Radical Markets: Uprooting Capitalism and Democracy for a Just Society

Radical Markets: Uprooting Capitalism and Democracy for a Just Society

by Eric A. Posner, E. Glen Weyl

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Product Details

ISBN-13: 9780691177502
Publisher: Princeton University Press
Publication date: 05/15/2018
Pages: 368
Sales rank: 100,549
Product dimensions: 5.60(w) x 8.60(h) x 1.30(d)

About the Author

Eric A. Posner is the Kirkland and Ellis Distinguished Service Professor at the University of Chicago Law School. His many books include The Twilight of Human Rights Law and Climate Change Justice (Princeton). He lives in Chicago. E. Glen Weyl is principal researcher at Microsoft and visiting senior research scholar in economics and law at Yale University. He lives in Boston.

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CHAPTER 1

Property Is Monopoly

CREATING A COMPETITIVE MARKET IN USES THROUGH PARTIAL COMMON OWNERSHIP

As a child fascinated by Elon Musk's Hyperloop, Alejandro Espinosa often pictured himself in the cab of the first supersonic train, sitting side by side with the conductor. It never occurred to him that these trains would have no conductors. Yet the topographic and economic maps displayed in the holographs he was peering at clashed even more powerfully with his childish dreams.

Espinosa grew up to be the head of OpenTrac, a new venture that would fulfill his lifelong ambition. The company was making plans for its supersonic train to run between Los Angeles and San Francisco, but before tubes could be installed, magnets laid down, and vacuums prepared, a route through the Central Valley had to be selected. The other sections of the train's full route, those through the East Bay and the San Fernando Valley, offered very limited choices, but there was a wide range of potential ways through the Central Valley.

Espinosa wanted to move fast. If landholders in the Central Valley heard about the project, some of them might be tempted to raise the price of their property. Doing so, however, would be a risky gamble: a price increase would impose a higher tax burden on the owner, while the probability of being on the selected route would be low.

Narrowing down the large number of possible routes was a headache, even with the Cadappster app displaying the listed value of each plot — every plot's value is posted there for anyone to see. It made Espinosa's head spin to imagine what planning a project like his must have been like before the institution of the common ownership self-assessed tax. He would have had to choose a route before he had any idea what landowners along it would be willing to accept as payment, and then he probably would have had to endure years of negotiations and court fights to obtain all the property. He knew he was lucky that finally there was a transparent, liquid, and honestly priced market for property. He would not have to endure the guilt and the public relations disaster of having to force an elderly woman off land that had been in her family for generations. These days any such resident could post a high price and deter the purchase, or sell and be richly compensated.

To find feasible routes, OpenTrac's computer scientists used many approximations. They focused on the number of topographical obstacles that would confront the engineers, such as the rockiness of the area and the heights and depths of its hills, mountains, or gorges, and used simple rules of thumb to narrow the selection. Espinosa instructed them to generate the five most promising routes.

All five selections had roughly similar land prices and offered reasonable tradeoffs in engineering cost and speed. Back when trains ran at slower speeds, the views along each route might have influenced the decision, but nowadays, even if the tubes were transparent, passengers would see only a blur. After a meeting with several of his top engineers and one marketing expert, the group settled on the route with the cheapest land costs, and felt confident that they made the best choice.

Espinosa's treasurer immediately opened Cadappster and confirmed OpenTrac's willingness to purchase each property along the route at its posted price. This automatically secured OpenTrac's ownership: having just raised a new venture round, OpenTrac was flush with cash and made all payments on the spot. With residents scheduled to move out within three months, ground-breaking could begin by the end of the year. As the new holder of the land, Espinosa merged the whole route into one plot and posted a value several times the sum of the purchase prices to ensure the security of the route.

Developers today face great challenges. When asked what the largest barrier is to implementing Hyperloop One, co-founder Josh Giegel replied, "We really need a right of way." The interviewer responded, "Some constituencies, such as private landowners ... could see holding this up for quite some time." There is an obvious incentive for a landowner to hold out for a high price when such a valuable project is coming through.

Suppose that each of 2,000 landowners along the route would normally be willing to accept $100,000 ($200 million in total) to cede right of way. Giegel believes that, net of other costs, Hyperloop can yield $500 million of operating profit. Now suppose that after the developer has bought the right of way on 1,999 pieces of land, the two-thousandth landowner learns of his plan. Rather than sell for $100,000, that homeowner might insist on a much higher price. Giegel would have no choice but to pay up: if he does not buy, he has lost his $199.9 million investment in the first 1,999 pieces of land. In principle, the landowner could hold out for nearly the entire $500 million. Even if she set the price at $400 million, the developer would do better by accepting the offer than by turning it down since $100 million is better than nothing. But if the developer anticipates holdout, he would not embark on the development in the first place. And remember that the developer has to contend with all 2,000 individual landowners, any of whom might decide to hold out for a high price. Several holdouts would quickly squash the project.

