matter: love, truth, beauty, wisdom, friendship, happiness, sorrow, justice. There is no way to squeeze money out of the priceless. That’s a binary system. It’s either priceless or worthless, and monetizing it only turns it into trash. Keeping money out of where it does not belong is more than a nice idea. It’s essential for a sustainable society because nothing lasts long if it’s worthless.
A second vital aspect concerns what money actually is. When you come right down to it, money is a measure. It measures goods to make it easier to exchange things. That’s all. It might as well be a ruler, except that nobody has ever died for a lack of inches. But that says more about what people do with it than what money is. The fact remains that money is simply a measure.
As such, money ought to share the characteristics of other measuring devices. One centimeter is always the same, for rich and poor, now and a thousand years from now, and whether it’s used in London or Lagos. However, unlike inches or minutes, the stuff money measures grows and shrinks from year to year. Wealth can fluctuate, so measuring it is much more of an art than a science. Economists have developed deep and sophisticated ideas on how to practice that art, so there are ways to approximate the ideal of a consistent measurement even if it can’t be perfect.
Besides fluctuation, there are other reasons why one might not want to keep money perfectly consistent. Another way to describe consistency is that there should be neither inflation nor deflation. A dozen eggs now should cost the same as they did in 1750. The very idea sounds funny because the situation is so far from actual events it’s near-inconceivable. But only something real can grow (or shrink) like that. It’s quite possible to start with one tomato and end with dozens a while later. But money isn’t like that. A bigger pile of money does not change the pile of tomatoes in any way. Or, to put it more generally, a bigger pile of money doesn’t change actual wealth. Neither gold nor paper nor conch shells will keep you alive. Only what money buys, that is, what it measures, can actually increase wealth. However, because of the confusion of ideas, an increase in inflated money can feel like an increase in wealth unless its inability to buy more is particularly stark, as in hyperinflation.
Inflation is therefore very handy as a feel-good mechanism. It’s not just politicians who use that fact. Almost everybody who can will charge more for what they’ve got if they can get away with it. There are ways to counteract that tendency, such as optimal competition, cost information, overall money supply, and other factors that economists can tell us a great deal about. The main point is not that there are things we can do, but that it’s essential to recognize how strong and how universal is the desire not to do them. That desire needs to be explicitly and constantly counteracted. Otherwise money ceases to be a measure, which is the only function it can perform to good ends, and becomes a tool of control.
Tangentially, I have to discuss the concept in economics that a basic level of unemployment is necessary to keep inflation in check. There is even an acronym for it I gather from reading one of my favorite economists: the NAIRU, the non-accelerating-inflation rate of unemployment. It’s axiomatic that without enough unemployment (how much is subject to debate) the wage-price spiral starts. In other words, unless enough people are flat broke, other people will raise prices. The fact that the system depends on a class of people with less access to life, liberty, and the pursuit of happiness doesn’t get much discussion.
That is not acceptable if all people are equal. A fair system simply cannot depend on some people being less equal than others. The demand side of inflation can be influenced by competition, by price information, and by any number of other measures that can be applied equally to everyone, but it cannot be influenced by the involuntary poverty of a few. Personally, I don’t believe that poverty is the only way to control inflation, that it’s impossible to find a balance between equal competing interests, and I do believe that it’s up to economists to work out new methods compatible with consistent rules.
However, if my intuition is wrong, and poverty really were to prove essential, then it has to be voluntary poverty. If people making less than X are essential to the system, then it’s up to society as a whole to facilitate their function. The government provides the meager annual income to the proportion of people required, and in return for having only the bare minimum to survive, those people don’t need to work. It may be that faced with the alternative of a whole cohort of people who get a “free ride,” (the quotes are there because poverty is never a free ride) there will be more motivation to work out a system that doesn’t require poverty.
There are also real, i.e. non-inflationary, reasons why prices change. We have much better industrial and agricultural processes now than in 1750, which makes the price of eggs on an inflation-adjusted scale much lower now than then. (We’ve also gone overboard with factory farming, but even with good practices, food is now proportionally cheaper than it was then.) Further, there may be completely new things that need measuring. In 1750, you couldn’t buy a computer at any price.
Given that money is a measure, it’s idiotic to run out of inches, as it were, when the underlying wealth is there. And yet that was the trap countries had to climb out of in the 1930s when they were on the gold standard, but didn’t have enough actual gold to measure their wealth. In what was recent history at the time, major countries such as Germany and Russia had struggled with hyperinflation, and a strict gold standard was intended as a “never again” law. It worked as far as it went. But without an explicit understanding that inflation was not the problem, unreliable measurement of goods was, they fell into the opposite error and allowed deflation to develop.
In the details, using money as a measure is hugely complex. “Running out of inches” can happen when there aren’t enough “rulers,” and also when the existing money is hoarded instead of used. Psychological factors — which are the worst kind — can be at work, or it can be a simple matter of the reward structure. For instance, in our current economic crisis, governments narrowly averted deflation by pouring money on the world’s financial systems. (They didn’t do it fairly, sufficiently, or well, but they did do it.) Logically, that money should be bubbling up through the system at this point (late 2009). Instead it’s sitting in banks because the executives’ jobs depend on their banks staying in business, and their primary concern right now is surviving an audit by having adequate capital reserves. So instead of lending, they complain about bad credit risks and sit on the money. Had a given level of lending been made a condition of aid, in other words if the reward structure was different, then bankers would have had to continue improving their balance sheets through their business rather than taxpayer funds.
The complexity is at least as intricate when merely trying to define inflation. It’s easy to say eggs should cost the same everywhere and everywhen, but to someone who doesn’t eat eggs, their price doesn’t matter. This is nontrivial. One of the big complaints about measures of inflation, like the Consumer Price Index, is that it’s out of touch with reality. College tuition costs skyrocket, medical costs skyrocket, and the CPI barely moves. That’s because those costs are mostly not part of the CPI which assumes, for instance, that college is optional. That’s true, on one level, but if you’re paying for it, it’s not true on another level. True measures of inflation — and their corresponding corrective measures — would have to take the diversity of needs and goals into account. One number can’t encompass the different reality felt by people in different walks of life. The point is that none of them should have to contend with money changing in its ability to measure the goods and services they need. Fairness, after all, is for everyone. The calculations must reflect reality. Reality won’t dumb itself down for convenience in calculation.
The complexity can be addressed if economic policy is explicitly geared to making sure that everyone’s money buys the same today as it did yesterday. Economists are very good at math. If the goal is clear, the complicating factors can be identified, and the calculations performed. Economists are not so good at answering the philosophical, psychological, and sociological issues that have to be resolved correctly first, before the complex calculations can serve a good purpose.
Getting back to some of those philosophical issues, the unexamined assumptions about money have enormous impact on daily life. Money is familiar stuff and we take it for granted. People don’t worry about whether their attitude toward it makes sense in light of what it actually is. Judging by results, that’s no less true of treasury secretaries, economists, and giants of finance than it is of Jane and Joe Schmoe. It may not matter whether ordinary citizens understand what money is, but the unexamined assumptions of policy makers affect the whole world.
The fundamental error is thinking that inflation or deflation are only economic issues. They aren’t. Money is a measure, and that makes its constancy a matter of fairness. Economics comes into it to figure out the numbers conducive to that goal, but economics, like science in the parallel situation, can’t determine purpose. Because it’s convenient to forget that, or because it simply isn’t thought through, there’s a sense that money follows its own rules and all we can hope to do is steer it. That’s absurd. Money is not a force of nature. It is a human construct, and its effects flow from human actions and regulations. They need to flow fairly, not as methods of covert control or as chaotic corrections against past errors.
Money as measurement has another far-reaching implication. Paying interest on money in and of itself makes no sense. It would be like adding inches to a ruler merely because it had been used to measure something. The inches would change size and the ruler would become useless.
People can be paid some proportion of the new wealth created by the use of their money, and they can be paid for the risk of losing it, but it makes no sense to pay for the money itself. Those aren’t new thoughts and paying for risk or new wealth are the accepted justifications for charging interest. And yet it’s so easy to become accustomed to paying tribute to power that nobody measures interest rates by objective standards. How much wealth was created can be approximated, and the same for how much risk was incurred. And yet the only accepted controlling factors on the price of money are supply and demand. Which ends only in those with the supply making all the demands. There’s nothing “free market” about that.
Before anyone objects that supply and demand are the only controlling factors that work, I’d like to add that supply and demand are steerable. Governments currently control interest rates through money supply and the interest they charge on funds available to banks. I’m not sure why the government’s function as a flywheel is only legitimate when applied to the biggest players. It could apply to everyone. An intractable problem of overcharging that isn’t solved by active promotion of competition would definitely melt away if the government provided a fairly priced alternative. Anyone who doubts the effectiveness of such actions need only watch the panic among the US health insurance industry at the thought that the government might provide a fairly priced insurance option. Politically motivated or unrealistic price controls are not effective for long, but that doesn’t mean prices can’t be steered within fair and realistic limits.
At the extremes of high interest, there is a sense that gougers are taking advantage of the situation. That’s led to usury laws and, in the extreme case, the Koranic prohibition against interest generally. Although it’s the right idea, what both approaches miss is that the problem isn’t interest. The issue is that money is a measure and that interest works only inside that paradigm. Allowing interest charges outside of those limits isn’t just a problem of some people cheating other people, it isn’t merely an aberration with no significance for the integrity of the system. It subverts the real purpose of money for everyone and therefore results in unsustainability.
At the heart of every endeavor involving money lies the exciting skill of accounting. Seriously. Without the invention of double entry bookkeeping in the Middle Ages, the scope of capitalism would have been limited to what you could keep track of in a checkbook. I’m joking only a little bit. By and large, that’s true. How money is accounted for is central to using it, so if we can get the accounting right, misuse of money can be much less of a problem.
On a simple level of personal fraud, the need to prevent misuse led to the invention of accounting. But correct accounting can also prevent much more generalized fraud. That’s important because activities related to making money inherently run on self-interest, and self-interest has the property of maximizing gain by any means available. Capitalism is the economic system that, so far, lets the most people work according to the natural template, and so capitalism works. All that remains is to make it work well.
Accounting is the tool that can do that. Consider, for instance, one of the worst side effects of an economic system founded upon the pursuit of self-interest: the tragedy of the commons. The term comes from the common land in villages where everyone could let their livestock graze. That way even landless peasants didn’t have to live solely on cabbage and gruel. Since it belonged to nobody, nobody took care of it, and it became overgrazed and useless, especially after infant mortality decreased and the number of peasants grew. The same process can be seen everywhere that “free” and common resources are used, whether it’s air, oceans, or geostationary orbits. The economists call these things “externalities” because they’re external to the transaction. They affect someone other than those buying and selling, and they don’t need to be booked on the balance sheet.
