Book Review: "Radical Markets" by Eric A. Posner & E. Glen Weyl

I've recently read the book "Radical Markets" by Eric A. Posner & E. Glen Weyl. I should disclose that I came to know of this book upon attending a talk and Q&A session on campus by the latter author about this book, and that I was able to ask a question during that time (though as I point out later, I didn't find the answer to be so satisfactory). In any case, the topic intrigued me. This book is essentially a vision for a radical reformation of society, starting in the West but ultimately spreading through the world, such that concentrations of power are systematically broken and a level playing field is quickly approached. The two key novel contributions of this work are the notion of a common ownership self-assessed tax (COST), which aims to revolutionize notions of ownership by abolishing property rights extending to perpetuity and replacing them with auctions for goods & capital, and quadratic voting (QV), which aims to replace the principle of one-person-one-vote with voting credits such that individuals can vote on issues or candidates (for or against) in proportion to their perceived importance while being prevented from unduly swinging elections. There are also other issues discussed, such as immigration, institutional investment, and the value of digital data, all in the context of concentrations of power. It is worth pointing out that though there are many arguments that extend to Canada, the UK, other European countries, Japan, Singapore, Australia, and New Zealand, most of the arguments are made in the context of the US.

I will leave a detailed critique after the jump, and summarize my thoughts here. I found the ideas presented in the book rather intriguing and certainly novel. However, the main flaw of the book in my view is that the authors too often like to present their ideas at a very broad conceptual (macroscopic) level while simultaneously presenting examples justifying these concepts at a very granular (microscopic) level. The missing elements are the granular implementations of their broad concepts as well as the implications of the granular examples interacting on a larger scale; as a result, particularly for the introduction of the COST ideas, the claims must be taken essentially on faith, as the authors are quite glib about the importance of implementation details to the overall path of society if their ideas were to be followed. Given this, there are many reasons to remain skeptical about these ideas. This is also evident in the writing style too, in that my need to reread parts of certain chapters multiple times, while in part because these ideas are certainly not trivial, was mostly because of these sorts of logical leaps to conclusions that were not obvious, and many times, these conclusions remained non-obvious even after multiple reads through; the writing is otherwise engaging and fun to read, but I could tell that the authors were at many points getting swept up in their own ideas at the expense of clarity for readers. Overall, I recommend this book because the ideas are intriguing and I do want to see these ideas fleshed out better, but I would not recommend this book in the sense of wanting to preach these ideas myself. Follow the jump to see more detailed discussion about this book.

Preface & Introduction

The preface describes the current state of economic inequality in Brazil, particularly using the favelas of Rio de Janeiro as an example, and posits that living conditions would improve & inequality would decrease if permanent property rights were replaced by public auctions not only in Brazil but everywhere. This is the thesis of the book, and the authors dedicate it to William Vickrey, whose work on auction mechanisms has been applied to congestion pricing, online advertising, pollution controls, and many other things, but who had a much grander vision for auctions transforming society. However, even this preface evinces schizophrenia (in the etymological sense of "split mind", not in the psychological sense) in claiming both that auctions would free Rio de Janeiro from abuse of land leading to favelas and simultaneously have mechanisms to ensure that an apartment owner/tenant doesn't suddenly lose his/her home. Perhaps the authors mean that even if ownership is abolished, there will be a certain minimum time in which people can hold onto property without fear of a potential buyer forcing a sale at auction, but their lack of clarity in this matter is not promising.
The introduction reviews the history of the last 2 decades leading to socioeconomic stagnation & rising nationalism around the world, and argues that radical 19th century and earlier economists like Mill, Bentham, George, and Smith lived through similar times in a broad sense and that much of the ills of today can be attributed to inefficient concentration of economic power through monopolies as well as political power through voting for singular candidates in equal measure rather than issues in proportion to importance. Thus, the authors argue for returning to the virtues of breaking economic & political monopolies. They admit that a lot of the trends in inequality, labor share of income, and so on may simply be correlated without a causative relation, but they argue that concentration of power is likely cause and effect of these phenomena.

