Fireflies and Algorithms

fireflies

We’ve been looking at workfare — the legislated link between jobs and the social safety net. An article published last week  — Fireflies And Algorithms — The Coming Explosion Of Companies[1] brought the specter of workfare to the legal profession.

Reading it, my life flashed before my eyes, beginning with one particular memory:  me, a newly-hired associate, resplendent in my three-piece gray pinstripe suit, joining the 4:30 queue at the Secretary of State’s office, clutching hot-off-the-word-processor Articles of Incorporation and a firm check for the filing fee, fretting whether I’d get my copy time-stamped by closing time. We always had to file today, for reasons I don’t remember.

Entity choice and creation spanned transactional practice:  corporate, securities, mergers and acquisitions, franchising, tax, intellectual property, real property, commercial leasing….  The practice enjoyed its glory days when LLC’s were invented, and when a raft of new entity hybrids followed… well, that was an embarrassment of riches.

It was a big deal to set up a new entity and get it just right — make sure the correct ABC acquired the correct XYZ, draw the whole thing up in x’s and o’s, and finance it with somebody else’s money. To do all that required strategic alliances with brokers, planners, agents, promoters, accountants, investment bankers, financiers…. Important people initiated the process, and there was a sense of substantiality and permanence about it, with overtones of mahogany and leather, brandy and cigars. These were entities that would create and engage whole communities of real people doing real jobs to deliver real goods and services to real consumers. Dissolving an entity was an equally big deal, requiring somber evaluation and critical reluctance, not to mention more time-stamped paperwork.

Fireflies And Algorithms sweeps it all away — whoosh! just like that!– and describes its replacement:  an inhuman world of here-and-gone entities created and dissolved without the intent of all those important people or all that help from all those people in the law and allied businesses. (How many jobs are we talking about, I wonder — tens, maybe hundreds of thousands?) The new entities will do to choice of entity practice what automated trading did to the stock market, as described in this UCLA Law Review article:

“Modern finance is becoming an industry in which the main players are no longer entirely human. Instead, the key players are now cyborgs: part machine, part human. Modern finance is transforming into what this Article calls cyborg finance.”

In that “cyborg finance” world,

“[The “enhanced velocity” of automated, algorithmic trading] has shortened the timeline of finance from days to hours, to minutes, to seconds, to nanoseconds. The accelerated velocity means not only faster trade executions but also faster investment turnovers. “At the end of World War II, the average holding period for a stock was four years. By 2000, it was eight months. By 2008, it was two months. And by 2011 it was twenty-two seconds….

Fireflies And Algorithms says the business entity world is in for the same dynamic, and therefore we can expect:

“… what we’re calling ‘firefly companies’ — the blink-and-you-miss-it scenario brought about by ultra-short-life companies, combined with registers that remove records once a company has been dissolved, meaning that effectively they are invisible.”

Firefly companies are formed by algorithms, not by human initiative. Each is created for a single transaction — one contract, one sale, one span of ownership. They’re peer-reviewed, digitally secure, self-executing, self-policing, and trans-jurisdictional — all for free or minimal cost. And all of that is memorialized not in SOS or SEC filings but in blockchain.

“So what does all this mean?” the article asks:

“How do we make sense of a world where companies — which are, remember, artificial legal constructs created out of thin air to have legal personality — can come into existence for brief periods of time, like fireflies in the night, perform or collaborate on an act, and then disappear? Where there are perhaps not 300 million companies, but 1 billion, or 10 billion?”

Think about it. And then — if it hasn’t happened yet — watch your life flash before your eyes.

Or if not your life, at least your job. Consider, for example, a widely-cited 2013 study that predicted 57% of U.S. jobs could be lost to automation. Even if that prediction is only half true, that’s still a lot of jobs. And consider a recent LawGeex contest, in which artificial intelligence absolutely smoked an elite group of transactional lawyers:

“In a landmark study, 20 top US corporate lawyers with decades of experience in corporate law and contract review were pitted against an AI. Their task was to spot issues in five Non-Disclosure Agreements (NDAs), which are a contractual basis for most business deals.

“The study, carried out with leading legal academics and experts, saw the LawGeex AI achieve an average 94% accuracy rate, higher than the lawyers who achieved an average rate of 85%. It took the lawyers an average of 92 minutes to complete the NDA issue spotting, compared to 26 seconds for the LawGeex AI. The longest time taken by a lawyer to complete the test was 156 minutes, and the shortest time was 51 minutes.”

