The Rise of Egalitarian Libertarianism
Rough Drafts of a Political Economy for the Blockchain Era
A new book by Eric Posner and Glen Weyl, Radical Markets, proposes policies aiming to make society both more market-oriented and more nearly equal. That will sound to many like a contradiction. But, while some of this book’s specific proposals are more attractive than others, they add up to a compelling case that libertarianism and egalitarianism are not natural enemies. This is no small achievement. Indeed, a convincing marriage of egalitarianism and libertarianism could be a game-changing political menu option. Also, it might be just what blockchain technologists have been looking for. More on that later, though.
To many, libertarianism means less outcome equality. No thinker bears more responsibility for this preconception than Ayn Rand, whose passion for laissez-faire was exceeded only by her ardent anti-egalitarianism. She suggested that the two ideas were logically inseparable, and celebrated outcome inequality. Her many disciples continue to reinforce libertarianism’s anti-egalitarian reputation by portraying the marketplace as a sorting mechanism where the worthiest assume their rightful perch atop society.
Committed egalitarians, on the other hand, tend to see the extremely disparate rewards of our (partly) market-driven economy as inimical to the equal dignity of every human life. Accordingly, they often look leftward for a political home.
A subset of egalitarians nonetheless appreciates the power of efficient markets, or looks skeptically toward centralized power, and therefore aligns uneasily with big-government leftists. This group has a mirror image in reluctant libertarians who worry that morality dictates a stronger form of egalitarianism than efficiency permits.
Posner and Weyl try to slice this Gordian knot by outlining ideas that aim to make society materially wealthier and more efficient, but also fairer and and more economically equal.
To the (considerable) extent of their success, they may just have discovered a fairly unexplored ideological continent. Here lies a home for the quiet voices at the margins of their own camps — the leftists worried about centralization and inefficiency, and the libertarians troubled by inequality. Egalitarian libertarianism also promises to expose those who espouse either leftist or rightist economics for selfish reasons. For example, where market mechanisms will lead to greater outcome equality, supposedly-egalitarian leftists whose real interest is preserving rents will be unable to object without dropping their loincloths. Equally embarrassed will be “free marketeers” who love the advantages of the rich more than the magic of the markets.
No, really, it is radical
To see whether egalitarian libertarianism has legs, we should look at some of Posner & Weyl’s ideas. None of them are quite fully-baked, but several already smell delicious. I will focus on their most (though not only) thought-provoking proposal: the “common ownership self-assessed tax”, or COST.
Inspired by the ideas of the 19th-century American economist Henry George, the COST would work something like this: All assets would be subject to property taxes, calculated as a percentage of the possessor’s self-reported asset value. That is, all asset holders would be free to under-report the value of their assets, and pay minimal property taxes. The catch is that when they report an asset’s value, they are also publicly committing to sell it to any bidder willing to pay that amount.
Here, Posner and Weyl earn the right to use the word “radical”. This is a partial dismantling of traditional property rights. Perhaps skeptical leftists will perk up their ears?
The obvious drawback to a COST is that it would harm investment efficiency, because people might hesitate to invest in assets that could be snapped up from them at any time. But this problem is less dramatic than it appears at first. For if possessors thought an investment likely to increase the value of an asset, they could simply increase their self-assessed valuation, rendering a forced sale unlikely (and/or profitable). Still, the taxation of asset values would dis-incentivize investment.
Counterbalancing this drawback are enormous efficiency gains. A COST could, to a remarkable extent, remedy capitalism’s most notorious flaw: monopoly. We have grown accustomed to thinking of monopolies as unusual cases when a large corporation gouges a cornered market. But monopolies, and monopoly profits, might be more commonplace than we generally realize. Posner and Weyl argue persuasively that monopoly profits occur whenever a self-interested seller names her price for a non-fungible asset. For example, a homeowner enjoys a monopoly windfall when she successfully waits out a rising market to sell at a higher price. So does an incompetent firm owner who — thanks to his banker’s tough negotiating — sells his shares to a better operator for a price much higher than he (the seller) would have been willing to accept. In all such cases, owners of assets are exacting wasteful rents by doing nothing of value.
