This is a book review of Radical Markets, taken from my blog Random Walks. I summarize and critique each chapter to varying extents. I give the book a rating of 2/5, and recommend reading the first two chapters.
Radical Markets? More like Activist Markets
The Atlas Fellowship partners with Impact Books to give fellows access to a curated collection of books worth reading. One of these books is Radical Markets. The first two chapters are worth reading, the rest are not.
Posner & Weyl make five proposals to "uproot capitalism and democracy for a just society":
Each has its own chapter, and each chapter is meant to stand alone as a defense of its policy. Yet the latter three fall flat.
What Radical Markets does well: a coherent exposition of Georgism, ‘radical’ applications of auctions to the uninitiated, and the first decent defense of quadratic voting from first principles I’ve read. What it falls victim to: left-right political reductionism, one-size-fits-all solutions to coordination problems, and hefty claims partnered with weak evidence.
Links to each chapter review:
The first chapter is the best chapter. It popularizes the Common Ownership Self-assessed Tax (COST) (aka the Harberger Tax) as a plausible mechanism by which an auction-based property market could be implemented. Coupled with concrete policy proposals and effect analyses, it is a self-contained introduction to modern-day Georgism and disrupting the current 'property monopoly' status quo.
What is a COST? In Harberger's own words:
If taxes are to be levied...on...the value of ... properties ... it is important that assessment procedures be adopted which estimate the true economic value ... The economist's answer... is simple and essentially fool-proof: allow each...owner.. to declare the value of his own property, make the declared values ... public, and require that an owner sell his property to any bidder... willing to pay... the declared value. This system is simple, self-enforcing, allows no scope for corruption, has negligible cost of administration, and creates incentives, in addition to those already present in the market, for each property to be put to that use in which it has the highest economic productivity.
- Arnold Harberger, Chile 1962
Essentially, tax properties based on their value as assessed by the property owner. To ensure that the self-assessed values are accurate representations of the owners' valuation, make all of the valuations public and mandate that a property be sold if someone outbids the declared value.
While Harberger designed his scheme as a way to raise government revenue, it offers an inspired solution to the monopoly problem we highlighted above.
Setting the tax rate requires trading off between allocative and investment efficiency w.r.t. the properties being taxed. If the COST is set at the turnover rate (the probability at which the asset changes hands) then on the margin the property owner's gains from price increases are exactly offset by tax increases -- incentivizing accurate valuations. This maximizes allocative efficiency.
However, such a high tax rate disincentivizes investment. Consider the case of a property owner who by investing $20,000 in his home can raise its value from $40,000 to $70,000. If this home has a turnover rate of 50%, and the COST is set to 50%, this owner will not invest in his home. A $10,000 profit combined with a $15,000 tax increase is not a good financial decision.
Disincentivizing property investment is bad. Private property rights are meant to avert the tragedy of the commons and encourage investment. Any alternative will have to do the same. As such, the socially optimal COST rate is less than the turnover rate.
The socially optimal property COST is non-zero though!
One might assume that the loss in allocative efficiency would offset the gain in investment efficiency. However -- and this is a key point -- the opposite happens. When the tax is reduced incrementally to improve investment efficiency, the loss in allocative efficiency is less than the gain in investment efficiency... In fact, it can be shown that the size of the social loss from monopoly power grows quadratically to the extent of this power. Thus, reducing the markup by a third eliminates close to 5/9...of the allocative harm from private ownership.
One can conceptualize higher COSTs as greater public ownership of private property, as they transfer use value to the public and increase the number of possible owners of the property. In some sense, higher COSTs mean a freer market -- more participation, more competition.
How could COSTs be implemented? Countless details would have to be worked out, most in practice, but the salient issues seem to be setting the correct tax rates and developing the necessary infrastructure for frictionless transactions. While the latter is mostly a technological and system design issue (an engineering problem! just an engineering problem), the former is an ideological one. What is the optimal tradeoff?
For typical assets, we estimate that turnover once every fourteen years is reasonable and thus (combined with other factors below) a 7% tax annually is a good target.