Chapter 1

This chapter goes over Henry George's ideas for land taxes & William Vickrey's ideas for auctions of public goods & services, as well as the ideas of allocative & investment efficiencies, in order to flesh out their central idea of COST. The idea of COST is basically that universal rights to property held in perpetuity would be abolished and replaced by common ownership in which people pay for the right to exclusively hold certain property for limited times, with the payment amount equal to the self-assessed value of the property multiplied by a rate dependent on the type of property such that the tax rate is equal to the probability that a new buyer will appear & force a sale at auction. Tax revenue will be redistributed through society (whether through public services, a universal basic income, or some combination of those), and this system would disincentivize both overvaluation, whose aim would be to avoid a sale, via higher taxes, and undervaluation, whose aim would be to avoid taxes, by making a sale more likely. A tax rate of 0% would essentially replicate today's system, which has low allocative efficiency because property holders can set prices arbitrarily high to avoid sale and thereby thwart measures to create more churn in the economy, along with high investment efficiency as property holders are incentivized to improve their property values through investments. A tax rate of 100% would be the ideal of Henry George, with high allocative efficiency by ensuring society as a whole and no individual profits from such churn, and low investment efficiency as individuals are disincentivized from investing in their property in the absence of profits. Intermediate tax rates would produce intermediate results, and the examples presented seem to favor lower tax rates.

The authors do warn that it is more realistic to apply this system to niche settings first, like wireless communication spectra or online advertising networks as is starting to happen now. This also reminds me of how, as I recall, the Japanese government builds rail infrastructure but holds regularly scheduled competitive tenders for private purchases of rolling stock & licenses for operations for limited times, which may be a reason for the efficiency and success of Japanese railway systems.

However, there are a number of points in this argument that make me skeptical. For one, it isn't clear whether academic research would be exempt from this system, and if not, how researchers can work effectively if their equipment is always under the threat of forced sale, given that basic research is an area where monopoly power is valuable. On the flip side, if academic research were to be exempted from COST, then that means academic institutions could become effective monopolies on all research by sucking up all equipment from nonacademic individuals & institutions and then using their status as gatekeepers (through admissions processes) to prevent competition from outside of academia, which also doesn't seem desirable. (For the record, this question about research was what I asked at the Q&A; it is no surprise that the book's treatment of this subject is as unsatisfactory as Weyl's response to me.)
Also, the chapter has a story about a hypothetical future fracking prospector being able to immediately see land values, but this raises several questions in turn. It isn't clear how COST would deal with externalities, like the positive externalities of clean drinking water versus the negative externalities of polluted water given upstream/downstream effects, in a fair & equitable way. Plus, if a fracking site is proposed near a poor community whose property would have less value, even if those people sell at the true value (avoiding higher taxes from overvaluation), they would have to pay to relocate too, thus perpetuating the cycle of poverty.
Many of the examples of transactions between two people seem to implicitly assume similar preferences for individual goods, but the analysis can change dramatically when considering heterogeneous preferences over bundles of good. While my memory is hazy, I seem to recall from my intermediate microeconomic theory class (14.04) that even in a general equilibrium analysis for 2 people, many of the welfare theorems can fail if their preferences differ greatly from each other, so trade can produce winners & losers rather than making both people better off at a Pareto optimum. It seems like the authors really like using simplified examples for illustration, but they should have been more responsible in addressing the complicated and subtle counterarguments rather than pretending such counterarguments are negligible from being so wrapped up in their own arguments.
It also isn't clear how this would avoid groups of people constantly bidding on objects within the group to exclude outside bidders, thereby effectively preserving the status quo. That said, the authors do acknowledge the need for government vigilance against such collusive behaviors. Also, while the authors do say that things like heirlooms can reasonably be excluded from the COST system, it isn't clear how turnover rates & corresponding tax rates can be practically assessed & enforced in general.