These developments significantly expand the pool of people potentially needing help through bad times. Currently, that means workfare. But how can you have workfare if technology is wiping out jobs?

More on that next time.

[1] The article was published by OpenCorporates, which according to its website is “the world’s largest open database of the corporate world and winner of the Open Data Business Award.”

The Success Delusion

poverty snareHow did the social safety net turn into a poverty trap? It was a victim of the success of the job as an economic force.

Psychologists call it “the success delusion.” You do something and get a result you like, so you keep doing it, expecting more of the same. It keeps working until one day it doesn’t. Do you try something new? No, you double down — it worked before, surely it will work again. You keep doubling down until you’ve made a mess.

You’re a victim of your own success. If you could listen, hindsight would tell you that there was more to it than what you were doing, that a lot of what happened was you being in the right place at the right time. You might believe that or not, but what matters now is that the times changed and you didn’t.

That’s what happened to social welfare. 40 years of post-WWII economic success positioned the steady job as the cornerstone of economic prosperity and upward mobility. Then, in the 80’s and 90’s, about the time the job was starting to lose its economic vitality, policy-makers doubled down on it:  work had raised the welfare of the whole world since the days of the telegraph and railroad, and surely it was still the best route out of poverty. So now we had workfare instead of welfare, and, as we saw last time, social welfare became “a system of suspicion and shame.”

get-a-job

Standin’ in line marking time
Waiting for the welfare dime
‘Cause they can’t buy a job
The man in the silk suit hurries by
As he catches the poor old lady’s eyes
Just for fun he says, “Get a job.”

That’s The Way It Is”
Bruce Hornsby and the Range

Rutger Bregman sums it up this way:

“We’re saddled with a welfare state from a bygone era when the breadwinners were still mostly men and people spent their whole lives working at the same company. The pension system and employment protection rules are still keyed to those fortunate to have a steady job, public assistance is rooted in the misconception that we can rely on the economy to generate enough jobs, and welfare benefits are often not a trampoline, but a trap.”

Utopia for Realists (2017)

Guy Standing explains it this way:

“The period from the nineteenth century to the 1970’s saw what Karl Polanyi, in his famous 1944 book, dubbed “The Great Transformation.”

“The essence of labourism was that labour rights — more correctly , entitlements — should be provided to those (mostly men) who performed labour and to their spouses and children.

“Those in full-time jobs obtained rising real wages, a growing array of ‘contributory’ non-wage benefits, and entitlements to social security for themselves and their family. As workers previously had little security, this was a progressive step.

“Labourism promoted the view that the more labour people did, the more privileged they should be, and the less they did the less privileged they should be. The ultimate fetishism was Lenin’s dictate, enshrined in the Soviet constitution, that anybody who did not labour should not eat.

“The labourist model frayed in the 1980’s, as labour markets became more flexible and increasing numbers of people moved from job to job and in and of employment.

“To defend labour-based welfare, social democratic governments turned to means testing, targeting benefits on those deemed the deserving poor.

“The shift to means testing was fatal. As previous generations of social democrats had understood, benefits designed only for the poor are invariably poor benefits and stand to lose support among the rest of society.

“Ironically, it was mainly social democratic parties that shifted policy towards workfare, requiring the unemployed to apply for non-existent or unsuitable jobs, or to do menial, dead-end jobs or phony training courses  in return for increasingly meagre benefits.

“Today, we are living in a Second Gilded Age — with one significant difference. In the first, which ended in the Great Crash of 1929, inequality grew sharply but wages on average rose as well. The Second Gilded Age has also involved growing inequality, but this time real wages on average have stagnated or fallen. Meanwhile, those relying on state benefits have fallen further behind, many pushed into homelessness, penury and dependence on inadequate private charity.

“Since the 1980s, the share of income going to labour has shrunk, globally and in most countries of economic significance… The labour share fell in the USA from 53 per cent in 1970 to 43.5 per cent in 2013. Most dramatically, it slid by over twenty percentage points in China and also dropped steeply in the rising industrial giant of South Korea.

“Besides falling wages, there has been an increase in wage differentials and a less-documented decline in the share of people receiving non-wage benefits, such as occupational pensions, paid holidays, sick leave or medical coverage. Thus worker compensation, in terms of ‘social income,’ has fallen by more than revealed by wages alone.