Posner & Weyl probably get their 7% from the median length of American homeownership being 13.2 years as of 2022. Note that this is essentially setting the COST at the turnover rate, maximizing allocative efficiency at the cost of investment incentivization. They then claim that:
At the tax rate we advocate, asset prices would fall by between a third and two-thirds from their current level. In popular and congested areas like San Francisco and Boston, where very modest houses sell for $600,000 or more, their price could fall to as low as $200,000.
Where are these numbers coming from? It seems plausible that prices would fall this much, considering that a 7% COST with a 14 year turnover rate would tax the owner $588,000 and as such they would be incentivized to lower the price of their home to find other buyers faster, leading to lower turnover rates overall and higher profits for owners. Unclear what the underlying model is though.
An important point that they make in footnote 47 of Chapter 1:
To make our account vivid we discuss some examples of personal possessions of individuals, like homes and cars, but the reader should keep in mind that most assets are owned by businesses and thus much of the participation and benefits from a COST would be through business assets.
The authors propose starting with implementing COSTs for publicly held assets to enter the private market. For instance, spectrum licenses:
...redesigning spectrum licenses to include a COST-based license fee would solve [the current misallocation of American spectrum] and could be implemented in a variety of ways consistent with existing FCC rules. This approach, which they call "depreciating licenses," would address many recent complaints about license design for the newly available 3.5 GHz bands of the spectrum; their small geographic scope and short durations under current plans were intended to maximize flexibility but may undermine investment incentives.
COSTs on Internet domains, grazing rights, and natural resource leases to name a few also make similar amounts of sense. But, a much broader implementation would reap much greater rewards:
As we noted above, the economy underperforms by as much as 25% annually because of the misallocation of resources to low productivity firms. A fully implemented COST could increase social wealth by trillions of dollars [emphasis mine] every year...
At the rate of roughly 7% annually that we imagine being near-optimal, a COST would raise roughly 20% of national income. About half of that money would suffice to eliminate all existing taxes on capital, corporations, property, and inheritance...and to wipe out the budget deficit and significantly reduce debt, further stimulating investment.
Where are these numbers coming from?? I don't doubt that the gains would be large, or that this would be a more efficient taxation regime, but where is the substantiation?? The models are neither in the text of the book nor in the footnotes, and I don't think it should be on the reader to fact check these claims?
Regardless of this chapter's issues with providing evidence commensurate to its claims, the underlying proposal of a COST is innovative and, according to John Halstead, perhaps the most serious intellectual challenge to the idea of private property in history. Worth the read.
In two words: quadratic voting.
In this chapter, we will show that these two elements -- the capacity to save up voting power, and the square root function -- would be a much-needed cure to the pathologies of the traditional voting systems used in democracies.
Why quadratic voting? Why not giving people votes proportional to the cube root of their credits, or the logarithm of their credits? What property does a quadratic have that no other function does?
Its derivative is linear. No other function would make the marginal cost of casting an extra vote proportional to the number of votes cast. We make decisions on the margin -- if one voter cares three times as much as another voter about an issue, they will be willing to pay three times as much for an extra vote, and as such buy three times as many votes than the other. No other function would lead to the same outcome.
QV achieves a perfect balance between the free-rider and the tyranny of the majority problems. If the cost of voting increased more steeply, say, as the fourth power of votes cast, those with strong preferences would vote too little and we would revert to a partial tyranny of the majority. If the cost of voting increased more slowly, those with intense preferences would have too much say, as a partial free-rider problem would prevail.
Radical Markets was my first introduction to this explanation, and for this I am grateful. I think this chapter is worth reading just for this, but your mileage may vary.
QV in practice has seen limited adoption. A version is in Akasha (a Ethereum based blockchain application) where money is the currency by which voters buy their votes. Paying for votes has obvious issues in today's world -- perhaps if the world was much more egalitarian, then this would be a better system than one person, one vote.
There is good reason to believe that QV mitigates polarization as a result of allowing individuals to vote more for issues they care more about. Implementation runs into a host of engineering challenges (how to make the UI easy to use & not require excessive amounts of thinking) but I am optimistic that they are solvable.
I doubt this will gain much traction for public elections at the state and national level. It could be useful and innovative for for local and private governance. Notably, the Colorado House Democratic caucus used it in 2019 to decide on their legislative priorities, and Taiwan has flirted with QV in their digital democracy.