The thing is, what’s on the balance sheet is a consequence of the established rules. There was a heartwarming can-do article about North Ivory Coast in early 2010. Rebels held sway there, and they kept the cooperation of the population by charging no taxes. So, in North Ivory Coast, taxes (and everything they buy) were an externality, and people worried about how to get the traders to accept a more “normal” system after reunification. In the same way, people everywhere else worry about how to get corporations to pay for the downstream costs of their business. The only difference is we’re used to taxes being on balance sheets, and we’re not used to putting social costs there.
Neither is impossible. It just gets done. Governments pass laws that people must not hold slaves, and legal businesses stop holding slaves. If taxes have to be paid, taxpayers do so. If corporations are required to contribute to retirement or unemployment insurance, they do so. If they’re not required, those things turn into externalities overnight. All of these things are not physical laws. They’re rules made by people, and they can be changed by people with the stroke of a pen.
To avoid the tragedy of the commons, the only change needed is to move to accounting that books the total cost of ownership. All the costs of a product, including the downstream costs usually passed on to others, have to be included in the balance sheet. There can be no externalities. It’s the “you broke it, you pay for it” principle. That’s only fair. Money to deal with downstream costs has to be paid into a fund that will deal with those costs when they come up.
The beginning of implementation of that idea is already happening, but a lack of transparency and accountability makes it very weak. Nuclear power plants, for instance, pay into a fund that is supposed to cover decommissioning costs. The amount has been estimated based on industry information rather than actual data from the few small or partial decommissionings there have been at this point, so the costs are underestimated by an order of magnitude or so. Including total cost of ownership is meaningless if it is allowed to turn into a charade. If transparency and accountability are not sufficient to force companies into honesty, then additional methods must be found and applied. The point is that there must be a total cost system, and that it must be fact- and reality-based.
As with all things, the details are complicated. Perhaps the most complicated of all is how to put an estimate on future costs, and how to delimit where a business’s responsibility ends. But those are not new issues. They’re solved daily by companies and governments everywhere. Something like good will is a more nebulous entity than anything discussed here, and yet that’s regularly priced when companies are for sale. The only thing that’s new is that costs which are currently not on the books have to be put there.
Downstream benefits can be an externality just as costs are, but it’s a much less common problem. Most such activities are already public or non-profit with government support, so the beneficiaries have already contributed payment for their future benefits. An example, though, of companies who don’t see rewards commensurate with the benefit they provide are vaccine makers. Whether that recognition is best given in the form of favorable tax treatment or by some other method, there needs to be some way of returning some of the benefit to those creating it.
External benefits are not a parallel situation to external costs. There is nothing to be fixed, so there is no price tag on the future. The benefits often come in intangible form — good health, for instance, is priceless — and there would be no way to return the full benefit to the company. Furthermore, the people in the company already benefit from living in a society where such intangibles are common. So, in important ways, they’re already repaid. That’s why external benefits can only receive token recognition, but insofar as they exist, that recognition should exist as well.
The other major flaw endemic to a system based on self-interest is that there is almost no long-term planning or overall coordination. Those things are supposed to emerge organically from the properties of the market, just as the resilience of ecosystems emerges from individuals’ self-interested effort to survive. When the desirable emergent properties don’t appear, economists speak of market failure.
By now, the market is failing the whole planet. The assumption has been that market failures are exceptions or something that happens at the limits of the system where some deficiencies are unavoidable. But the failures happen so consistently and with such vast consequences that it’s necessary to consider whether there’s a fundamental misunderstanding of what markets can do.
The analogy between markets and natural systems isn’t simply imperfect, as all analogies must be. It is downright wrong. Markets have a structural feature not seen in natural systems: their components are self-aware, able to envision goals, and able to alter their behavior based on those goals. That is a game-changing difference, and means that none of the models useful in natural systems, not even the most complex, can be applied to economics without drastic revision and the addition of several new variables.
Economists think they are modeling a croquet competition, as it were, and have complex calculations of the force of the mallet hitting the ball, trajectories, wind speeds, athlete fitness, and on and on and on. But the game they’re really modeling is the one the Queen ordered Alice to play in Wonderland where the ball was a hedgehog and the mallet a flamingo that had to be tucked just-so into the crook of her arm. By the time she had the flamingo adjusted, the hedgehog uncurled and ambled away. When she recovered the hedgehog, the flamingo twisted up and fixed her with a beady glare. The pieces don’t stand still in economics, and they all have a mind of their own.
That’s an old idea by the way, even though much ignored. For instance:
“In his 1974 Nobel Prize lecture, Friedrich Hayek, known for his close association to the heterodox school of Austrian economics, attributed policy failures in economic advising to an uncritical and unscientific propensity to imitate mathematical procedures used in the physical sciences. He argued that even much-studied economic phenomena, such as labor-market unemployment, are inherently more complex than their counterparts in the physical sciences where such methods were earlier formed. Similarly, theory and data are often very imprecise and lend themselves only to the direction of a change needed, not its size.” (Hayek, Friedrich A. “The Pretence of Knowledge”. Lecture to the Memory of Alfred Nobel.)
Expecting emergent properties to work for the best in a system whose participants are self-aware and able to use those properties for their own purposes is a fallacy. It serves the interests of those who’d like to take advantage of the system, but that doesn’t change the fact that it doesn’t work.
What does work for self-aware participants who can modify their behavior is rules that apply to everyone, with rewards for abiding by them and punishments for transgressions. That type of regulation is the domain of law, not commerce. The rules need to favor long range planning. Using total cost is one such rule. Transparency and the ability of affected people to alter outcomes are another two. Accountable regulators who can be unelected are yet another.
The forces for beneficial outcomes have to come from outside the market. Those outcomes cannot be an emergent property of markets. They may happen occasionally by accident because markets don’t care either way, but they’re not going to happen regularly or even often. Applying the right laws is what will lead to the most vigorous markets with the most generally beneficial effects.
Again, these are things everyone knows even if they’re rarely articulated. The proof is in how hard people with market power work to make sure none of those rules can take hold. The problem always comes back to undue concentrations of power and the difficulty of doing anything about it for the perceived immediate payoff. As I’ve said before, I don’t have new solutions for how to wrest control back after it’s been lost, but I do think it points up how vital it is to prevent such concentrations to begin with.
Preventing concentrations of market power is as important a function of government as the maintenance of a fair monetary system. I’ve touched on it in the sixth chapter under Government 2: Regulation. Current practice already recognizes that extreme concentrations benefit only a few at the expense of everyone else. Economists even view unbalanced market power as a symptom of market failure. Given that they know it’s a malfunction, you’d think they’d be more concerned about why it’s so pervasive.
And pervasive it is. For a quick selection of anti-competitive practices here’s a list from Wikipedia: monopolization; collusion, including formation of cartels, price fixing, bid rigging; product bundling and tying; refusal to deal, including group boycott; exclusive dealing; dividing territories; conscious parallelism; predatory pricing; misuse of patents and copyrights.
It reads like a summary of the high tech business model. There’s a reason for that. In the interests of giving US businesses a leg up against their foreign competitors, the US government ignored most of their own antitrust law. Biotech, electronics, and software, all the new industries of the last few decades, have been allowed to operate in a free-for-all with the usual results. There are now a few behemoths who spend most of their time squelching innovation, unless they own it, and overcharging for their products. The easiest example is the telcos, who were more regulated in Europe and Japan than in the US. In the US, average broadband download speed in 2009 is said to be around 3.8mbps and falling, whereas in Scandinavia it’s around 5mbps. (I say “said to be” because mine is less than 1mbps.) Cost of broadband, however, is similar or cheaper in the countries with faster speeds. Average phone service cost in the US is around 75c per minute. In contrast, the Scandinavian rates are less than one-fifth that amount. If the more-regulated European telcos could compete in the US, how long do you think the coddled oligopoly here would last? A relatively new method of squelching competitors is using the law, such as patent law, to subvert the laws on competition. There is nothing in antitrust laws preventing much larger companies from tying up their competitors in lawsuits, which, because money is a factor, hurt small players much more than large ones. Instead of competing on price and performance, companies compete on lawyers, defensively filing for as many patents as possible. Then when the suits start, one can countersue with one’s own arsenal. There’s even a new term to describe companies whose entire business model is extortion using the law: patent trolls. The market no longer works to provide good products at the best price. The law no longer works to provide equal justice for all. And the situation continues to devolve because doing anything about it is an uphill struggle against some of the largest corporations in the world.
As I’ll argue in a moment, I see strict enforcement of competition as the primary tool to prevent excessive market share. However, the evidence shows that significantly larger size than competitors, by itself, is enough to tilt the playing field. So fallback rules to restrain size are also necessary in case competition can’t manage the task alone. Whenever there’s talk of using more than competition to restrain business, a typical set of objections emerges.
One of the commonest arguments against down-regulating a company rapidly acquiring majority market share — at least in the US — is that the others are losing out because they just don’t compete as well. Suppressing the winner only enables inefficient producers. Free marketeers make the same argument in each new situation no matter how often concentrations of market power lead to inefficiency. They pretend that a snapshot in time of a vigorous growing company is indicative of how that company will behave once it has dominance. It doesn’t seem to matter that there’s a 100% consistent pattern of using dominance to throttle competition instead of increasing innovation. Promoting market power in the face of that evidence is neither rational nor sustainable. It is competition that leads to vigorous competitors, not the lack of it.
Another argument is that cost of intervention exceeds benefits to consumers, so using the total cost approach that I favor so much, it does more harm than good. However, I’ve never seen this approach applied to the real total cost. It’s applied to the snapshot in time where, right this instant, Widget A would be X amount cheaper for consumers, but the cost to the government and industry in implementing the change would be more-than-X. It’s irrelevant to them, for some reason, that in a few years when the company in question is too big to control the price will go up and stay there. Plus it leads to an even bigger loss of value as innovation suffers. (Just as one small example, consider cell phones in the US, yet again. We could, at this point, all have phones that move seamlessly between voip, wifi, and cell, that use voice-to-text and visual voicemail, and we could have that at a small fraction of the costs we pay. We don’t because the four large companies that own the US market don’t have to compete against anyone who would provide it, and this way they can feed in useful features as slowly as possible.) A real total cost approach would take into account the vast downstream effects, and thus would never provide a justification for unlimited, cancerous market growths.
Free market proponents also object to “restraint of trade,” as if that’s a bad thing. On some level, it’s essential because market motivations don’t relate to larger or long term social benefits. However, even free marketeers see that. All except the wild-eyed extremists understand the need for some antitrust, pro-competition regulation. The very heart of capitalism, the stock and commodity markets, are the most stringently and minutely regulated businesses on the planet. (That doesn’t stop anyone from trying to work each new loophole as it comes up, such as high frequency trading, which proves how essential unflagging regulation is.)