“As a consequence of these developments, ‘in-work poverty’ has rocketed. In some OECD [Organisation for Economic Cooperation and Development — 34 industrialized member countries], including Britain, the USA, Spain and Poland, a majority of those in poverty live in households where at least one person has a job.

“The mantra that ‘work is the best route out of poverty’ is simply false.”

The Corruption of Capitalism (2017)

Not only are jobs doing a poor job at social welfare — for both employed and unemployed alike — but they are themselves an endangered species. More to come…

Poverty Gets Personal

poverty

“In the sixties we waged a war on poverty and poverty won.” – Ronald Reagan

Poverty is a “personality defect.” – Margaret Thatcher

The Gipper was referring to LBJ and his Great Society, but he got it wrong:  the Great Society failed to eliminate poverty because it never got all the way to dealing with it. Instead it took a more politically acceptable path focused on education and community involvement — not bad things, but there’s a difference. As for the Iron Lady, there’s actually some truth in what she said (we’ll look at that in a moment), but I suspect not in the way she probably meant it. She was more likely voicing the common attitude that the poor are intellectually impaired, morally flawed, prone to bad lifestyle choices, and criminally inclined, and therefore worthy of only the most grudging kind of help. That attitude and the Great Society’s reputed loss[1] in its War on Poverty explain a lot about today’s prevailing approach to poverty relief.

Rutger Bregman tackles this tough subject in his book Utopia for Realists: And How We Can Get There (2017):

“A world without poverty– it might be the oldest utopia around. But anybody who takes this dream seriously must inevitably face a few tough questions. Why are the poor more likely to commit crimes? Why are they more prone to obesity? Why do they use more alcohol and drugs? In short, why do the poor make so many dumb decisions?”

He continues with more tough questions:

“What if the poor aren’t actually able to help themselves? What if all the incentives, all the information and education are like water off a duck’s back? And what if all those well-meant nudges [toward self-help and away from government assistance] only make the situation worse?”

He then profiles the work of Eldar Shafir, a psychologist at Princeton, and Sendhill Mullainathan, an economist at Harvard, who formulated a theory of poverty based on the concept of “scarcity mentality.” Their research shows that the chronic poor are really good at scrambling after short term solutions, but tend to be inept at sustainable long-term thinking. It’s a matter of mental bandwidth:  today’s urgency gets all the attention, leaving other matters to go begging (sometimes literally). In fact, their research estimates that poverty costs a person about 13-14 IQ points. In other words, living in a chronic state of being poor can eventually rewire the human brain to the point where clear thinking and prudent behavior are challenged.

Hence the grain of truth in Margaret Thatcher’s comment.

One problem with that attitude, though, is that it uses the terms “poor” and “poverty” interchangeably. But not everyone who’s poor is also impoverished. At the simplest level, the poor are poor because they lack money. But poverty goes further:  it’s a chronic condition that generates a specific outlook and way of approaching life. When that condition is shared, it  becomes a culture. You know it when you’re around poverty; you might not know it when you’re around poor.

Government assistance programs don’t make that distinction. As a result, as Bregman states, social welfare has “devolved into a behemoth of control and humiliation.”

“An army of social services workers is needed to guide people through the jungle of eligibility, application, approval, and recapture procedures… The welfare state, which should foster people’s sense of security and pride, has degenerated into a system of suspicion and shame.”

Is it really that bad? Try applying for food stamps sometime.

Our bank account was thin after a business failure and some health issues. Following the advice of family. my wife applied for food stamps. Her experience was everything Bregman describes. Case in point: after two mandatory daylong job search classes (how to write a resume, set up a LinkedIn page, use the internet to check out online job postings…), she had to prove her willingness to work by reporting for 8 hours per week of wall-washing duty at a church community center. She washed the same walls every week — the same walls that other people were also washing every week — the cleanest walls in Denver. Washing walls — pointlessly, needlessly, endlessly — to prove you’re not a slacker.

Help with the grocery bill was bittersweet for a couple months, then we opted out. It’s easy to intellectualize and debate about “all the information and education” and “the jungle of eligibility, application, approval, and recapture procedures.” It’s not so easy when they get personal. We were poor but not impoverished, and the system was just too demoralizing to continue. Maybe that was the point.