Subtitled: REBALANCING THE INTERNATIONAL ORDER TOWARD LABOR
The basic argument: economic freedom is necessary for economic growth. Gains from trade have been the primary engine by which this occurs, but as intranational inequality is less severe than international inequality gains from migration should be considered instead. Expanding existing legal migration channels is insufficient and possibly detrimental to natives. Therefore, countries should auction visas and let individuals sponsor migrants. They dub this the Visas between Individuals Program, or VIP.
Bryan Caplan thinks this is his open borders proposal in disguise. I think it's where the book starts going off the deep end.
I agree with the claim that low-skilled migrants are likely a net drain on the state. As migrants are more likely to work informally and typically send large proportions of their income outside the country, they pay less taxes and consume less than natives. Naturally, this facilitates resentment (amongst a multitude of other cultural reasons, etc.), typically in existing rural, low-income, and more conservative regions.
How is the VIP going to fix this issue, exactly?? Posner and Weyl think that the money generated by the visa auction system will be enough:
Suppose that OECD countries accepted enough migration to increase their populations by a third. Suppose too that migrants on average bid $6,000 per year for a visa. This sum seems plausible that Mexican migrants to the United States gain more than $11,000 annually under the current highly inefficient system. Average GDP per capita in OECD countries is $35,000, so this proposal would boost the national income of a typical OECD country by almost 6%, comparable to their growth in real income per person in the last five years.
This is highly optimistic, and assumes that both the demand and quota for visas is at least equivalent to the population of a given OECD country. For America, that's 300 million migrants willing to pay $6,000 for a visa per year. This won't even give you 6% income growth because the GDP per capita in America is so high.
The population of Mexico isn't even 300 million! The likelihood of most migrants having $6,000 on hand is almost nil! And this money goes to the government, not to private individuals directly -- many individuals will not make the connection between increased funding for public services and the massive, massive amounts of migrants this proposal would apparently bring.
Even if migrants would arrive in the numbers that the authors propose, it would utterly, completely, irreversibly change the cultural landscape of the developed world. We are considering migration in numbers such that for every native American there would be a non-native migrant -- statistically low-skilled and with poor English. All the typical conservative arguments migration would be multiplied ten-fold, and they would have a point.
But individuals can sponsor visas! Moreso, they can sponsor migrants and get a cut of their earnings such that the migrant earns less than minimum wage! And this isn't wage slavery because the migrant would be making more than he would have in his home country, so it makes sense!
The risk of exploitation is minimal because foreign workers are protected by the same health, safety, labor, and employment laws that Americans benefit from, and foreign workers can return to their home country if the employer mistreats them.
Who enforces these health and safety laws? Americans. What are the economic benefits from arriving from, say, Haiti to the United States? About thirty-fold? What is the likelihood that the system would be abused, ala the Jim Crow South? And even then, what is the likelihood that the migrant would voluntarily return to their home country??
Many people may object to this system. Perhaps to some readers it is uncomfortably similar to indentured servitude, even though migrants would be free to leave at any time. Or perhaps it just seems exploitative.
YES.
Oh, but don't worry about any of this, because 100 million people will want to sponsor visas.
Imagine then, that 100 million people sponsor migrant workers. Currently, there are about 45 million foreign-born people in the United States. Of those, about 13 million are legal noncitizens, and 11 million are illegal aliens. If our program replaced existing migrant worker visas [which it wouldn't], the number of migrant workers would increase dramatically, from 24 million to 100 million, but not in a way that would disrupt society and overwhelm public services. [sure] It would leave the ratio of foreign-born to natives in the United States below the numbers in even the most restrictive GCC countries.
To be clear, 22.7% of Americans would be foreign born, or a little bit less than one in every four American residents would be migrants. Yes, this is a potentially sustainable foreign population, but at once? These GCC countries being used as a reference class are members of the Gulf Cooperation Council. Members include the UAE, Qatar, Kuwait, Bahrain, Oman, and Saudi Arabia. Countries positively praised for their labor rights record.