Perhaps all of these questions can be resolved by fully considering the implementation details of COST as well as all dynamic interactions in a system-wide sense, but the notion that such a consideration would vindicate the robustness of COST is far from obvious. The authors are too glib about implementation details & too narrow in the approach to examples, which is a major flaw of the presentation of the idea of COST given their sweeping statements about the need for markets to accommodate the diversity of preferences, promote competition, and decentralize power. Moreover, COST, like many of the ideas in the book, seems to depend crucially upon a well-informed & well-educated citizenry, yet even with better education, the combination of imperfect information (particularly the difficulty in people honestly assessing the values of their possessions) and emergence of phenomena in large populations not seen at the level of pairwise interactions (analogous to the emergence of condensed phase behavior from large collections of molecules) could very well lead to the unintended consequence of COST perpetuating socioeconomic inequities rather than mitigating them. Finally, the authors optimistically meditate on the possibility that COST will lead to people valuing experiences and relationships more than possessions; this is meant to be more philosophical, so I won't comment on that further.

Chapter 2

This chapter describes the Condorcet paradox & Arrow impossibility theorem, which basically say that if multiple people vote rank multiple alternatives, then collective preferences among pairs of alternatives will not be transitive. These effects, combined with strategic voting, could explain why citizens of Western democracies feel disenfranchised & politically hopeless, so the authors propose a solution in the form of QV. The idea is that instead of each person getting a vote for each candidate & referendum issue in equal measure at each level of government, each person would get a number of vote credits every year that can be distributed among candidates & issues in a given election or saved to accumulate for future elections. If a voter uses a certain number of vote credits on a given candidate or issue (with the key being that every candidate or issue must have options to vote either specifically for or specifically against it), the actual number of votes that person casts is the square root of the credits used for that candidate or issue. This ensures that intensity is accounted for in voters' preferences while making more extreme voting patterns more costly, forcing voters to more carefully budget & save vote credits.

In this chapter, the authors do a much better job of explaining why QV, which has a marginal cost to voting that linearly depends on votes cast, is superior to other functions with increasing marginal costs, and of justifying their claims with well-designed surveys & trials along with appropriate caveats about the initially feasible regime of applicability: essentially, if the marginal cost increases too slowly, then passionate minorities can too easily swing elections, while in the opposite case, passionate minorities will too often be quashed by majorities. One big question though is how multi-candidate elections would really work. The authors go into this in some detail, but it isn't clear whether the majority rule would still be kept, whether the candidate that receives the largest (along the entire real number line, i.e. most positive or least negative) number of votes will win regardless of the other candidates, and so on. Also, it is still possible for older people to strategically save vote credits to vote when they only have a limited time left in their lives and are therefore less concerned about long-term consequences. Of course, there shouldn't be an upper limit on the age of voters or a test of health, but given that the current system does give everyone an equal vote for every election, it isn't clear if QV would do better in this context.

Chapter 3

This chapter describes a scheme to liberalize immigration in the US in order to allow ordinary citizens (beyond relatives or employers) to sponsor immigrants, earning money from the government proportional to the number of immigrants they sponsor. Ideally, companies would benefit from a larger labor pool, immigrants of all skill levels would benefit from more opportunities, and working-class Americans would benefit from money earned through sponsorships along with the intangible gains from cultural exchange. Moreover, such a system would clarify the costs of perpetuating poverty outside of US borders, and allow for more remittances that would enrich developing countries enough to end up mitigating the need for further emigration from those countries to the US.

This raises a few questions in my mind. First, it isn't clear if the financial incentives for sponsorship would be able to overcome lost or depressed wages from a larger labor pool, especially for lower-wage workers. Second, even if temporary migrant workers are exempt from minimum wage laws, it isn't clear that health care, local infrastructure, schools, and other public services would be able to handle such a huge influx: even if laborers were to move freely, laws concerning public services are still confined to lie within national borders, and the authors' naïve/cavalier view of this issue contrasts with their serious consideration of the issues migrants to western Europe have faced. Finally, it isn't clear why the authors see merit-based immigration, like the Canadian system, as a "failure", while simultaneously lauding Toronto as a role model on immigration issues. Again, perhaps many of these concerns could be alleviated with a fuller consideration of implementation details as well as broader system-wide effects, even if other ideas like COST or QV are not brought into the picture, but this still isn't obvious, and the authors' neglect of such details and broader effects seems irresponsible given the political divisiveness of immigration in the US right now. (This book was written and published after the 2016 election, and the authors make reference to this and to the features of right-wing nationalism that led to the result, so ignorance is not a valid excuse.)