Plus, earning money reduces or eliminates benefits — a result which economist Guy Standing calculates is equivalent to the imposition of a 80% tax. The quandary is obvious:  earn money or opt out of the system– either way, you pay the tax. Most people — even the cognitively-impaired — wouldn’t agree to a deal like that.

How did “Brother, can you spare a dime?” turn into this? Curiously, the current welfare system derived from the same post-WWII economic surge that rewarded working people. We’ll look at how that happened next week. In the meantime, have a listen:

brother can you spare a dime

This week’s post uses portions of a LinkedIn Pulse article I wrote last year about poverty, crime, and homelessness. Next week’s post will also tap that source. You might like to jump ahead and read the article:  Why Don’t We Just solve Some Problems For a Change?

[1] Not everyone agrees that we lost the War on Poverty. See this article that considers both sides.

Archeconomics

archangelI made up the term “archeconomics.” I’m using “arch” in the sense of “first principles” — e.g., as in “archetype.” An “arch” is the larger version of the smaller expressions of itself — e.g., not just a villain but an arch-villain, not just an angel but an archangel. Life goes big when an arch-something is at work:  experience expands beyond circumstance, meaning magnifies, significance is exaggerated.

Archeconomics is therefore the larger story behind economics.

I ended last week’s post by referring to the larger story behind the rentier economy. As usually happens when I’m on a research trail, several commentaries have appeared in my various feeds lately that look beyond the usual opinionated mash of current events and instead address over-arching ideas and issues. All of them deal in one way or another with the current status and possible future of the liberal worldview — an arch-topic if there ever was one.

The term “liberal” in this context doesn’t refer to political liberal vs. conservative, but rather to historical liberalism, which among other things gave us post-WWII neo-liberal economics. Mega-bestselling author Yuval Noah Harari describes this kind of liberalism in his latest book 21 Lessons for the 21st Century:

“In Western political discourse the term “liberal” is sometimes used today in a much narrower sense, to denote those who support specific causes such as gay marriage, gun control, and abortion rights. Yet most so-called conservatives also embrace the broad liberal worldview.

“The liberal story cherishes human liberty as its number one value. It argues that all authority ultimately stems from the free will of individual humans, as expressed in their feelings, desires, and choices. In politics, liberalism believes that the voter knows best. It therefore upholds democratic elections. In economics, liberalism maintains that the customer is always right. It therefore hails free-market principles. In personal matters, liberalism encourages people to listen to themselves, be true to themselves, and allow their hearts — as long as they do not infringe on the liberties of others. This personal freedom is enshrined in human rights.”

If you read Harari’s books Sapiens and Homo Deus. you have a sense of what you’ll find in 21 Lessons, but I found it worth reading on its own terms. Two recent special magazine editions also take on the fate of liberalism:  Is Democracy Dying? from The Atlantic andA Manifesto for Renewing Liberalism” from The Economist. The titles speak for themselves, and both are offered by publications with nearly two centuries of liberal editorial perspectives.

Another historical liberal offering from a conservative political point of view is “How Trumpism Will Outlast Trump,” from Time Magazine. Here’s the article’s précis:

“These intellectuals are committed to a new economic nationalism … They’re looking past Trump … to assert a fundamental truth: whatever you think of him, Donald Trump has shown a major failing in the way America’s political parties have been serving their constituents. The future of Trump’s revolution may depend on whether this young group can help fix the economy.”

Finally, here’s a trio of offerings that invoke environmental economics — the impact  of the global ecology on global economics being another archeconomics topic. The first is a scientific study published last week that predicted significant environmental degradation within a surprisingly short time. Second is an article about the study that wants to know “Why We Keep Ignoring Even the Most Dire Climate Change Warnings.” Third is last week’s announcement that the winner of this year’s Nobel Prize in Economics is an environmental economist.

Some or all of those titles should satisfy if you’re in the mood for some arch- reading.

Next time, we’ll return to plain old economics, with a look at how the low income social strata is faring in all the dust-up over rentiers and economic inequality, robotcs and machine learning, and the sagging paycheck going to human labor.

The Rentier Economy: A Primer (Part 2)

My plan for this week’s post was to present further data about the extent of the rentier economy and then provide a digest of articles for further reading.

Turns out that wasn’t so easy. The data is there, but it’s mostly buried in categories like corporate capitalization, profits, and market concentration. Extracting it into blog post sized nuggets wasn’t going to be that easy.