A more sane reference class would be Australia and New Zealand, which have about one foreigner for every two natives (admittedly, which are mentioned as examples). Where did they come from? According to Wikipedia:
After World War II Australia launched a massive immigration program, believing that having narrowly avoided a Japanese invasion, Australia must "populate or perish". Hundreds of thousands of displaced Europeans migrated to Australia and over 1,000,000 British subjects immigrated under the Assisted Passage Migration Scheme... The scheme initially targeted citizens of all Commonwealth countries; after the war it gradually extended to other countries such as the Netherlands and Italy.
In other words, Australia heavily enouraged white immigration (see the White Australia policy) until the early 1970s, at which point it was comfortable accepting large amounts of migrants. Skilled migrants, I might add. There are only about 1.5 million temporary migrants in Australia (compared to about 7.5 million total foreign-born Australian residents), which is an imperfect yet decent upper bound on the number of low-skilled Australian migrants.
There is no developed country which has managed to have a large foreign-born low-skilled migrant population enter over a short period of time and provide them the same standard of living or the same rights as natives. The GCC has similar proportions of low-skilled workers and an atrocious human rights record; Australia and New Zealand manage to treat migrants decently but with a predominantly high-skilled population.
These are arguments against any open-borders policy that advocates for a large influx of low-skilled immigrants over a short period of time. But the VIP is doubly stupid because it places the liability of migrant well-being on low-skilled natives, the very same people who are the least well equipped to handle it.
Anthony is a native Ohioan, Bishal is a hypothetical migrant under the VIP:
In our case, Anthony will be required to obtain basic health insurance for Bishal before he arrives (though this would come out of Bishal's earnings). If Bishal is unable to find work, Anthony must support him for as long as he remains in the country...If Bishal commits a crime, he will be deported after serving his sentence; Anthony will be required to pay a fine. If Bishal disappears, Anthony will also be fined. We do not think that the fine needs to be large, but it should sting.
100 million Americans are supposed to sign up for this??
If you want a defense of open borders & greatly expanded immigration, you can read Caplan's comic book. Not this.
This chapter advocates for letting BlackRock invest in Uber but not Lyft, Coca-Cola but not Pepsi, and McDonald's but not KFC. Anti-trust for institutional capital. A good idea in theory, but I have doubts about the practical implementation.
Who are the institutional investors, anyway? They include companies that manage mutual funds and index funds, asset managers, and other firms that buy and hold equities on behalf of their customers. The largest names are those we mentioned above: Vanguard, BlackRock, State Street, and Fidelity.
26% of the public American stock market is held by institutional investors. As institutional investors are the only single entities with large enough amounts of capital to own significant portions of centibillion dollar companies, they have an outsized influence on industry policy. And because they own significant portions of companies which are nominally supposed to be competing in the same industries, it is in their interest to stifle competition within those industries, creating pseudo-cartels negatively affecting consumers.
As an example, look at banking. BlackRock, Vanguard, State Street, and Fidelity are in the top five largest shareholders of JP Morgan Chase, Bank of America, Citigroup, Wells Fargo, U.S. Bank, and PNC Bank. If the same entities own the companies that are nominally supposed to be competing, the incentives to compete are diminished & monopolistic tendencies being to crop up. Think of Rockefeller after Standard Oil broke up -- he still was the owner of the subsidiary companies in each state, and this allowed him to multiply his wealth far beyond what would have been possible if Standard Oil stayed as one company.
Monopolies are bad for consumers! This is what anti-trust law was made to combat! We already bring anti-trust litigation against firm mergers which will increase market concentration, why not do the same for capital investments?
A simple but Radical reform can prevent this dystopia: ban institutional investors from diversifying their holdings within industries while allowing them to diversity across industries. BlackRock would own as much as it wants of (say) United Airlines, but it would own no stake in Delta, Southwest, and the others. It would also own as much as it wants of Pepsi, but not Coca-Cola and Dr. Pepper. And it would own as much as it wants of JP Morgan, but none of Citigroup and the other banks...
Our approach can be stated as a simple rule:
No investor holding shares of more than a single effective firm in an oligopoly and participating in corporate governance may own more than 1% of the market.