In short, the traditional right of private property facilitates one kind of efficiency, investment efficiency, at the expense of another kind, called allocative efficiency.
This principle is well-understood in the context of eminent domain. If private property rights were absolute, someone who happened to own a piece of land over which an important highway had to be built would hold out for nearly the entire surplus value of that highway to society. Because this would be ruinously inefficient and unfair, such landowners are compelled, in the United States, to sell at fair market prices. Yet we routinely allow property owners in private markets to hold out in almost exactly the same way, generating enormous waste.
To visualize allocative inefficiency, think of a landowner who buys an empty lot, leaves it vacant for several years while the neighborhood around it develops, and then sells it at a profit. During that time, the lot’s productive capacity goes entirely to waste. Despite imposing this burden on society, the landowner nonetheless captures value created by the lot’s neighbors, whose work made the neighborhood more desirable.
Similar waste occurs routinely with intellectual property (patent trolls), stocks and bonds (passive investors), and every other asset class — even commonplace chattels like cars and clothes. Posner and Weyl estimate that a COST would increase economic output by as much as 5%, and some reckon the burden of allocative inefficiency as high as 25%.
OK, but how much is the COST?
If the COST were set at 100%, possessors would be forced to dramatically under-report the values of their assets. Consequently, assets would change hands like hot potatoes, and investment efficiency would be abysmal. But if the COST were 0%, possessors would report ridiculously high asset values and efficiency-promoting forced sales would almost never occur. Possessors would enjoy monopoly profits, just as they do now. Clearly the COST should be somewhere between 0% and 100% — but where?
Posner and Weyl observe that if the COST were set at the “turnover rate” (i.e., the probability that the asset will change hands in a given period), possessors would truthfully report their reservation price (i.e., the price at which they are indifferent between selling and holding the asset). When the COST is equal to the turnover rate, the advantages and disadvantages of under- or over-reporting the asset value turn out to be in perfect equipoise. For example, if I have a million-dollar asset of the sort that changes hands about every ten years, then its turnover rate is 10%. If I over-report its value by $100,000, there is a 10% chance I will get an extra $100,000, giving me an expected gain of $10,000. But I will also be taxed an extra $10,000, perfectly offsetting that gain. The same principle holds if I under-report its value: my tax savings are perfectly offset by the risk of fetching a lower sale price. Therefore, I am best served by candidly reporting what the asset is worth to me.
Still, a COST set at exactly the turnover rate would come at substantial cost to investment efficiency. Somewhere below the turnover rate, but above zero, lies a COST that would strike an optimal balance between allocative and investment efficiency.
A Digression on Private Property
It is worth reflecting on our bizarre blindness to allocative inefficiency. When we see an underutilized asset, if we even notice the inefficiency, we tend to accept it as a socially benign exercise of the owner’s rights. We are very accustomed indeed to the thought that private property is a friend, not an enemy, of economic efficiency.
But property rights are not features of nature. Nor are they entirely products of modern thinking. In fact, when 18th century economists laid the foundations of modern capitalism, they were essentially proposing tweaks to older, murkier feudal privileges known as land tenure. Land tenure, of course, had nothing to do with efficiency or the common interest: It was based on a simple axiom that the king owns everything absolutely and by divine right. All non-king landholders were tenants or sub-tenants who had essentially been entrusted with a greater or smaller portion of the despotic privilege. At the end of the feudal era, the notion of absolutist dominion was not discarded, but rather devolved to a somewhat broader class of people, who became the first modern land owners.
I do not want to write a dissertation on the history of private property. I only want to point out that it is complicated and profoundly historical. Neither a natural fact, nor a product of pure reason, it is a messy “bundle” of many rights connected to property, some of which are best understood as relics of an ancient despotism. We rightly laud enlightenment-era thinkers for moderating and updating those medieval privileges, giving us modern property rights. Three hundred years later, no one who celebrates that achievement should categorically oppose a further update.