Further, the data was generally only footnoted in a maelstrom of worldwide commentary. Economists and journalists treated it as a given, barely worthy of note, and were much more interested in revealing, analyzing, and debating what it means. The resulting discourse spans the globe — north to south, east to west, and all around the middle — and there is widespread agreement on the basics:

  • Economic thinking has traditionally focused on income from profits generated from the sale of goods and services produced by human labor. In this model, as profits rise, so do wages.
  • Beginning in the 1980’s, globalization began moving production to cheap labor offshore.
  • Since the turn of the millennium, artificial intelligence and robotics have eliminated jobs in the developed world at a pace slowed only by the comparative costs of technology vs. human labor.
  • As a result, lower per unit costs of production have generated soaring profits while wages have stagnated in the developed world. I.e., the link between higher profits and higher wages no longer holds.

Let’s pause for a moment, because that point is huge. Erik Brynjolfsson, director of the MIT Center for Digital Business, and Andrew McAfee, principal research scientist at MIT, wrote about it in their widely cited book The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies (2014). The following is from a chapter-by-chapter digest  written by an all-star cast of economists:

Perhaps the most damning piece of evidence, according to Brynjolfsson, is a chart that only an economist could love. In economics, productivity—the amount of economic value created for a given unit of input, such as an hour of labor—is a crucial indicator of growth and wealth creation. It is a measure of progress.

On the chart Brynjolfsson likes to show, separate lines represent productivity and total employment in the United States. For years after World War II, the two lines closely tracked each other, with increases in jobs corresponding to increases in productivity. The pattern is clear: as businesses generated more value from their workers, the country as a whole became richer, which fueled more economic activity and created even more jobs. Then, beginning in 2000, the lines diverge; productivity continues to rise robustly, but employment suddenly wilts. By 2011, a significant gap appears between the two lines, showing economic growth with no parallel increase in job creation. Brynjolfsson and McAfee call it the “great decoupling.” And Brynjolfsson says he is confident that technology is behind both the healthy growth in productivity and the weak growth in jobs.

Okay, point made. Let’s move on to the rest of the rentier story:

  • These trends have been going on the past four decades, but increased in velocity since the 2007-2009 Recession. The result has been a shift to a new kind of job market characterized by part-time, on-demand, contractual freelance positions that pay less and don’t offer fringe benefits. Those who still hold conventional jobs with salaries and benefits are a dying breed, and probably don’t even realize it.
  • As non-wage earner production has soared, so have profits, resulting in a surplus of corporate cash. Low labor costs and technology have created a boom in corporate investment in patents and other rentable IT assets.
  • Rent-seeking behavior has been increasingly supported by government policy — such as the “regressive regulation” and other “legalized monopoly” dynamics we’ve been looking at in the past few weeks.
  • The combination of long-term wage stagnation and spiraling rentier profits has driven economic inequality to levels rivaled only by pre-revolutionary France, the Gilded Age of the Robber Barons, and the Roaring 20’s.
  • Further, because the rentier economy depends on government policy, it is particularly susceptible to plutocracies, oligarchies, “crony-capitalism,” and other forms of corruption, leading to public mistrust in big business, government, and the social/economic elite.
  • These developments have put globalization on the defensive, resulting in reactionary politics such as populism, nationalism, authoritarianism, and trade protectionism.

As you see, my attempt to put some numbers to the terms “rent” and “rentier” led me straight into some neighborhoods I’ve been trying to stay out of in this series. Finding myself there reminded me of my first encounter with the rentier economy nine years ago, when of course I had no idea that’s what I’d run into. I was at a conference of entrepreneurs, writers, consultants, life coaches, and other optimistic types. We started by introducing ourselves from the microphone at the front of the room. Success story followed success story, then one guy blew up the room by telling how back in the earliest days of the internet, he and Starbucks’ Howard Schultz spent $250K buying up domain names for the biggest corporations and brand names. Last year, he said, he made $76 Million from selling or renting them back.

He was a rentier, and I was in the wrong room. When it was my turn at the mic, I opened my mouth and nothing came out. Welcome to the real world, my idealistic friend.

As it turns out, following the rentier pathway eventually leads us all the way through the opinionated commentary and current headlines to a much bigger worldwide issue. We’ll go there next time.