At present, developers minimize the holdout risk by taking costly precautions when they buy up land — for example, by acting secretly through shell corporations. But they still must engage in lengthy and expensive negotiations with individual sellers, which can cause delays and increase risk to intolerable levels. That is why governments often take the lead, using the power of eminent domain to create new commercial or residential districts. But eminent domain is often unfair and always politically controversial.

Large-scale land development controversies receive public attention, but bargaining problems like those faced by developersaffect ordinary people and small businesses every day and cause trillions of dollars per year of losses that are hidden from public view. This challenge — which we dub the "monopoly problem"— turns out to be inherent in private property. It has preoccupied economists and philosophers since the birth of the modern economy.

Capitalism and Freedom, or Capitalism and Monopoly?

Modern capitalism evolved out of a system of feudal land ownership, which put significant restrictions on people's freedom to sell land and labor. As Adam Smith explained, a defining feature of capitalism is the right to trade. Capitalism advanced in tandem with the scientific and technological innovations that made trade a valuable and significant part of the economy. A fiefdom in a valley in, say, thirteenth-century Europe, might have occasionally traded with itinerant merchants. But most goods — including foodstuffs and textiles — were produced in the community for community members. When improvements in navigation made long-distance trade cheaper, it became more efficient for the community to specialize in one commodity (say, wheat or textiles) while buying the goods it needed from other communities. It was the harnessing of steam and electric power in the late eighteenth and nineteenth centuries that allowed for a massive expansion in trade.

Making the system more efficient also required adapting communities to serve the broader market by allowing extensive trade within communities and local areas as well. For example, a lord could sell his game park to an entrepreneur, who might use it for more modern intensive farming or for the premises of a factory. A lone craftsman makes far fewer pins per person than a factory where workers are assigned to specialized tasks. To set up a factory, however, an entrepreneur might have to acquire land from several feudal estates and hire a large number of workers who were bound as serfs to different feudal lords. Industry thus depended on ending the system of entailments, which kept land in the hands of a single family, and on peasants freeing themselves from bonds of fealty. At the same time, a great deal of property was held communally, such as common pastures where peasants grazed their flocks. Peasants could not buy or sell rights to graze and could not acquire plots of this shared land.

Smith and other Radical reformers in Britain (such as Jeremy Bentham and James Mill) saw these privileges and traditions as barriers to achieving the most efficient use of property, or what came to be known as allocative efficiency. To support such allocative efficiency, Radicals promoted clearer and freer property rights and the enclosure of common areas (including pastures and forests), which turned them into private property. These changes are closely associated with the rise of capitalism. In the American West, the conversion of open pastureland into family farms was a first step to industrialization.

Yet the justification for private property goes back well before capitalism, at least to Aristotle, who realized that people care best for things they own. If you own a plot of land, which no one can take from you without your permission, you will be compensated for any investment you make by either your enjoyment of that land or the high price that you can charge a future buyer. In contrast, a common pasture will be overgrazed, a shared kitchen neglected, and a group project usually put on the back burner. We will refer to this beneficial feature of private property as investment efficiency.

When put into practice, however, the Radicals' vision of capitalism did not run as smoothly as they had hoped. At first, events seemed to bear out their optimism. The nineteenth century saw an unprecedented period of economic development. Previously, economic growth was largely in line with population growth, which in turn proceeded slowly. Income per person, an important measure of social progress, had been stagnant for nearly all of human history. The nineteenth century was the first time that national productive capacity steadily grew. The fruits of invention and development abounded. Factories opened in enormous numbers. Steam carried passengers across continents. Goods from around the world became available in many countries.

However, these gains were concentrated among the bourgeoisie, a small class of rich city-dwellers. The former peasants who became the working class lived under miserable conditions like those depicted by Charles Dickens. Despite the early industrial revolution, workers' wages in Britain remained flat from 1750 to 1850.

Nor did the new capitalist order even seem to be as productive as hoped. Some aristocrats allowed large swaths of their lands to lie idle or be used unproductively. The "Long Depression" of the 1870s in the United States inspired self-trained political economist Henry George to write his 1879 masterpiece Progress and Poverty. In that book, George summed up the paradoxes of nineteenth-century capitalism:

The nineteenth century saw an enormous increase in the ability to produce wealth. Steam and electricity, mechanization, specialization, and new business methods greatly increased the power of labor ... Surely, these new powers would elevate society from its foundations, lifting the poorest above worry for the material needs of life ... Yet we must now face facts we cannot mistake. All over the world we hear complaints of ... labor condemned to involuntary idleness; capital going to waste ... Where do we find the deepest poverty, the hardest struggle for existence, the greatest enforced idleness? Why, wherever material progress is most advanced ... This relation of poverty to progress is the great question of our time.