By imposing a COST, we would remove just one element from the complex endowment that we now call private property — namely, the right to eternally prevent more productive users from purchasing property at a fair price. If any element of the property right is a stubborn relic of despotism, it is surely that.
Wait, Why is This Egalitarian Again?
You might be worrying that this isn’t necessarily egalitarian. Under a COST regime, wouldn’t the wealthy be able to snap up the possessions of the poor? Wouldn’t the needy be forced to sell their property at low prices if they couldn’t afford to pay a high COST?
Of course these things would sometimes happen. But consider the COST’s other consequences. First, it would increase efficiency and growth throughout the economy, at once guiding assets into the hands of more industrious owners and decimating the monopoly profits by which the rich effortlessly grow richer. Second, the COST would raise enormous revenue that could be distributed to everyone as a social dividend.
Posner and Weyl envision a COST averaging about 7%. This would raise about 20% of national income at current asset prices. They propose using about half of that revenue to eliminate other inefficient taxes, and the other half to fund a payment of about $5000 to each person in the country. This enormous yearly benefit would grow with the newly more-efficient economy.
Instituting a 7% yearly COST would immediately reduce asset prices by between one third and two thirds. To the wealthiest members of society, this would be painful. But it would make little difference to the vast majority whose most significant assets are the future returns to their labor. In fact, the drop in asset prices would put more property within their reach.
Furthermore, even though it would cause an initial drop in asset prices, the COST would immediately increase the expected future returns of all assets in the economy by increasing the chances that they will be productively managed. Thus, the COST would increase growth, decrease monopoly power, and broadly redistribute the returns to wealth. Everyone would win except monopolists.
Interestingly, Posner and Weyl observe that the COST would reduce the traditional opposition between labor and capital by meaningfully socializing the returns to capital. If technological progress continues to increase capital’s share of income, e.g. through automation and A.I., then the time for a COST is, well, soon.
The Crypto Political Economy
Many worry that blockchain technology is anti-egalitarian. Indeed, decentralization of political power holds little appeal if it will be accompanied by some new hyper-concentration of economic power. Why should we want liquid democracy if it means the rich will be able to buy most of the votes? Why should we laud new bottom-of-the-pyramid economic opportunities, if the wealthy will continue to entrench their power by capturing most of the returns?
These are important questions. The basic appeal of blockchain technology is connected to its potential to decentralize power. But whether decentralization also means more equality remains an open question. And so far, blockchain technology has tended to concentrate vast power in the hands of a few, just like previous supposedly-democratizing technologies. If this continues, blockchain technologies may not deserve the enthusiasm of the general public.
I believe that blockchain technology can enable a more egalitarian economy. But if sincere egalitarian voices do not prevail within the blockchain community, it will not happen. The weird ideological posturing within the chaotic world of blockchain therefore might be rather important. Far too many smart, interested people are missing a trick by sitting on the sidelines.
Obviously, the COST is a radical idea. Congress will not soon approve it. But, in a world where technology reshapes society as fast as politics, a COST could still play a role in near-future property ownership. For example, on a network like Ethereum, an ecosystem of non-fungible assets represented by ERC-721 tokens could be designed with a built-in COST. Real economic growth might occur in such ecosystems, providing dividends to all participants in a fair and efficient manner. This might serve as a proof-of-concept for real-world legal reform. (More speculatively, if enough economic activity migrated to the networks, the inefficiencies of analog property law might become less important.)
The point is that if political power is about to be decentralized, how it’s done matters. It matters whether new digital asset classes are subject to a COST. It also matters whether new forms of governance use mechanism design to empower individuals, or dollars. And it matters how the wielders of new crypto-fortunes decide to influence the public debate.
Egalitarian libertarianism of the kind described in Posner and Weyl’s book might be the political template that blockchain technologists need. Everyone interested in the future of political economy should be familiar with its key arguments.
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Edited by: Steven McKie