But there’s also another, and larger, point about restraint of trade. Markets are just as capable of it as governments. Restraint by market participants isn’t somehow better than government restraint, even though it has no softhearted good intentions. It’s precisely to prevent market restraint that government restraint is necessary. Interestingly, the loudest objections to government involvement generally come from those who hope to take advantage of their market position.
All that said, the opponents of market restraint do have a point. Restraint as an attempt to manipulate the market is not valid no matter who does it. It can only be used to keep the field level.
That implies protectionism, as one type of market restraint, should never be applied. By and large, that’s true, but only when protectionism is correctly delimited. Equalizing prices to compensate for bad practices is not protectionist even though, for instance, the World Trade Organization currently assumes it is. WTO’s thinking is based on a fallacy. Equalizing prices does not protect industries that can’t compete in terms of their actual business. Instead, industries that try to compete by sloughing off real costs are penalized. Nullifying cheating is not the same as protectionism.
There is one instance when true protectionism is justified: in the case of a much weaker party who would otherwise suffer significant social disruption. The situation can arise because of past imbalances, such as former colonial powers and the former colonies, or because of small size and intrinsic resource poverty. In the former case the adjustment would be temporary, in the latter possibly permanent. Ideally, of course, every region could sooner or later find its niche and not require that kind of assistance. But it’s not hard to imagine, for instance, a hunter-gatherer culture which could never compete economically with a factory-based one. Yet it’s also not hard to imagine that preserving diversity could one day mean the survival of our species in the face of overwhelming disaster.
Getting back to competition itself, it’s interesting how hard it is to maintain in spite of all the rules supporting it. If current rules were applied, market distortion would be much less of a problem than it is. It’s not rules we lack. It’s enforcement.
The first question therefore becomes which factors work against enforcement and how to counteract them. The best rules imaginable won’t help if they’re not enforced. Any number of factors working against enforcement can be identified, but there is one which, by itself, is always sufficient to cause the problem. People will always try to gain what advantage they can. And while they’re in the process of gaining it, whoever tries to halt the fun is reviled.
Consider one current example. Now that the housing market has done what was once unthinkable and caused losses, there’s fury that bankers were so greedy, that financiers invented instruments whose risks they could pass on to others, and that regulators didn’t stop the excesses.
And yet, I don’t remember anyone even joking about what a wild ride we were having at the height of the fever. I lived in one of the centers of it, in southern California. Everywhere you went, in superrmarket aisles, at the next table in restaurants, in the dentist’s waiting room, you heard people discussing the latest house they bought, their low monthly payments, the huge profit they were going to make, the good deal they got on a second mortgage and how they were going to put their money to work by trading up. The return on investment was enormous. It was simply a sober business decision not to leave money on the table.
Now let’s say the regulators had shut down the frothy housing price appreciation. It would have been simple. All they needed to do was enforce the income and asset rules required to get loans, and enforce accurate risk assessments on new financial instruments. Those two things, by themselves, would have made the whole repackaging and resale of mortgages a much more staid business. With known and sober risk assessments, there would have been far fewer investors able to buy. The mortgage derivatives would have been too risky for pension funds and municipalities and the trillions of dollars they control.
With fewer buyers, the sellers who thought they were going to make a profit of $300,000 on their house were now going to make, maybe, $25,000. Can you see them being happy about it? Not easily. Any regulator who did them out of $275,000 would have been skewered. And so would any politician who supported him or her. There is little protection in the current system for making unpopular but necessary decisions.
It was only after the bubble burst that people would have been glad of a gain, any gain, instead of the losses they got. It was only after the bubble burst that it was all the bankers’ fault. People transformed almost overnight from savvy financial mavens into innocent victims.
That isn’t to say it was not the bankers’ fault. It was. And the regulators. But the point I’m trying to make is that it was also everyone else’s fault. There were no loud voices — either in the media or in the neighborhood — who wanted the party to stop.
So the problem has two sides. One is that people always take what advantage they can. That’s hard enough to stop when it’s a matter of power and people are trying to ignore that they’re losing by it even as it happens. But the other side is that when it comes to money, people don’t feel they’re losing by it. The accumulative phases feel like gains to most people, not losses. Party poopers are not wanted.
It’s vital to recognize how unpopular it is to down-regulate gains and how inevitable that unpopularity is always going to be. A disaster before it happens is nothing, and it is the nature of prevention that disasters do not happen. So how it feels at the time is that money is taken off the table for nothing. That always breeds resentment. That always breeds a thousand arguments why the best idea is to go for broke.
I think the force of these gut-level convictions is so strong that brain-level reasoning will be bent to it sooner or later. Very rational governments may be able to avoid some disasters, but convincing excuses will overwhelm reason often enough that disasters will still happen. Recognizing that emotional dynamic, any government which is sincere about regulation for the greater long term good will need to employ automatic triggers for the most unpopular and necessary regulations. There is just no way we can rely on our rationality to see us through when there’s money to be made.
Automatic triggers mean that when a company grows beyond a certain market share, say 50%, in any part of its business then down-regulation takes effect. No excuses. I’m thinking, for instance, of the national interest argument used in the US to “help” the nascent high tech industry. It seemed so rational, but in the long run (which turned out to be a mere decade or two) it actually turned out to be against the interests of the nation and its citizens. The reason for the caveat about “any part of the business” is that vertical integration can’t be used to acquire a chokehold on a critical process, but to then argue that there is less than 50% market share overall.
It’s important to stress that automatic triggers are the last resort, a backstop. Regulatory scrutiny and downsizing would generally be appropriate before that level is hit. Prevention of problems is the goal, and that means preventing the development of market-altering market share to begin with. The purpose of an automatic trigger is to compensate for the inevitable lack of regulatory perfection.
If, on the other hand, the business is one where monopoly makes sense, such as water supply or internet search, then the business needs to be transformed into a regulated utility. Another instance of justified monopoly is intellectual rights. (I’ll discuss them in more detail in the last chapter.) The whole point to copyrights and patents is to give creators the benefits of their inventions. However, I think we’ve slipped a vital cog in the understanding of which rights are involved. The right to benefit is not the same as a “right” to manipulate markets. A creator has the inalienable right to receive payment for their invention for the term of the copyright or patent, but not the right to absolute market power. The rules of competition still hold. In other words, the creator must be paid, but they must also license their creation if requested. Compulsory licensing should include the retention of what’s called “moral rights” in the fiction industry — control over usage the creator considers inappropriate — but compulsory licensing has to be a component of a system dependent on competition.
Whether a company needs utility status or competition, the point is that a business answerable only to private interests cannot be allowed to acquire game-changing levels of market power.
Moving on from the failsafes guaranteeing competition to the day-to-day rules promoting it, the ideal would be for them to work so well that the failsafes are never actually needed.
Transparency and short feedback loops should go a long way toward achieving sustainable competition. By transparency I mean easily accessible, true cost and reliability information. A Consumer Reports-style listing and explanation needs to be one component. That type of review is not costless, and it should be funded from a tax on all businesses. It is, after all, the extreme likelihood of biased and deficient information coming from vendors that creates the need for independent review in the first place. Ease of access also means that, when possible, information shouldn’t require separate access at all. For instance, cost of production could be a subscript to the listed price. If there are other downstream payments, the total cost would also have to be listed.
Picture that for something like the iPhone in the US. Cost of production for this coolest-gadget-on-the-planet when introduced in 2007 was around $220; minimum cost with texting over the two year contract when introduced was around $2445. The price listing required in all ads and other information would be: $599, $220, $2445. (Sale price, cost of production, total price.) I think the information factor would generate pressure for fair pricing. Coupled with compulsory licensing, the pressure would also have a way to take effect.
When they can, vendors have done their best to suppress that type of information, probably because it works. There was a very useful service that popped up a few years back which would tell you how many minutes were left on your cell phone plan(s). Once it caught on, the telcos had it shut down by refusing to provide the necessary data, even though the users had explicitly told the service to access their own data. (Similar services have since popped back up — it is, after all, a rather basic idea that should be part of the phone plan to begin with — but the US telcos seem to successfully keep them in the fragmented startup stage.) Given that unused minutes are the biggest reason why US users are paying around 75c per minute without realizing it, it becomes very clear why the service had to be quashed, even though it did nothing but put information in users’ hands. Information, by itself, can be a powerful force, and depriving people of it is another example of using small, unnoticed actions to grab anti-competitive advantage.
In a computer-saturated society, there are further ways to provide customers with information across all vendors that make buying decisions even more transparent. Air travel has several sites like that, but also points up the shortcomings of a haphazard, private facility. Some carriers aren’t included, so the comparative power falls short, and there are no guarantees of truth or objectivity.
The solution to those problems in this subset of search functions is the same as in the larger set: searching either has to be a government function or a regulated public utility subject to rules that require transparency, objectivity, and ease of use.
The other major tool to promote competition is to give all competitors an equally effective voice. The most alert enforcers against anti-competitive practices will always be the smaller competitors who suffer the most from them. Short and effective feedback loops promote economic fairness just as much as any other kind.
Feedback should consist of a series of measures that escalate in the level of compulsion. The first tier could be a public call for comment, referenced where the product or company involved is advertised or listed. The call would have to have a documented basis and be considered realistic either by an independent ad hoc panel of knowledgeable people or by a regulator. If independent comments accumulated on one side or the other, the call should be withdrawn or the offending company should modify its practices. If the outcome of comments was insufficient to cause action, there could be appeal for review by regulators whose decision would be binding. If either party disagreed with it, then the last stage could be the legal process. Especially in fast moving tech markets, which side gets the benefit of injunctions pending a decision can amount to a de facto decision in itself. As in other areas, when the merits of the case are less than obvious, the decision should favor the weaker party. Since in the system envisioned here money is not a major factor at any point, larger companies should not have an advantage by their size alone. Furthermore, there are time limits both on regulatory and legal processes. Those have to be set low enough so that decisions are still relevant by the time they’re made.
One inevitable question in any system of checks is what provides the balance. What is to prevent competitors from using the law as harassment? There need to be safeguards at every step. From the first step, the call for comment, the accused company has the right to present its side. If the call really is harassment, it shouldn’t get past the first step of vetting for plausibility. If it does, the public will have no sense of injury and there would be few comments. If the accuser escalates to regulatory or even legal review, and that for something which has already appeared baseless at earlier stages, then there needs to be some form of sanction. The most direct might be to rescind the right to complain about anti-competitive practices for some period of years. Monetary damages, however, need to be applied sparingly if at all. It is more important to protect the right to contest anti-competitive behavior than it is to punish all abuses.
As always, the regulators play a crucial role. Their function is to prevent abuses by either side and to keep things running so smoothly the legal system has nothing to do. Equally obviously, they will almost never be able to perform to that standard because where money is to be made, nobody will be happy. There are many safeguards in the system to keep the regulators honest: transparency, complaints, recalls, and legal action. In this case particularly, though, it’s to be expected that people will make an extra effort to game the system using complaints. Protection of regulators from frivolous or vengeful complaints should always be robust, but that protection may need an extra layer or two for financial regulators.