George's concerns echoed a growing chorus of socialist critics. They shared Smith's aims of efficiency but doubted that private property would achieve it.

It is useful to remember that many people in nineteenth-century Britain inherited their land. Rather than investing in it or selling it, they would lazily collect rental payments from tenant farmers. Even after early reformers succeeded in eliminating many feudal restrictions on property, owners often refused to sell their land to people who wanted to put it to more productive use except at absurd prices, thus impeding industrialization. Aristocrats gave scant attention to their properties, preferring to spend their time in high society or in politics. Many depictions of this period focus on the social lives of the aristocracy; little attention is given, or was given by the aristocrats, to the hard work of managing their properties. Even those who did sell them would waste the money they raised on the indulgent entertainments depicted in Jane Austen's novels rather than investing the money in new ventures.

Caring for the land was left to the peasants, slaves, and tenant farmers. Yet even the most fortunate of these, the tenants, had little reason to invest in land because it could be expropriated by their shiftless landlords. So farmers allowed it to decay, with poor results for output. As the population grew and productivity increased, aristocrats charged ever more for their land, inhibiting further progress and leaving even less to tenant farmers. Land lay idle and neglected, and the growth of cities was stunted.

The wealthy were rewarded for doing nothing. Poor people who needed land had to pay vast prices to obtain it or else starve. Critics attacked these circumstances as perverse, and portrayed the rich, in fiction and nonfiction alike, as parasites (sometimes literally, as in Bram Stoker's Dracula).

The problem critics identified we label the monopoly problem (as did many of them), though our use is somewhat broader than is common these days for reasons we discuss later. We normally think of a monopolist as a person or company that owns all of a good and can charge a price higher than the normal market price by withholding some of the supply. However, a landowner can also be regarded as a monopolist because land is so often unique in its character and location.

Like a monopolist, the landowner can earn higher returns on the sale of her land by holding out for a generous offer (effectively withholding supply from the market) rather than selling to the first person who offers a fair price. In the meantime, the land is unused or underused. Thus, private ownership may actually hamper allocative efficiency. And this is the case not just for private ownership of land: private ownership of any asset, except homogenous commodities, may hamper allocative efficiency. Think of business equipment, automobiles, art, furniture, airplanes, intellectual property. The amount of money we are talking about is not small. Because of the ubiquity of private property in our economy, empirical research suggests that the misallocation of resources due to monopoly and related problems we discuss below may be reducing output by 25% or more annually — trillions of dollars per year in the United States alone.

The capitalist system created by Radical reforms, it thus seemed, had loosened the restrictions inhibiting the free flow of land and labor in order for them to be put to their best uses, but had not eliminated them. Monopoly power blocked the path of progress.

Central Planning, Corporate Planning

Some socialist critics imagined that this "irrationality" of capitalism could be solved through state ownership and central planning. After all, they reasoned, if the government owns all the land and employs all citizens, it can simply order the land to be improved and used in the best way. So long as the government is benevolent and operated by well-informed experts, there can be no monopoly problem because no private person enjoys the right to exclude others from the land. This central planning approach is closely identified with the ideas of Karl Marx, though Marx ultimately soured on centralized planning, seeing it as too open to abuse.

Yet planning wound up being as important to capitalism as it was to any dream of a socialist utopia. Social critics were not the only ones increasingly frustrated with the way landowners, small-business people, and other property owners stood in the way of economically valuable projects. As many economists have pointed out, creating large-scale enterprises consistently requires putting together a variety of moving parts, each controlled by a local monopolist. Entrepreneurs were frustrated by monopoly problems at every turn. If they tried to expand their factories, a landowner would hold out. If they tried to build a railroad, thousands of local politicians tried to extract a pound of flesh. Every small supplier of oil, coal, or parts would waste endless hours bargaining with them or trying to take advantage of them.

Nobel Laureate Ronald Coase called these frustrations the "transaction costs of the market." He explained that to avoid this chaos, business people formed large corporations that would own many assets, such as factories and parcels of land, and employed many workers whom the head of the corporation could centrally direct to accomplish its goals without constant negotiation. Corporations rapidly took over the business landscape during the nineteenth and early twentieth century. Standard Oil, for example, came to dominate oil production and the railroads were managed by similarly large corporations.

(Continues…)



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Table of Contents

Acknowledgments ix

Preface: The Auction Will Set You Free xiii

Introduction: The Crisis of the Liberal Order 1

1 Property Is Monopoly 30

2 Radical Democracy 80

3 Uniting the World’s Workers 127

4 Dismembering the Octopus 168

5 Data as Labor 205

Conclusion: Going to the Root 250

Epilogue: After Markets? 277

Notes 295

Index 319

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