The Rentier Economy — Primer Part 1

rise of the rentiers

As we saw last week, the original Monopoly game — then known as The Landlord’s Game — offered a choice of two different games, one played under “Prosperity” rules and the other under “Monopoly” rules. The post-WWII economic surge was a real-life Prosperity game:  it generated a rising tide of economic benefit that floated all boats across all social classes. The surge peaked in the 1970’s, and since then the Monopoly rules have increasingly asserted themselves, resulting in, among other things, stagnant employee compensation (except for the top 10%) and rising returns to capital owners — the lion’s share paid in the form of rents. The latter reflects the rise of a “rentier economy.”

First, we need to define “rent”:

Economists use the term ‘rent’ in a special way. For them, rent refers… to the excess payment made to any factor of production (land, labor, or capital) due to scarcity.

The scarcity factor that gives rise to rents can be natural, as with the case of land.

But rents can also arise from artificial scarcity — in particular, government policies that confer special advantages on favored market participants.

The Captured Economy:  How the Powerful Enrich Themselves, Slow Down Growth, and Increase Inequality, Brink Lindsey and Steven Teles (2017).

And “rentier”:

A rentier is someone who gains income from possession of assets, rather than from labour. A rentier corporation is a firm that gains much of its revenue from rental income rather than from production of goods and services., notably from financial assets or intellectual property. A rentier state has institutions and policies that favour the interests of rentiers. A rentier economy is one that receives a large share of income in the form of rent.

The Corruption of Capitalism, Why Rentiers Thrive and Work Does Not Pay, Guy Standing (2016)

Economists didn’t see the rentier economy coming. They especially didn’t foresee how government policy would create it. The following is from The Corruption of  Capitalism:

John Maynard Keynes, the most influential economist of the mid-twentieth century, famously dismissed the rentier as the ‘functionless investor’ who gained income solely from ownership of capital, exploiting its ‘scarcity value.’ He concluded in his epochal General Theory that, as capitalism spread, it would mean the “euthanasia of the rentier,” and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity value of capital:

“Whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital… I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work.”

Keynes was mistaken because he did not foresee how the neoliberal framework built since the 1980’s would allow individuals and firms to generate ‘contrived scarcity’ of assets from which to gain rental income. Nor did he foresee how the modern ‘competitiveness’ agenda would give asset owners power to extract rental subsidies from the state.

Eighty years later, the rentier is anything but dead; rentiers have become the main beneficiaries of capitalism’s emerging income distribution system.

The old income distribution system that tied income to jobs has disintegrated.

And this is from The Captured Economy:

The last few decades have been a perplexing time in American economic life. Following a temporary spike during the Internet boom of the 1990’s, rates of economic growth have been exceptionally sluggish. At the same time, incomes at the very top have exploded while those further down have stagnated.

As a technical matter, rent is a morally neutral concept. ,,, Nevertheless, the term ‘rent’ is most commonly used in a moralized sense to refer specifically to bad rents. In particular, the expression ‘rent-seeking’ refers to business activity that seeks to increase profits without creating anything of value through distortions to market processes, such as constraints on the entry of new firms.

Those advantages can also take the form of subsidies or rules that impose extra burdens on both existing and potential competitors. The rents enjoyed through government favoritism not only misallocate resources in the short term but they also discourage dynamism and growth over the long term. Their existence encourages an ongoing negative-sum scramble for more favors instead of innovation and the diffusion of good ideas.

Economists have had an explanation for the latter trend, which is that returns to skill have increased dramatically, largely because of globalization and information technology. There is clearly something to this explanation, but why should the more efficient operation of markets be accompanied by a decline in economic growth?

Our answer is that increasing returns to skill and other market-based drivers of rising inequality are only part of the story. Yes, in some ways the US economy has certainly grown more open to the free play of market forces during the course of the past few decades. But in other ways, economic returns are now determined much more by success in the political arena and less by the forces of market competition. By suppressing and distorting markets, the proliferation of regulatory rents has also led to less wealth for everyone.

To be continued.

 

The Landlord’s Game

monopoly

“Buy land – they aren’t making it anymore.”

Mark Twain

You know how Monopoly games never end? A group of academicians wanted to know why. Here’s an article about them, and here’s their write-up. Their conclusion? Statistically, a game of Monopoly played casually (without strategy) could in fact go on forever.