If I’m correctly imagining some of the comments on these ideas, they’ll have started with skepticism that market power can be consistently contained. After seeing the sections on promoting competition, the objections change to, “Well, of course, if you do it that way, but people will never go for it.” I (obviously) disagree. People do whatever they have to do. There was a time when it was equally inconceivable that governments would consist of elected officials. As I keep saying, I have no good ideas on how to get control that’s been lost, but people have figured out how to do that over and over again. They’ll do it eventually in the economic sphere as they’ve done in the political one. Once that’s happened, then what I’m hoping to do is help in the quest for sustainability so that we avoid the heartbreaking regressions we keep going through.
The world of finance — stock markets, banks, commodity markets, and the like — has few regulatory problems, contrary to intuition. Those are some of the most tightly regulated activities in commerce, which is ironic given the public philosophy of some of the players. At the heart of the free market is an intensely levelled playing field. The necessary regulatory environment for finance is well understood, and insofar as additional measures are needed they’re not a fundamental rethinking of the principles involved. The principles are fine: market information must be equally available to all, all transactions happen in an open environment where all participants are equal, and the only variables are supposed to be price, performance, and quality.
The deficiency in high finance is enforcement. After financial catastrophes, enforcement ratchets up a bit, followed by new methods of avoiding it that then inevitably lead to the next catastrophe. The primary mission in the world of big money has to be finding sufficient tools to make enforcement consistent. I would expect that transparency, the rules for competition, and explicit limits on size and market share would be sufficient to prevent backsliding on enforcement. However, if it proves otherwise in reality, then means have to be found to prevent unsustainable financial situations, not merely to fix them after the fact.
Enforcement of sustainable and equitable rules in the financial world is always likely to be difficult. The very close relation of money and power is one big reason. The overwhelming desire to believe in unbelievable deals is another. It’s not that people don’t know those deals are too good to be true. It’s that they don’t want to know.
I’ll give an example of how complexity is used to achieve ignorance since it’s a method seen most commonly in finance. It was particularly in evidence in our last go-round of inventing new financial instruments and a whole new shadow banking system that was free of regulation.
The idea was that these new instruments were totally different from the old ones, and hence couldn’t be regulated by the old methods. They also weren’t regulated by any new methods, but that bothered few people while the things were ostensibly making money. On the rare occasions when there was talk of regulation, the objection was that these things were so new nobody knew how to regulate them. However, that was okay because markets worked in the interests of their participants, not against them. When it turned out not to be okay, even someone with the financial credentials of Alan Greenspan said he was in “a state of shocked disbelief.”
That’s nonsense. If I, a financial amateur, could see the outlines of what was happening, then there is no chance the high financiers didn’t. They knew enough to know perfectly well that they didn’t know how the risks were being evaluated. That, by itself, is normally a red flag in financial circles.
Just to underline how easy it was to understand the essentials, I’ll give a quick summary here. Mortgages were divided into packages of good ones and not-so-good ones and sold as packages. Some of them carried very high yields and yet were rated to have low risk. That’s a classic too-good-to-be-true scenario.
The packages were a mix so it was hard to tell how risky they really were. The hugely complicated calculations to assess the risk of the mix were passed to computer programs whose workings very few people understood. That’s a classic Garbage In, Garbage Out scenario. You don’t need to understand the programs or the instruments to know that.
The potentially GIGO risk was insured by companies that had only a few percent of the capital needed to cover any eventual failures. Logically, they should have been terrified of losses, since they had so little capital to cover them, and should have erred on the side of setting risk estimates too high. Instead the risks came in so low even pension funds could buy the packages. They were sold by the trillion, and everybody collected fees on the sales all up and down the line.
If that doesn’t smell of a scam to you, then you have an enviably trusting mind. Everybody in finance knew it was a house of cards. There is no need to understand the intricacies of risk assessment to know that. People didn’t care because they were making money on it, but that is not the same as not knowing. Pleading ignorance is just an excuse.
It’s been said that the only people who can be conned are the ones who want to be, and that’s the problem with financial enforcement. Now that the party is over, the best minds in finance are pointing out that the excess complexity led to lack of transparency, and that it’s important to reduce the complexity if it isn’t to happen again. But even the complexity is only a symptom. The cause of the disease is the desire to believe in the scam.
Somehow, enforcement has to be immune to the desire for the latest get rich quick scheme, and immune to everyone’s, including the experts’, willingness to believe they’re on to a winning super-deal. It’s my hope that a clear-eyed awareness of the root cause and a matching legal framework to stop flimflam before it starts will be enough to free people from the predictable cycle of asymmetrical advantages and subsequent crashes.
Scale of business
Whether an enterprise is global or local, distributed or concentrated, can have social consequences. Military procurement is perhaps the one area where the broader implications of one aspect of sourcing are already recognized, but that’s only one specialized domain. The scale of enterprises has many general social implications that markets won’t take into account without government attention.
Theoretically, trade allows everyone to benefit from different natural advantages. But situations where everyone benefits from resources beyond human control are not the same as situations engineered by humans to benefit some at the expense of others.
The clearest example is labor. Money can scour the world for the cheapest workers, but workers can’t search the planet for the best money. That sets up an imbalance which has nothing natural about it. It’s based on government regulations about nationality and immigration that are outside the markets. It’s simply dishonest to pretend that globalization (in the current common meaning of the word) is successful because it is superior on economic grounds when the whole thing would collapse tomorrow without external regulations that give one side asymmetric power.
(I’m not arguing, as a practical matter, that infinitely mobile labor is a good idea or even compatible with maintaining social cohesion. The point is that capital and labor must have similar bargaining power with respect to each other in a sustainable system. If labor can’t be infinitely mobile, neither can money.)
Globalization, for all the rhetoric about spreading wealth, has manifested the usual consequences of concentrated power. As is often the case with money, that feels good to some people to begin with. For instance, price dumping can be part of establishing monopoly and can seem like a good deal to consumers for a while. Once market power is established, the good deal evaporates. But that’s not the end of the costs to the one-time winners. Nobody is immune to exploitation. Expensive US labor loses to Mexican labor, which loses to cheaper Philippine labor, which loses to Lesotho labor, which loses to Guangdong, which loses to Western China. There are any number of specific paths, but the ability of capital to move much faster than workers leaves the same trail of job loss and social disruption everywhere. That’s an absurd price to pay for a few decades’ worth of cheap T-shirts.
The solution I see to this problem — and reality-based economists may know of better and more elegant ones — is pricing in line with the cost of production under equitable constraints. That seems as if it would largely solve the whole issue. There is no point chasing cheap labor or lax environmental regulation if doing so only triggers compensatory fees and doesn’t give any advantage against the competition.
Inclusion of real costs would cancel out more than inequities in the “colonies.” It would also make transport play its proper role. Now the enormous explicit and hidden fossil fuel subsidies make it economically feasible to transport pint size bottles of drinking water half way around the globe. It seems quite mad, but our crazy quilt of subsidies and inequities has made it a rational business decision. If realistic pricing were applied, the unsustainability of such practices would be reflected in their cost.
Obviously, no single nation could make others act fairly by itself in this fragmented world of ours. As with all rules that promote fairness, they can only work if everyone abides by them. On a planetary scale, we’ve refused to understand the huge benefit of doing so, although on a national level some people have. It’s worth noting that the more commitment a nation has to equitability, the richer they are, even when resource poor. They are not losing by forging ahead with fairness, counterintuitive as that might be. Nor is it a matter that countries are rich first and therefore have the luxury of fairness. Saudi Arabia is rich and continues to be grossly unfair. Germany after the World War II had next-to-nothing. It was not the Marshall Plan by itself that saved them. It was how they used it. Sooner or later (later, I would guess, based on current trajectories) the screamingly obvious benefits of fairness will start to be understood across national boundaries as well as within (some of) them.
One of the early arguments in favor of globalization was that it would spread the wealth. By selling goods in more expensive markets, companies could pay higher wages to laborers who were used to working cheap. That would lift the standard of living everywhere. The only problem with this rosy scenario is that no specific company feels under an obligation to spread wealth, nor are there any rules to make them do so. So once the wealth actually spreads a bit and the cheaper location becomes less cheap, the company moves to the next place with better pickings.
There are people who argue that chasing the cheapest buck doesn’t matter because another company will be along in a minute. But continuous job loss and job search dependent on large corporations over which there is no local control is not a recipe for security, independence, or sustainable development. This has been evident, for instance, in Africa. (Also, (Phalatse, 2000 (paywall). Other instances: Jordan, 2002, Washington Post; Silver, 1993.) The fact that exploitation coexists with wealth for a few does not prove the success of globalization. It proves that those who start with comparatively better advantages are better able to profit from the situation in which they find themselves. Or, once again, “thems that has, gets.” That is not equitable and, as we’re finding while the world spirals toward disaster, not sustainable either.
Another social reason to limit trade is preservation of a way of life. Sometimes, as in the Swiss support for their dairy farmers, the motivation is to save another industry and to present tourists with the views of alpine cows that they came to see. Sometimes, as in the Japanese support for local small-scale rice farming or in Inuit whaling, the motivation is to preserve an activity seen as culturally vital. Of course, it’s easy for arguments about a way of life to shade into protectionism with no redeeming features, the kind protecting a local business when there are better mutually beneficial alternatives and when the real obstacle is the cost of the transition for a few people. However, just because bad protectionism exists, and just because it can be hard to distinguish from the necessary kind when they overlap, that doesn’t mean it’s a good idea to give up and avoid making the distinction. The alternative is to lose whole chunks of human diversity in exchange for not much. The cheap stuff coming in from overseas doesn’t stay cheap forever, but lost ways of life never come back.
Many examples of the benefits of local production come from food, which is easily the clearest case of diseconomies of scale. Food which has to be shipped long distances loses taste (if it had any to begin with after being bred to ship well), is stored for much longer, loses nutritional value, and often is subjected to processing to cover up for those defects. It’s another of the many instances where cheap is not a bargain if the product has no value. And that’s the best case scenario.
The worst case scenario develops the situation much further. Huge agribusinesses process food into a near-addictive non-nutritive substance that creates obesity and disease. At least in the US, the production end is hugely subsidized through various farm bills. With the 2010 health insurance reform bill, as Pollan says, “the government is putting itself in the uncomfortable position of subsidizing both the costs of treating Type 2 diabetes and the consumption of high-fructose corn syrup.” That way lies madness. And bankruptcy.
In the same NY Times article, Pollan notes that experts at MIT and Columbia designed a food program to counteract obesity and were surprised to discover “that promoting the concept of a ‘foodshed’ — a diversified, regional food economy — could be the key to improving the American diet.” Had they done their background reading, they would have known that they’d re-discovered the wheel. The value of locally produced fresh food has been discussed for decades. Perhaps the best known in the US is Frances Moore Lappé’s book, Diet for a Small Planet, published in 1971, but the tradition goes back to the biodynamic agriculture movement of the early 1900s. At least in agriculture, even considered only from the narrow standpoint of the final product, leaving aside the social consequences, it’s not hard to see that small scale works better than large.