I agree with this policy, in principle. However, it seems difficult to disambiguate industries cleanly. In today's world, where a relatively small number of massive corporations control disproportionate amounts of the economy, it seems at least somewhat viable. But what of venture capital firms investing in multiple competing startups? Would they be required to divest from one of them if both become unicorns? How big would an industry have to be for the FTC to care about regulating it?
The authors raise the issue of the lack of usage of anti-trust in local markets. For instance:
...sociologist Matthew Desmond suggests that landlords in poor neighborhoods often buy up enough housing to have substantial power to drive up rents by holding units vacant and artificially depressing supply. Yet as far as we know, no antitrust case has ever been brought against such local but potentially devastating attempts at monpolization.
Yes, property is easy to point to as an instance of monopolistic behavior ruining lives. I am wary, however, of giving regulators even more power than they currently have. Property market regulations seem to be, on the whole, good and necessary (or at least, good regulation has the potential to have a large positive impact). But letting regulators control the behaviors of small businesses seems bad? Perhaps giving business owners more leeway to bring civil suits against others engaging in anti-competitive practices is the way to go.
Finally, the authors address the digital economy:
Antitrust authorities, who are accustomed to worrying about competition within existing, well-defined, and easily measurable markets, have allowed most mergers between dominant tech firms and younger potential disrupters to proceed. Google was allowed to buy mapping startup Waze and artificial intelligence powerhouse DeepMind; Facebook to buy Instagram and WhatsApp; and Microsoft to buy Skype and Linkedin.
Their solution:
To prevent this dampening of innovation and competition, antitrust authorities must learn to think more like entrepreneurs and venture capitalists, seeing possibilities beyond existing market structures to the potential markets and technologies of the future, even if these are highly uncertain.
Much easier said than done. The day a government regulating body has the same market foresight as the entrepreneurs and investors in the market, I will eat my hat.
Meh. Not as groundbreaking as the first two proposals, and not as patently idiotic as the third. It is surprising that they advocate for a drastic expansion in market regulation in a book nominally focused on relying on free market forces to bring about good, but oh well.
(this is where the Activist Markets label came from)
Pay people for their data. Never mind that the marginal benefit of your data to any given firm is negligble. Because machine learning systems need large amounts of data and have spiky loss curves, diminishing marginal returns for data doesn't count here!
(I am not joking, this is the argument Posner & Weyl make)
However, if later, harder problems are more valuable than earlier, easier ones, then data's marginal value may increase as more data become available. A classic example of this is speech recognition. Early ML systems for speech recognition achieved gains in accuracy more quickly than did later systems. However, a speech recognition system with all but very high accuracy is mostly useless, as it takes so much time for the user to correct the errors it makes. This means that the last few percentage points of accuracy may make a bigger difference for the value of the system than the first 90% does. The marginal value grows to the extent that it allows this last gap to be filled.
Maybe the concept of scale, scale, scale wasn't as prominent in their time as it is nowadays? Two issues: model capabilities grow logarithmically with the amount of data they are trained on, and oftentimes getting from 99% to 99.9% requires as much data as getting from 0% to 99%. The idea that the marginal datapoint has anything but negligible value is absurd.
Paying people for data that's used to finetune models, sure. Paying people to RLHF models, sure. Paying people for data that's used in massive datasets -- in principle, this should probably happen, but this will come nowhere near to providing individuals with an income equivalent to their job that has just been automated.
To make a ballpark estimate of what gains we might expect, we suppose that over the next twenty years, AI that would (absent our proposal) not pay data providers comes to represent 10% of the economy. We further assume that the true share of labor if paid in this area of the economy is two-thirds, as in the rest of the economy; and that paying labor fairly expands the output of this sector by 30%, as seems quite reasonable given productivity gains accompanying fairer labor practices in the early twentieth century. Then our proposal would increase the size of the economy by 3% and transfer about 9% of the economy from the owners of capital to those of labor.
Fundamentally, the authors miss the point that AI will make labor substitutable with non-human entities. The world in five years will likely use datasets generated by AI systems, simply because the Internet is too small for the capabilities of the models we want to build. Paying people for their data is not an alternative to UBI in an increasingly automated economy.
I would critique this chapter more, but it seems like a reasonable proposal to make in the world before ChatGPT and before people realized that scaling laws held to this extent. Still not worth reading in 2023.