Chapter 4

This chapter focuses on the oligopoly of institutional investors. While the authors don't make it clear at first, they do later clarify that their focus is on actively managed investment funds, as opposed to passively managed index funds. Their claim is that institutional investors whose main business is actively managed funds (thereby excepting Vanguard, which only deals with passive index funds), by virtue of having significant fractions of company shares, wield enormous corporate power, and their holdings across similar companies within an industry constitute oligopoly power. The authors propose either banning institutional investors from holding shares of multiple companies in a single industry, or capping the holdings of each among multiple companies within a single industry, though it isn't clear how to then deal with large conglomerate corporations that span multiple industries in the absence of further antitrust regulations. Moreover, passive index funds could be exempted from such caps provided that their managers or heads do not have any say in corporate governance. It was interesting to see the authors acknowledge that some of the further issues that could arise from this could be dealt with by applying QV to corporate governance too, thereby limiting the powers of large shareholders and incentivizing smaller stakeholders to participate more actively. That said, I would like to have seen more explicit discussion of the degree to which antitrust policy would need to be more strongly enforced for this to work; for example, if each institutional investor is nominally limited to buying 1% of the shares of each company within a single industry, institutional investors could form shell companies and act as a trust to get around this.

Chapter 5

This chapter is about the value of digital data to companies, the fact that users are effectively doing unpaid work for those companies so most data is of poor quality, and the possibility of data labor unions. The authors give a pretty decent description of neural networks for lay readers, and go deep into the issues with paying people for their data. In particular, I didn't realize just how much work people are doing by providing their data to companies like Google & Facebook (as I'm doing now in some sense), and how formalizing this by paying users for data would change the relationship users would have with these sites; strikingly, as Facebook wants more high-quality images, tags, and captions for classification, categorization, and generation of descriptions, paying people for submitting data to the site would change the site from simply a place to upload and share posts & pictures with friends & family to a place where users would actively interact with the site specifically to assist in such classification. Also, the idea of paying users for data does remind me of one of my research collaborators' suggestion to pay scientific journal referees to review papers so that they are incentivized to write more useful comments.

Conclusion & Epilogue

The conclusion extends the arguments in the book to their combined speculative logical endpoint. In particular, it suggested ultimately replacing vote credits with money for QV in conjunction with COST, as the socieconomic leveling effects of COST revenues going back to society as a whole would effectively ensure that people have roughly the same number of vote credits. That said, I'm still not convinced that this wouldn't lead to socioeconomic inequities even with the revenues of COST going back to society. Moreover, the authors suggest that by putting money as the basis for both COST and QV, decisions regarding public and private goods & services can be made on a level plane, as some people will choose to allocate more money toward private purchases, while others will choose to allocate more money toward public policy decisions. However, this may have the perverse effect of calcifying a divide between those who care predominantly about the commonweal versus those who care mostly about private commercial activities, and that divide may make the whole system vulnerable to being overturned entirely.

The epilogue meditates on the idea of markets as analog computers for optimization, liberally quoting Hayek and von Mises. The authors do later clarify that they are not market fundamentalists, and reiterate their acknowledgement of the various problems associated with unregulated or improperly designed markets, but their breathlessly optimistic description of a market being able to find an optimum without central planning initially seems to completely gloss over the fact that the optimum may not be anywhere close to socially desirable. Unlike the book I Contain Multitudes by Ed Yong (which I have reviewed before), which contextualizes the notions of symbiosis, mutualism, commensalism, and parasitism in a very nuanced way instead of associating concepts like symbiosis & mutualism with warm & fuzzy feelings and parasitism with visceral disgust, the authors of this book get too wrapped up in their belief in the primacy of well-designed markets and lose a lot of nuance & perspective in the process of communicating these ideas to readers. Earlier in the book, the authors warned against the failures of the faith of left-wing politics in government institutions and of right-wing politics in unregulated markets, but by cherry-picking simple illustrative examples while glossing over much more complicated subtleties, the authors seem to evince the same sort of blind faith.