The smallest, most distributed ways of doing business generally provide the most benefit compared to larger ones. They spread the wealth without the application of brute force, which is always desirable in an equitable society, and they prevent many of the problems of undue market power from ever developing. Each of those is an enormous social good. The only thing small scale enterprises can’t do is provide the lowest possible price if bigger businesses are given a free ride for the social costs they generate.
Efficiency is often given as the counter-argument to the desirability of small-scale enterprises. As far as I can see, the argument only works when no downstream or social costs are included, and when efficiency is held to be the highest good. That’s a laughable assumption to everyone except the shareholders making money on it.
All that said, though, I want to stress that although efficiency isn’t the only factor, it is a factor. In some cases, size really does bring enough benefit to justify making exceptions. Ore smelters, for instance, would not work best as Mom and Pop operations. Other examples of relatively large optimum size are heavy industries, industries that require very expensive equipment, and industries with pollution problems that are better mitigated as point sources. The optimum, as always, balances many factors. The goal is the smallest size consistent with optimum efficiency that takes into account all social factors. Maximum efficiency at any cost is only another name for getting someone else to pay the price.
Corporations as bodies
Confusion of concepts and reality can lead to bizarre actions like jumping from a third floor window on the idea that one can fly. When many people share the confusion, whole societies can fall. A real world example is the strange conflation of corporations (a word based on the Latin corpus, or body) and real biological bodies.
That point has been brought home recently by the US Supreme Court’s weird decision in the 2010 Citizens United case. Corporations, said some of the men of the Court, have the same rights as real people even though they don’t share any of the characteristics that rights are supposed to protect. Corporations can’t be stabbed, they don’t bleed, they don’t starve, they can’t be jailed. They have none of the responsibilities and vulnerabilities that go with rights.
Except for a few rarae aves in the legal system, that’s been obvious to everyone, including me. The following repeats a post I wrote on the topic several years ago.
The history of the delusion shows that, as usual, people had some help before they started believing in it. What helped was money. Wikipedia provides a potted summary. In the mid-1800s,
“Corporate law at the time was focused on protection of the public interest, and not on the interests of corporate shareholders. Corporate charters were closely regulated by the states. Forming a corporation usually required an act of legislature. Investors generally had to be given an equal say in corporate governance, and corporations were required to comply with the purposes expressed in their charters. … Eventually, state governments began to realize the greater corporate registration revenues available by providing more permissive corporate laws.”
So the corporation as we know it was born. They were group entities — body business rather than body politic, so to speak — but it didn’t take long for bright wits to realize that real bodies had more rights than business bodies did. They wanted some of that. So they spread the notion that this was unfair. All people are created equal, aren’t they?
Astonishingly enough, they found judges who fell for it.
In 1922, the Supreme Court ruled that the Pennsylvania Coal Co. was entitled to “just compensation” under the Fifth Amendment because a state law, designed to keep houses from collapsing as mining companies tunneled under them, limited how much coal it could extract. … [In the mid-1990s a] federal appellate court struck down a Vermont law requiring that milk from cows treated with bovine growth hormone be so labeled. Dairy producers had a First Amendment right “not to speak,” the court said.
However, these odd “rights” don’t extend to the responsibilites that real people have. Sludge dumpers argue that their rights to due process and equal protection under the law are violated when towns prevent them from dumping, but when real bodies are harmed by the toxic waste somehow that’s nobody’s fault and somebody else’s problem. This is not the way it works for real people with real rights. To begin with, I can’t dump toxic waste in your garden. To go on with, if I did, I’d be liable for the ensuing damages.
If corporations are persons, then why aren’t they persons all the way? They get the rights, but they don’t get the consequences of their wrongs. But then again, how could they? Only people can pay fines, even when they’re shareholder people. Only people can go to jail. And the individuals in question can always argue that the crime wasn’t theirs because it was committed by a much larger group of people. So the individual’s right to equal protection under the law means that nobody is punished and the crimes continue.
Giving special privileges to wealth and escaping accountability are both the antithesis of justice. There can be no corporate personhood in a fair or sustainable system. Corporations are business entities, not people. Trying to fool people into believing otherwise is just a way to give a few rich people an excuse to trample everyone else. Nice for them; bad for everyone else; and the reason why it’s such a durable piece of flimflam. Anything that helps the rich and powerful has huge staying power.
However, just because corporations aren’t people doesn’t mean they can’t be legal entities who exist under given rules. And, since the people who run corporations really are people, they have the responsibility of making sure their corporations follow those rules. Responsibility must be matched to control, so it cannot rest on shareholders. It’s another ridiculous legal fiction that they control anything. The people actually making the decisions must be the ones facing personal consequences if they break the law, the same way any other criminal does. If that principle were actually applied, corporate executives would either straighten out or (and I’m being only slightly facetious) we’d have to fine them enough to pay for all the new jails we’d be building.
I need to spend some time on a tangent about advertising. The issues surrounding it are largely ignored at this point, but they have huge effects that make it the business of government. The right to freedom from intrusion by others has been discussed, and there is also the information function which relates to education. In this chapter, the relevant problem is that free markets are based on the premise of rational choices, but advertising works largely by trying to short circuit rationality.
In effect, advertising is a way of not playing by the rules and of not appealing to reason. The fact that people say they don’t care doesn’t change the problematic nature. The difficulty with any form of cheating, the reason why it’s cheating and not just another way to play the game, is that it can’t be applied by everyone equally without implosion. It depends on there being a few manipulators, and many who are manipulated.
There is also the problem that people don’t consent to manipulation. When there was first talk of using subliminal advertising — such as messages to drink soda flashed on a movie screen too fast to see consciously — people were incensed at the thought of having their strings pulled. Such advertising was quickly abandoned partly because of the backlash and no doubt also because research showed it wasn’t terribly effective. But when it comes to ordinary advertising, the kind that’s not trying to hide, people are convinced that it has no effect on them. It’s their choice whether to pay attention to it or not, and if advertisers want to throw billions of dollars at the hope that they might make an impression, let them. It doesn’t matter.
That is manifest nonsense. Armies of professionals don’t throw billions at the same thing for decades if it doesn’t provide a good return on investment. There’s a body of research accumulating that shows why. Advertising, it turns out, is effective because people tune it out. From a 1999 paper on “When an Ad’s Influence Is Beyond Our Conscious Control”:
Further, all four studies provide strong evidence that the response bias caused by incidental ad exposure is due to unconscious influences—advertised products were more likely to be included in a consideration set even when subjects were explicitly trying to avoid choosing products that were depicted in the ads.
Note that. “More likely [to be considered] … even when subjects were explicitly trying to avoid choosing products that were depicted in the ads.”
That is not an isolated finding. Parents are unaware of how much their children steer their buying choices. (And you can bet your last dollar that the children aren’t spending time paying attention to the effect of ads on them.) People who were deciding between buying French or German wine preferred one type over the other by three to one depending on which nation’s music was piped over the sound system. On being questioned later, only one in forty had even noticed the music to say nothing of noticing its effect on them. A 2008 study of web advertising found that “upon exposure to Web ads, consumers experience priming caused by implicit memory and build a more favorable attitude toward the advertised brand regardless of the levels of attention they paid to the advertisements.”
Advertising for financial services companies boosts consumer confidence in them even though all the ads have done is make people feel the name is familiar. That’s enough for a sufficient number of people to place money with the company, which more than pays for the advertising. Think about that. People are willing to hand over money based on an artificially induced sense of familiarity. Yet if asked, I’d bet all those people say they tune the ads out. (The comments to the article, for instance, express contempt.) They certainly wouldn’t admit to basing investment decisions on them. But in the aggregate, regardless of what any given individual thinks, that’s exactly what they’re doing.
So far, from the standpoint of government, the examples indicate the need to rethink what constitutes permissible advertising. It gets worse, though. Advertising is as successful at steering political choices (pdf) as it is at steering consumption. (Popular article based on last reference.) From Franz and Ridout (2010): “Having a 1,000-ad advantage across the
entire [presidential] campaign, for instance, resulted in about a 0.5 percentage point
improvement in a candidate’s share of the vote in 2008.” [
earlier link now broken 2014] A less precisely measured but nonetheless obvious relationship is evident in smaller elections that get less attention: The [US] House in 2012: Dark Money Still Works at the District Level.
Americans for Campaign Reform plowed through years’ worth of data on spending for and winning US Representatives’ seats between 1992 and 2006. What they don’t make explicit in “Does Money Buy Elections?” is that most of the money is spent on advertising, aka “wholesale mass media communication,” and that “name recognition” means only the same fuzzy feeling of familiarity noted above. It does not mean awareness of a candidate’s past actions or their implications for the future.
For the typical non-incumbent candidate, pursuing a combination of retail grassroots campaigning and wholesale mass media communication is the only viable means of obtaining the level of name recognition that is required for voters to take note. … But few non-incumbent candidates ever reach the competitive threshold [of spending]. [Pegged at $700,000]. Incumbents, by contrast, enjoy a range of institutional advantages … [and] require relatively less campaign spending than non-incumbents to mount a credible campaign, even as their demonstrated ability to raise funds far exceeds that of the average challenger.
Likewise and even more starkly, they look at all New York State races in 2000. Interestingly, ACR comes to the conclusion that campaigns should receive funding so that everyone can reach the competitive threshold. The obvious implication that advertising influences voting is too distasteful to be addressed.
Da Silveira and De Mello (2008) Da Silveira and De Mello 2011 (pdf) look at the relationship between money and votes directly. They use Brazilian data which allows easier comparison of amounts and effects due to their campaign funding laws. “We find that a one percentage point increase in TV time causes a 0.247 percentage point increase in votes.”
On the other hand, Ben-Bassat et al., 2012, find no significant effect of money on election outcomes in Israel. They hypothesize this is because people are less impressionable in developed countries. Depending how one defines the USA, that idea is contradicted by the US studies cited earlier. Given the almost one-to-one correspondence between money spent by candidates and election results, factors internal to the Ben-Bassat et al. study probably yield a more parsimonious explanation for their conclusion.
Da Silveira and De Mello also destroy the comforting thought that correlation does not demonstrate causation in this case. It is the only variable that changes between general and runoff elections that involve the same candidates and the same voters a few weeks later.
Contrary to that finding, Meg Whitman’s high profile attempt to buy the California governorship in 2010 through advertising is certainly one attempt that failed. Despite spending over one hundred sixty million dollars of her own fortune, she lost against Jerry Brown’s thirty million or so. As a California voter myself, I feel that’s down to our general intelligence. More seriously, the real message is that the occasional contrasting data point doesn’t change the overwhelming direction of the evidence.