I once played a game that actually ended. I had a strategy:  buy everything you land on, build houses and hotels as fast as possible, and always mortgage everything to the hilt to finance acquisition and expansion. I got down to my last five dollars before I bankrupted everybody else. It only took a couple hours. Okay, so the other players were my kids. Some example I am. Whatever economic lessons we might have gained from the experience, they certainly weren’t what the game’s creator had in mind.

While Andrew Carnegie and friends were getting rich building American infrastructure, industry, and institutions, American society was experiencing a clash between the new rich and those still living in poverty. In 1879, economist Henry George proposed a resolution in his book Progress and Poverty: An Inquiry into the Cause of Industrial Depressions and of Increase of Want with Increase of Wealth: The Remedy.

“Travelling around America in the 1870s, George had witnessed persistent destitution amid growing wealth, and he believed it was largely the inequity of land ownership that bound these two forces – poverty and progress – together. So instead of following Twain by encouraging his fellow citizens to buy land, he called on the state to tax it. On what grounds? Because much of land’s value comes not from what is built on the plot but from nature’s gift of water or minerals that might lie beneath its surface, or from the communally created value of its surroundings: nearby roads and railways; a thriving economy, a safe neighborhood; good local schools and hospitals. And he argued that the tax receipts should be invested on behalf of all.”

From “Monopoly Was Invented To Demonstrate The Evils Of Capitalism,by new economist Kate Raworth.[1]

George’s book eventually reached the hands of Elizabeth Magie, the daughter of newspaperman James Magie and a social change rabble-rouser in her own right. Influenced by her father’s politics and Henry George’s vision, she created The Landlord’s Game in 1904 and gave it two sets of rules, intending for it to be an economic learning experience. Again quoting from Ms. Raworth’s article:

“Under the ‘Prosperity’ set of rules, every player gained each time someone acquired a new property (designed to reflect George’s policy of taxing the value of land), and the game was won (by all!) when the player who had started out with the least money had doubled it. Under the ‘Monopolist’ set of rules, in contrast, players got ahead by acquiring properties and collecting rent from all those who were unfortunate enough to land there – and whoever managed to bankrupt the rest emerged as the sole winner (sound a little familiar?).

“The purpose of the dual sets of rules, said Magie, was for players to experience a ‘practical demonstration of the present system of land grabbing with all its usual outcomes and consequences’ and hence to understand how different approaches to property ownership can lead to vastly different social outcomes.

“The game was soon a hit among Left-wing intellectuals, on college campuses including the Wharton School, Harvard and Columbia, and also among Quaker communities, some of which modified the rules and redrew the board with street names from Atlantic City. Among the players of this Quaker adaptation was an unemployed man called Charles Darrow, who later sold such a modified version to the games company Parker Brothers as his own.

“Once the game’s true origins came to light, Parker Brothers bought up Magie’s patent, but then re-launched the board game simply as Monopoly, and provided the eager public with just one set of rules: those that celebrate the triumph of one over all. Worse, they marketed it along with the claim that the game’s inventor was Darrow, who they said had dreamed it up in the 1930s, sold it to Parker Brothers, and become a millionaire. It was a rags-to-riches fabrication that ironically exemplified Monopoly’s implicit values: chase wealth and crush your opponents if you want to come out on top.”

“Chase wealth and crush your opponents” — that was my winning Monopoly strategy. It requires a shift away from the labor economy — selling things workers make or services they provide — to the rentier economy — owning assets you can charge other people to access and use. The scarcer the assets, the more you can charge. Scarcity can be natural, as is the case with land, or it can be artificial, the result of the kind of “regressive regulation” we looked at last time, that limits access to capital markets, protects intellectual property, bars entry to the professions, and concentrates high-end land development through zoning and land use restrictions.

Artificial scarcity can also be the result of cultural belief systems –such as those that underlie the kind of stuff that shows up in your LinkedIn and Facebook feeds:  “7 Ways to Get Rich in Rental Real Estate” or “How to Create a Passive Income From Book Sales and Webinars.” In fact, it seems our brains are so habitually immersed in Monopoly thinking that proposals such as Henry George’s land ownership  tax — or its current equivalents such as superstar economist Thomas Piketty’s wealth tax, Harvard law and ethics professor Lawrence Lessig’s notions of a creative commons, or the widely-studied and broadly-endorsed “universal basic income” — are generally tossed off as hopelessly idealistic and out of touch.

More to come.

[1] Kate Raworth holds positions at both Oxford and Cambridge. We previously looked at her book Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist  (2017).