The first step to dealing with the problem of advertising is acknowledging that there is one, no matter how much that hurts the need to feel we’re in control. The fact is that plain old brainless repetition, especially if there’s also a resonant feeling, will generate enough votes to swing enough districts to make democracy meaningless.
Advertising simply cannot be any part of the political process. Voter information: yes. Debates (real ones): yes. Advertising: no. This is true in a system with elections, but it’s no less true for a system with unelections. In politics, negative advertising works better than positive, so ads could have an even more pernicious effect where the voters’ function is essentially negative. A system of government premised on rational choice has to run on appeals to reason, not on fake familiarity or manufactured adrenalin spikes.
But even outside of government, advertising works, which means it’s a problem. It’s assumed to do nothing but draw attention to choices people would have made anyway, maybe more slowly. It is assumed, in effect, that it does not work. But in a market system based on rational choice, that is the very thing ads undercut. That makes it a form of market manipulation. It is not playing by the rules. And that makes even non-political advertising very much the business of government.
That said, and although market manipulation is categorically off-limits, it’s hard to say what exactly is the appropriate place for advertising in commerce. There’s nothing wrong with drawing attention to products. But there is something wrong with stepping over that line and pulling people’s strings. Finding that line requires much more research than we currently have on advertising and degrees of subrational manipulation. Although there are mountains of research on advertising, most of it studies effectiveness from the standpoint of advertisers rather than fairness. Standards for what it means to be non-manipulative would have to be identified. They’d have to include all the various quasi-ads such as sponsorship, product placement, trial products, as well as ordinary paid ads.
Even without research, some of the more egregious practices are rather obviously unacceptable. One example is a business model pushing “free” products in return for ad-induced mind share. That model simply wouldn’t pay off without manipulating consumers. If it did, there would be no need for companies like Google to expend the energy they do tracking every single user click forever, or, worse yet, invading privacy to have an even larger pool of data for targeted ads. Information is the same regardless who’s looking at it, but suggestion only works on the suggestible. A model that depends on manipulation is not legitimate in a fair society.
Prices and Incomes
At the extremes of low and high, the amount paid for both goods and work can reflect market power rather than worth. I’ll discuss minimum and living wages in the last section. The government also has a role in counteracting pricing or incomes that are based on taking whatever someone will pay for it. Contrary to popular belief, that is not a simple matter of supply and demand. Except in the case of some entertainment celebrities (which includes sports), stratospheric compensation almost always depends on the ability to set — or at least heavily influence — one’s own pay. Disproportionate prices of consumer goods almost always depend on excessive market share or some monopoly-related practice. Both of these are a departure from the level playing field markets are supposed to depend on, and both therefore need government regulation.
Paying ridiculously high compensation can’t be justified on either philosophical or practical grounds, even though it’s true that some people are worth vastly more than others to the rest of humanity. People like Mother Teresa, Bishop Tutu, the Dalai Lama, Shirin Ebadi, Einstein, Rosalind Franklyn, P. G. Wodehouse, Mother Jones, Wycyslava Szymborska, in different ways and for different reasons really do have more to offer than the rest of us. But that has almost nothing to do with how much money they make. In terms of the sorts of things that can be measured and paid for, nobody is worth hundreds of times more than anyone else. The skills of an outstanding manager are worth more to a company than those of a mail room clerk, but only somewhat more.
Severe financial inequality accompanies corrosive social consequences. Large income inequality is associated with decreased social cohesion, increased corruption, and poorly run governments. The evidence is everywhere, whether the comparison is between countries or within them. (Just one source, Conscience of a Liberal, Krugman, 2007, with reference to a library’s worth of others.)
At this point it’s customary to get into an argument about whether income inequality causes bad things or bad things cause inequality. That shows a fundamental misunderstanding of the processes at work. Societies are organic structures, not linear and mechanical. Everything in them works together and simultaneously. Whether corruption causes inequality or vice versa is immaterial. Once started (and they can start by any route), they’ll reinforce each other, and the cure can come from any side. Ideally, it comes from all sides at once. Arguing that the process should consider equalization of incomes last, if at all, is almost always symptomatic of wanting wealth more than justice.
Economically, vast compensation is associated with reduced performance. Interestingly, those results are evident even when the comparison includes only other executives, i.e. “industry standard” peer groups, which ignores the already inflated industry averages in the US. A more useful comparison is to workers’ wages. A 2002 NPR report, showed that executive salaries 11 to 20 times larger than workers’ wages are considered ample in most of the developed world. Then there’s the US, which approaches 500 times. That multiple did nothing but grow after 2002 until these worth-any-price executives had to be bailed out by the government.
Incomes need to be capped for the greater good just as company size needs to be limited for the same reason. Excessive incomes are a sign of structural imbalance. What, exactly, is “excessive” can be approximated based on research and practice. If upper echelon total compensation is tied to worker pay then the incentives are in place for sustained equitability.
The incentive structure is vitally important and must be continually and critically reevaluated. For instance, an obscure rule change by the SEC in 1993 limited to $1 million the deductibility of executive pay as a cost to the corporation, unless the compensation was performance-related. A sensible rule, since otherwise all profits could simply be “disappeared” into executive pay. And yet, it resulted in an avalanche of payment methods defined as performance-related not-salary when neither was true. These forms of compensation had a good deal to do with some of the financial exotica that led to the crash. In a system with enough transparency to make such practices publicly visible and actionable, and with alert regulators who could be recalled if they’re asleep on the job, it’s to be hoped that issues like this would be handled within a year or two of appearing. If those factors aren’t enough, further measures need to be put into place to prevent problems from growing.
The final line of defense against excessive income inequality is a progressive tax system. At the upper reaches, taxes at 95% will prevent the most acquisitive from making much headway. Yes, that will reduce the desire to “work hard” to make more money. That’s the whole point. That desire at that level has corrosive consequences for other people and, it could be argued, also for the individuals themselves.
However, don’t get me wrong. I’m a great believer in the value of having plenty of people of independent means in a society. Most of them may be Bertie Woosters, but a few of them are Charles Darwins, Lady Ada Lovelaces, or George Hales. Their contributions are immense and likely wouldn’t have happened if they’d needed somebody else’s approval for funds. So I emphatically do not think that taxation should make it impossible to live on unearned income. I do think that it should be high enough to prevent unearned income from growing without limits or from exceeding the top acceptable compensation for high earners such as executives. Having independent means is fine; being a billionaire is socially corrosive. The idea throughout is that some income inequality is okay, but only within limits, and that those limits should be enforced by making it structurally difficult to exceed them, by taxation and/or by whatever works most effectively with the least friction.
I see one exception to the rule that incomes should not grow without limits. People whose contributions to others are incalculable should benefit by their deeds. In other words, inventors, artists, entertainers, and similar people whom the public pays as it enjoys the result of their work aren’t in the same class as the rest of us. Progressive taxation should still apply, but the top rate would not be used to promote an equitable ceiling. It would be based only on carrying a fair share of government costs, something that would be in the neighborhood of 50-60% rather than 95%. (If the cost of government and its programs is about 33% overall, and if one agrees that poorer people pay a proportionately smaller share, then it follows that the top rate for businesses or people would be around 60%, if the cost of government was the only factor.) Thus, the one way to be ridiculously rich is to create something that many people want or need. Possibly, that means there would be lots of would-be artists and inventors in the fair world I’m imagining. Some of them might even produce something worthwhile.
Estate taxes are a significant way of spreading the wealth in some countries, but they are hard to justify. Taxes have already been paid on the accumulated wealth, so further taxes are double taxation of the same person, even if they are now dead. Instead, taxes should be calculated from the standpoint of recipients, that is, based on what their new financial standing is. A very large sum left to one person would be subject to a high tax because the person would suddenly have a huge income. (Whether earned or unearned, the amount is what matters.) However, a large sum divided among many people would be taxed based on what they owe, which would vary based on their wealth. Again, trying to deal with this issue fairly leads to incentives that would tend to spread the wealth, which is a good thing.
Prices of goods, as opposed to people’s work, is another area where the amount paid can be far over or under what’s dictated purely by market forces.
Subsidies are one distorting influence. They get built into the price of the product and further skew the price of competing products until all purchase decisions have to be irrational to make money. Decisions based on factors other than reality are not sustainable. Take energy, for example. Nuclear energy has many subsidies, explicit and implicit. Without just one of them, the government guarantee and limitation of their insurance liabilities, the companies making the decisions would be exposed to the inherent risks. Decision-making about whether to use nuclear power would suddenly become much more reality based. Fossil fuels get a huge implicit subsidy from the military expense of acquiring and defending access to the raw materials. Housing subsidies in the US benefit owners but not renters. The mortgage interest deduction is so thoroughly baked into house prices at this point that cancelling it would lead to (another) implosion in house prices. Meanwhile, the inflated price makes it that much more difficult for renters should they want to become buyers. A fair government can certainly help people, but it can’t help some people at the expense of others. Nor should it or anyone else distort the market away from level.
Pricing can be drastically irrational in some very limited areas that don’t concern most people. Artwork, custom made goods, ultra-luxury goods, all sorts of things that most people never buy, are outside the scope of this discussion. Paying thousands of dollars for diamond-studded phones and the like may be foolish, but the things are more akin to jewelry than to consumer goods in the ordinary sense. Their prices affect only a few volunteers, so to speak, and don’t have much to do with fairness.
I see information as a major tool toward achieving fair pricing. (Together with the fact that advertising has to have a circumscribed role as discussed in that section, and could not be used to gin up irrational demand.) I’ve mentioned that the cost of production has to be listed with price at all times. I’ve also mentioned that finding comparative information should be as simple as the process of buying a product. Armed with both information and the rules promoting competition, unjustifiably high prices should not be a problem.
Unjustifiably low prices, however, might be. If too many people enter what seems to be a lucrative opportunity at once and competition becomes so strong that everyone is operating on paper-thin margins, then nobody can make a reasonable living. To prevent that, just as the practice of “dumping” by underpricing goods is illegal now, likewise selling goods or services for less than will yield a living in the long term should be illegal also. That’s necessarily another approximated number, but as with all of them, the best estimate is better than no estimate. If sellers can show a regulator that their prices are lower than that because they’ve found better ways of operating, that is they can make a living at the lower prices, then the estimate gets lowered instead of the price being raised.
Pricing of basics
Necessities are in a class by themselves, more or less the converse of ultra-luxury goods. Everybody depends on them and access to them is very much a matter of fairness. Some of them, like light and air, we don’t think of in terms of money (yet). They’re part of the commons, but as an unexamined assumption rather than as policy. If someone figures out how to monetize them, there’s nothing to stop them, no matter how wrong it feels. And it is wrong. Demanding money in exchange for not choking off life can never be right.
First, what are the necessities? Light, air, and water are the easy ones. In the natural state, they’re usable without any processing, so they must be free. Nobody can rightfully ruin them or limit them and then charge others for access to the usable form. In some far future world, nobody could put up solar screens in space and then charge regions for sunlight. In a not-so-future world, breathing stations necessitated by bad air pollution would have to be provided free, paid for by the people ruining the air.
It can never be acceptable to allow a resource to be ruined, and then to charge for not ruining it, whether or not the underlying thing is essential to life or not. For example, airlines make seat sizes too small to allow normal movement, and then charge for enough space to accommodate the passenger’s knees. Or the similarly odious, but as-yet unrealized, concept of allowing cellphones and then charging people to avoid the noise pollution of those creating it. (Even worse: charging for the privilege to use cellphones and charging others to sit as far away as possible.) That sort of thing is nothing but a variant on the gangster practice of demanding money not to break someone’s bones. It’s criminal for them, and it’s criminal for everyone else.
Water is a vital resource that holds a position halfway between the free essentials and the ones we’re used to paying for because it generally needs to be delivered to the point of use. A delivery price can be charged at cost, but a substance which is a daily necessity for everyone and which cannot be stored in significant quantities by most people cannot become a source of profit. Nobody’s life can be bought and sold, either directly or indirectly by acquiring a chokehold on an essential. Chokeholds cannot be applied without double standards.
Nor is there any way to have a sustainable competitive free market in absolute necessities like air and water. Controlling that kind of necessity confers a completely unbalanced amount of power, and sooner or later somebody will take advantage of it. The only solution is to keep these things out of markets altogether. They cannot be bought and sold. They can be municipal utilities if they need to be delivered, such as air on a space station, but they cannot be traded.
Which brings the discussion to food and housing. At the basic level, they’re absolute necessities. But they also have to be produced by someone as well as distributed. And it’s not self-evident where to draw the line for less-than-basic levels of these things. The situation is unavoidably self-contradictory: food and housing have to cost something in money or labor, and yet it is the deepest kind of unfairness to let anyone die for lack of them.
Where and how to draw the lines with respect to both food and housing is something that requires input from experts and social decisions about how far above bare survival the basic acceptable minimum lies. The important point here is that the line exists, which means the prices of some types of housing and food are not just a concern of markets. They have more to do with fairness than markets at the very basic level of the right to live.
The fairness component of access to basic necessities has several implications for government action. The price ceiling for basic food and housing would be subject to special scrutiny by regulators that other goods wouldn’t have. That ceiling would have to be identified and, if need be, enforced. Profiteering would be a crime at all times, not just during war or disaster.
It also means the government, that is, the regulators in it, have the responsibility of ensuring an economy where nobody suffers hunger or homelessness (barring natural disasters). Regulators who egregiously allowed structural imbalances to develop that condemned some people to the edge of survival would be fired. The clause stipulating that the guilty party’s assets are first in line for any recovery of damages should be even more motivating toward acting for the greatest good of the greatest number. Any citizen could bring a suit to that end, since it affects a basic right. They would only have to show that the regulator acted contrary to the knowledgeable consensus at the time of the beneficial course of action.
The biggest changes would be in real estate and housing. Those are now entirely market commodities, but that framework makes sense only at the upper end of the market. Land, for instance, is a resource more like air and sunlight than food or housing. Human labor doesn’t produce it. Except in terms of improving top soil, we don’t create it. It differs only in its scarcity, but that, unfortunately, is enough.
There is a finite amount of land to go around, so there has to be a way to distribute it. For thousands of years that’s been done by buying, selling, and holding title. There’s nothing wrong with that so long as the first consideration is fair access rather than market forces, as is appropriate for an essential and pre-existing resource. At the smallholder end of the scale, the distribution model needs to be more like a public water utility than a stock market. The underlying substance doesn’t have a price. The charges don’t include profits. The cost is the living wages for the people administering the equitable distribution of the resource.
The basis of a right to land is not, emphatically not, that everyone gets their slice of the Earth’s acreage. It’s that land is primarily an unownable resource, and that people have a right to enough of it to live. They can’t be charged for something that nobody had a right to put fences on to begin with. In case my meaning isn’t clear, imagine an analogous case with air. If someone sucked all the air off the planet, and then charged each of us to feed it back, we’d feel they had no right to do that. And they don’t. It’s the same with land. Using it to live doesn’t give anyone the right to more than they need, or to sell their “share” to somebody who needs more, or to ruin it. It means only that in the same way as we take air for granted and expect to have enough to breathe, we should be able to take our right to land for granted and expect to have enough to live.
The clause about having no right to ruin the land is important. Also, since the right derives from the right to live, it has to actually be used for that purpose in order to have a right to it. So, one has a right to the plot of land around one’s primary house, or to an allotment (community garden in the US), or to a subsistence farm. One doesn’t have a right to a farm if one isn’t a farmer. One doesn’t have a right to an allotment if one doesn’t use it. And people who do use land, whether as suburbanites or growers, must keep it in at least the same condition as when they started. Those are basically the rules that govern allotments, at least in Great Britain, and something similar to that should be generalized.
The point about using land well needs to be stressed. Zimbabwe has recently taught everyone what happens when it isn’t. They redistributed land from large farmers to landless citizens. In principle, it needed to be done (although they didn’t ease the transition for the large farmers nearly enough, but that’s another topic). Then it turned out that many of the newly minted farmers didn’t want to be farmers. They just wanted ownership and/or money. Some did want to farm, but no longer knew how, or knew but had no tools. Available help, such as tractors or fertilizer sat in warehouses. Meanwhile, ministers snapped up land at bargain basement prices from the new owners who wanted money, not farms. The result was that in the span of a few years a very fertile country didn’t produce enough food to feed itself. Obviously, that is not the idea behind having a right to land. The point is to have something like the allotment system, writ large.
If smallholder land can only be transferred at the price of the administrative costs, then the biggest threat to the system is likely to be cheating. People will start demanding undercover payments. The penalties for cheating have to be draconian enough to overmatch the desire for shortcuts. Markets in organs for transplant, for instance, are suppressed with serious and enforced penalties. The same would have to be true of smallholder land. An example of a possible preventive measure might be to allow surreptitious recording of land transfer negotiations. The negotiators wouldn’t know whether their words were being preserved for posterity or not. If there was even an allusion to any kind of under the table compensation, then the bribed party would be awarded triple that amount out of the briber’s assets.
The fact that smallholder land is handled like a public utility instead of a commodity would have the most far-reaching consequences in countries where subsistence or small-scale agriculture was important. A right to enough land to live on would help to make life more secure there. In areas where most people are not farmers, the right to land has less direct application. It would mean the land under someone’s primary house couldn’t be priced higher based on its location. The primary determinant of the price of housing becomes the building, which is not unlike the current situation in many parts of developed countries.
Unlike land, labor is by far the largest factor in producing housing. On the one hand that makes it tradeable, like other measurable goods produced by people. On the other hand shelter is an absolute necessity, like food, so even though it’s tradeable, it has to have strict ceilings at the low end. At the level of basic needs it’s a right, not a market commodity. At the opposite end of the scale, it can fall into the same class as diamond-studded watches. Where to draw the line for basic housing, “normal” housing, and luxury is, as I mentioned earlier, something that needs expert study and social decisions appropriate to local levels of technology and custom.
In one respect, housing is unlike food. It regularly goes through boom and bust cycles, whereas food tends to do that only during famine or war. We’re so used to seeing speculation on real estate, it feels normal. But it shouldn’t. Speculation in a life necessity is profiteering, and it’s not right at any time. Thus, even though luxury housing, like museum pieces, would fall outside the usual scrutiny of price, all other classes would not. Housing is a right for all people. Even though society is not under an obligation to provide more-than-adequate shelter, it is under an obligation to prevent structural changes which could threaten basic rights. Speculation in housing sets up precisely that kind of instability and cannot be allowed.
Preventing speculation is not difficult. For instance, tax treatment of gains or losses on second houses, or on those sold within a few years of purchase, is enough to tamp down much of the excitement by itself. Commercial real estate is, by definition, not a luxury since it’s involved in people’s livings, so it would be bound by the same rules.
Markets cannot be laws unto themselves in an equitable society. They must participate in the same framework of rights that delimit acceptable behavior in all fields. That implies perhaps the largest departure from current practice when it comes to the pricing and distribution of goods necessary for basic needs.
Pay and hours worked are vital to everyone, even when the rest of economics or finance seems remote and theoretical. It’s another area where regulation (or the lack of it) and market forces interact. Pay depends on supply and demand, but it also depends on regulation. If there are minimum wage laws, businesses pay at least the minimum wage (unless they can skirt the law). If there are no labor laws, people are quite capable of making others work constantly from the earliest age. If there are laws, businesses find themselves able to make a profit with less exploitation. They say they can’t — all the way back to Dickens’ Bounderby they’ve been saying they can’t — and then after the new regulation is passed, they make more money than ever. All that twaddle needs to be ignored. A more useful procedure is to figure out what’s right, then what’s possible, and to see where they overlap.
What’s right isn’t difficult. It’s in Roosevelt’s Second Bill of Rights, and it’s in the UN Declaration of Human Rights. Everybody has the right to freedom from want, and sufficient means to develop and fulfill their own potential to the extent they desire. The first takes a basic level of money, the second also takes time.
Calculations of living wages are easy to find for many cities, mainly because cities have realized that the costs fall on their budget when employers can pay workers too little to live. That means cities have to estimate living wages so they can pass ordinances requiring them. Thus, for example, the current federal US minimum wage is $15080 per year, but a living wage established by Los Angeles for airport workers was approximately $23,400 in 2009 ($11.25 per hour) raised to $29,640 ($14.25) in 2010 .
However, if you add up the expected expenses for a person in the area, taken, for instance, from the amounts the IRS will allow a delinquent taxpayer and fair market rent tables available from HUD, even $29,000 a year is low. (The 2009 IRS link is now broken. When written, the amounts were as discussed. The 2014 link that replaces the original will have somewhat different numbers.) The costs are approximately $14,000 for rent for a one-bedroom or studio apartment; $2400 for utilities; $6300 for food, personal care, and clothing; transportation is $6000 (which assumes paying off or saving for a new car on an ongoing basis since there is no public transportation worthy of the name here); medical, dental, and vision expenses are $720 a year. That’s $29,420 so far, for one person. That person has to have this amount after taxes, which means making around $35,000 before taxes.
That sum doesn’t include any expenses for a dependent child, such as food, medical costs, school fees, clothing, nor does it include phone costs or internet access, if any. Allowances for a child, for instance according to USDA calculations for the LA area, are near $12,000 per year for one child. To have $42,000 after taxes requires a wage of around $50,000 before taxes.
The Universal Living Wage organization uses slightly less round numbers than I do and estimates the local living wage at $46488. The example is from the area where I live, and I can vouch for the fact that it would require careful attention to the pennies not to go over the amounts listed. You’ll notice that the estimates don’t include money for toys, books, movies, or the occasional holiday. $50,000 ($24/hr) is what it takes for one parent and one child to live without extravagance and without money worries in urban southern California. If you’re shocked at how far away we are from a living wage, you should be.
In the low-cost rural parts of the country, where a minority lives, a living wage can be as low as $8 per hour. Remember that the federal minimum wage is supposed to be enough to support a family of four, not one. Even in rural areas, except for singles, it doesn’t approach a living wage. The US national average living wage is said to be around $12/hr for one person working 40 hours per week.
For those wondering about the effect on business of paying a lot more than minimum wage, actual studies don’t find damage, let alone threats to survival. For instance, a study at San Francisco’s airport, where wages jumped to $10/hr, an increase of 30% or more, found that turnover was much reduced and improved worker morale led to measurably greater work effort. The result was that the cost to employers of the much higher wages was 0.7% of revenue.
The next question is how much time it should take to make a living. What’s customary is not necessarily the best yardstick. In 1850, it was normal to work about 11 hours per day, 6 days per week. In the US, improvement stopped in the 1950s and the work week has been 40 hours per week ever since. In France, it is currently 35 hours per week. Hunter-gatherer tribes have been estimated to spend about 24 hours per week keeping body and soul together. There is much dispute about that, since it’s hard to define “work” in a comparable way for hunter-gatherers. However, the quibbles are on the order of a few hours here or there. There seems to be broad agreement that they work much less than more developed societies.
Since longer work weeks are already well known, the 24 hour work week is interesting to think about. Speaking somewhat facetiously (but only somewhat!) we should be able to do better than hunter-gatherers or else how can we claim progress?
Twenty four hours, specifically, not 25 or 26, has advantages because the number is divisible so many ways. That could allow for great flexibility in scheduling. Four, six, eight, twelve hour days are all possible in work weeks of six, four, three, or two days. That would allow individuals to have many options, always desirable in a society trying to preserve the maximum freedom compatible with the same degree in others.
It would allow people to continue their educations and have other interests besides work. For many people, that might result in nothing more than an expanded social life — in itself a good thing — but a few would do interesting and other socially enriching things with their time. Having time is at least as important as money for the flowering of creativity.
Perhaps most important, assuming there are regulations to stagger parents’ hours on request, a 24-hour work week would solve many child care issues in two parent families without either parent being run ragged. That is not a minor matter. Parental involvement is the single biggest factor in a child’s eventual growth into a contented and productive adult. It has huge social implications, and it’s main facilitating factor is time. Any society that cares about sustainability will make sure that the parents among them have that time. It also solves some child care issues without assuming the presence of a third class of people, such as grandmothers or nannies. In a country with true living wages, nannies would be far too expensive for almost everybody in any case.
The flexibility of hours per work day could also be useful in jobs that require constant and perfect focus, which is impossible to maintain for eight hours. For jobs such as air traffic controllers, it would be better for everyone if shifts were four hours long (with the requisite break(s) within the shift).
One likely consequence of a 24-hour work week is that plenty of people would try to have two or even three jobs. However, a system of shorter hours and higher pay means that incomes would be more equal than they are now. That would mean only a few people could have double jobs without depriving others of work. So, while there’s nothing intrinsically wrong with people working themselves silly, assuming they don’t have children, it can’t come at the expense of a livelihood for others. Acquiring double or even triple jobs should only be permitted when there’s enough of a labor shortage that there are no other people to fill the positions.
Having envisioned the levels of wages and work time that are consistent with the implementation of the right to a living and the pursuit of happiness, the next step is to see how close we can come to that in the realm of the possible. One thought experiment is to see what the hourly wage would be if income were distributed completely equally. Perfect equality is never going to happen and is not even desirable because people have different goals and abilities, but it does show the highest income level an economy could support for everyone equally under current conditions. If the living wage is higher than that, it would bankrupt the economy. If lower, it might redistribute income, but it is not impractical.
I’ll use the US as an example again. Figures are readily available. In 2007, there were 139.3 million tax returns filed and the reported amount earned by all was around 7.9 trillion. That includes government payments like unemployment, as well as rental income and unearned income from interest, dividends, and capital gains. That works out to $56,712 per taxpayer if the income wealth of the country were spread evenly among all earners. That would be a national average of $45.44/hr for a 24 hour work week.
A national average living wage of $20/hr for a 24 hour week, or $25,000 per person per year, is less than half of the theoretical equal distribution. It would come nowhere near bankrupting the economy. It would even allow plenty of room for some people to earn far more than others. There’s no question that a living wage earned over 24 hours per week would require different priorities than our current ones and that it would redistribute income, but that’s different from saying it’s impossible. In that, it’s just like so many other characteristics of a fair society: It’s so far from our current situation, it looks unreal.
It goes without saying, but I’ll say it anyway, that the amount of money needs to be transposed to a lower or higher key depending on local economic conditions — at least until the whole planet has one smoothly running economy. Poorer countries have lower costs of living and lower pay, but if income is not concentrated in a tiny elite, not-rich does not equal poverty-stricken. Take Botswana, as an interesting example. They have some mineral wealth (e.g. diamonds), but then, so does Congo (DRC) whose GDP (using purchasing power parity per capita) is about 2% of Botswana’s. About three quarters of Botswana is the Kalahari desert. It’s a small country with some resources, not a lot, that doesn’t trade oil or drugs. What they do have going for them is low levels of corruption.
The country was one of the poorest at independence nearly 50 years ago. Now they have a GDP in purchasing power equivalents of $25 billion and a population of two million. Assuming the same proportion of earners and income as a proportion of GDP as the US, equally distributed income would be $14,000 per year. The minimum wage is $0.58 per hour (approx. $1200 per year). If there’s a similar relationship between minimum and living wages there as in the US, the amount needs to be quadrupled or quintupled. So, a living wage might be around $6000, or $5/hr in a 24-hour workweek. That’s much less than $14,000. There is plenty left over to allow some people to be richer than others.
They’ve managed that despite being hard hit by the AIDS epidemic. The government, not just charities or the medical profession, have tried to take action against it (pdf). Given the scale of the disaster, it shows that coordinated and reasonable government action makes a big difference.
Although I’m using Botswana as an example, I’m not saying the people there are saints. There’s plenty of sexism, up to and including ignored levels of gender violence, and other problems. They are not totally unlike their neighbors. What they show is the level of dividends paid by any progress toward justice, even when it’s not perfect.
The biggest problems in very poor countries, those where ensuring better-than-starvation incomes for all people is literally beyond the scope of the economy, are corruption and fighting. Consider Kenya as a not-too-extreme example. They have resources, fertile land, and a large and generally educated population. But the national income, evenly spread, could not provide even $3 per day per person ($1095 per year). And yet, forty years ago they were one of the richer countries in Africa. Kenya is far from the worst country in the world when it comes to corruption and war, and yet it’s been enough to beggar them. I know colonialism didn’t help. But oppression or the extraction of resources is not the hardest thing to recover from. The hardest thing is catching the corrupting illusion that raw power, whether military or financial, brings benefits and that justice is a loser’s game. Whereas in reality it’s the other way around.
The point I’d like to stress is that even in countries without great wealth, the resources of the people can give all citizens a life free from abject poverty, preventable disease, and job-disqualifying ignorance. It just requires a lot less greed and corruption on the part of the elites. In other words, the problems in poor countries are not different from the ones in rich countries. The consequences of the same basic cause are just more stark.
Last, there’s the issue of people who aren’t working. They fall into three categories that need different approaches. The temporarily unemployed are easily addressed using much the same methods as are already familiar. A tax (or insurance, if you want to call it that) is subtracted from all earnings, and paid out as the need arises. Likewise, we already know how to address the inability to work due to physical or mental disability. They’re paid the same way as retirees, which I’ll discuss in the chapter on Care. The last group is the problem. There are people, and they’re common enough that almost everybody knows someone in the category, who are normal in every way except the ability to support themselves. The shiftless are not unemployed. They’re unemployable. There’s a difference, and attempting to pretend their situation is temporary wastes everyone’s money and energy.
However, no matter how true that is, it goes against the grain for almost everybody to pay the shiftless a guaranteed annual income and not worry about it. Possibly, if there’s a real need for a non-zero proportion of people with bare survival incomes to keep inflation down, then the non-workers could be that group. That’s also similar to the current system, except that I see it as being explicit and the members of that group take on the poverty because they prefer it to working. However, assuming true full employment is not in fact incompatible with a non-inflationary economy, then the problem of non-workers who don’t want employment remains.
Religious orders and the military have traditionally been the social service agencies for people who need outside discipline to manage their lives. The military would no longer be large enough, unfocused enough, or unskilled enough in the world I’m envisioning to serve that purpose. Religious orders are outside the scope of government and couldn’t be relied on to solve social problems. But an institution whose explicit purpose is to provide a regulated environment in exchange for work could well be a facet of government.
A government always needs a work corps, whether they use the military for that purpose, or a national guard, or something like the Civilian Conservation Corps. Most of the people working in it would be ordinary workers, but because it is a government agency, it could also serve as the place for people who were unemployable on the open market. (It’s much the same de facto pattern as the military has now.)
A civilian work corps could take on the tasks perennially in need of labor: planting trees, delivering meals-on-wheels, maintaining city parks, and so on. On the principle that anything which can be voluntary should be, people in the program could volunteer, to the extent possible, for the jobs congenial to them. The work week would be the same length as for everyone, which would leave time for voluntary training programs. Such programs would allow people who might have simply not found their niche in life to do so. The civilian work corps could have a range of options for housing, from the ordinary situation of people living on their own and coming in to work, to halfway houses, to dormitories and meals in cafeterias. People wouldn’t have to have trouble organizing their lives to choose the latter options, but they’d be there for those who did.
There would inevitably be some people whose labor was so worthless it didn’t even cover the cost of their room and board, or who were more trouble to oversee than they were worth. That’s why this has to be a government function: to support those who can’t hold up their own end.
As to how people take part in this program, I think most of it would be self-sorting. People who need extra structure in their lives, tend to gravitate to the situations that provide it. Those who didn’t, those who kept being thrown out for nonpayment of rent, who were picked up repeatedly for being intoxicated in public places, who one way or another made themselves a burden on others with no record of subsequently making amends, they could be “drafted,” as it were, and prevented from being as much of a burden in the future.
The role of government in the economy is the same as everywhere else: to ensure there are no abuses of power and therefore no concentrations of power, and to ensure there are no double standards. The consequences of consistently applying those principles to money and work require big changes compared to all current systems, from much stricter regulation of inflation, deflation, interest, and competition, to a living wage that requires a more equitable distribution of income. The ability to make vast fortunes would be limited, if not lost. The rewards for human happiness would be incalculable. Applying fairness to economies depends largely on whether people want money or goods, in the literal meaning of the word.