"Some Men Just Want to Watch the World Burn"

The Republican party promotes economic growth. The Democrats talk of fairness and making the rich pay their fair share, without defining what a fair share is or acknowledging the progressivity of the current tax code.

Does Jones think that two parties are about “burning the other team’s money” to the same degree? His post is worded as if they are.

In Constitution of No Authority Lysander Spooner did make a point about the anonymity of the voting process making it easier to vote for plundering-type behavior. But he was a 19th century legal/political thinker so he wasn’t doing a systematic study to back up the assertion.

Obviously it’s not the “politics of envy,” since the experiments suggest that the wealthier you are the more likely you are to destroy other’s wealth.

Life is a relative game. No doubt the wealthier you are, the more you fear being laid low by the poor. Making the poor more poor is probably a way of keeping them passive. After all, history shows that revolutions are led by the middle class not the poor.

First off, now’s as good a time as any to explicitly say what I’ve been thinking for a while now: not that my opinion matters that much, but fwiw, I think you, Garrett, have been a great addition to this blog. I don’t compare you to Arnold – who I hope someday reconsiders. I merely enjoy your posts.

Regarding this one, I’m reminded of studies suggesting that we’re hardwired to want punish those we disapprove of (defectors, outgroup members, etc.), to the extent that we punish ingroup members who refuse to sanction those we dislike even more harshly than we punish those we dislike.

I suppose that here, that’s a little beside the point, i.e., even if the passive party is a part of our ingroup, some folks (up to 15%, here) will *still* choose to destroy.

Interesting stuff, though…

(And, of course, yes, typical caveats about behavior in experiments – or in any artificial setting – generalizing to the real world always apply. Thank goodness, for example, that young adults who play Grand Theft Auto don’t mimic – in the real world – the sort of behavior they enjoy in the game. 🙂

I was once talking to a guy and I was shocked when he said that no one should be allowed to get really rich even if it cost all of us to prevent it.

I see a lot of this in partisan politics, especially in white v. white status competition over things like immigration. Encouraging illegal immigration from Mexico, such as George W. Bush liked to do, is a way to stick it to white Democrats by hurting the job prospects of their pet minority, African Americans. GWB’s animus wasn’t really against blacks, it was against white liberals who claim to be superior because they are for blacks, and he’d show the white liberal by letting in millions of his pet minority, ha-ha-ha, who is laughing now?

I wonder could the destructive tendency be related at all to a kind of curiosity? A child, wanting to understand how a machine works, might rip it apart to see its insides. There could be a primitive urge to intervene decisively and just see what happens?

Why do young boys like to throw rocks through windows of abandoned buildings?

the richest subjects… punish other weakly poorer players, they do so even [more] than subjects who are not among the richest…

“If confirmed, how should this influence our view of the global elite?”

I hate studies like this because they don’t prove anything about the real world. The study shows only that some people playing games like to sabotage other players, and that the the better game players are more likely to be saboteurs.

There is no evidence that people who are most likely to become rich in the real world will behave like the “rich” “destroyers” in the study. Therefore, this study, and any similar studies, will tell us nothing whatsoever about the “global elite.”

This type of nastiness is not at all a motivation for preventing people from getting rich. People would love a thriving market economy, it really does lift all boats. The question is how to get there.

One must keep in mind the ideal frictionless market— it’s a bunch of agents which compete for positions in a completely open way, so that anyone can submit a bid for any job at any wage, the lowest competent bid is accepted for all positions, and every corporation has a slew of competitors. This is what one is generally trying to achieve with government meddling— a good competitive market which approximates the ideal you read about in books.

In such an ideal, nobody gets too rich, because if they do, other people just copy what they are doing until it doesn’t work anymore. Because of this, it is rare that a person gets rich in the presence of free-market competition. Such a situation does happen once in a blue moon, but it is the exception rather than the rule. But these exceptional situations are trotted out as if they were typical. Such a free-market success is a person who built a new business or a new occupation from scratch, out-competed everyone without buying them out, by constant innovation. An example of such a person might be Walt Disney.

This model is not the typical story of great wealth, at least not in the USA at this time. The richest people are mostly in old-business, things where there has not been major innovation for a hundred years. Those in new business, like Bezos or the Google team, essentially are banking on an early monopoly in their niche to stay profitable forever.

This is the typical route to wealth: identifying a potential path to a market domination, where competition is essentially impossible because of some benefit of size. Then you need to assure investors that one will be able to actualize the monopoly without being shut down by regulators, this is very easy today, because antitrust law is declawed to the extent that you can claim that Amazon competes with bookstores.

While a centralized book provider might be a good thing, who knows, it is definitely not something that one can easily compete with on a small scale. Any competition to Amazon or Google must spring up fully formed at the large corporation level, and this is just not feasable. Hence the great wealth, it is a very plausible monopoly identified and exploited early. But this is not a market success story.

Another possible route to great wealth is through managing wealth and investment. This industry is very competitive, so one should not be able to accumulate wealth. But here there is a fluctuation problem. Even slight fluctuations in performance will lead to market winners and losers over the long term. If you have 32 corporations doing money management, and you flip a coin to determine which ones outperform the market in any given quarter, after 5 flips of the coin, only one of them is in business, and all the rest have lost their investors.

This is not good market competition, since any market fluctuations, even with an identically good investment strategy, will eventually produce an all out winner in a natural way. There is no counterforce to this, so you get hedge fund billionaires.

The success of these business models is precisely because they cannot be checked by competition, either because they drive the competition out of business without any significant innovation, or because the capitalization barrier is to high for any reasonable competition to form, The goal of market construction should be to prevent this phenomenon, to ensure the maximum amount of competition in the market, so that the ideal market is approximated as closely as possible. This will not happen in the presence of wealth-generation schemes predicated on the expectation of monopoly.

In an ideal market, you can only get rich with a new idea, and you can only get _so_ rich before people figure out your idea and copy you. So extraordinary wealth is simply a testiment to the extraordinary inefficiency of real markets.

To fix the brokenness of the model, people use stopgap measures:

* Progressive taxation: the idea here is that high incomes are generally not competitively earned, and should be taxed at an extremely high rate, to redistribute among those who actually compete with others in the open market.
* Antitrust legislation: This attempts to prevent organization of business to prevent competition

These bandaids are generally very onerous and bureaucratic compared to free-market operations. In the absence of anything better, you take what you can get. One can only get rid of the above if there is an actual ideal free market constructed at some point.

I would love to see an ideal frictionless market. To make one, I think you can do the following:

* Open hiring laws: require that all vacant positions in publically traded corporations be open to competitive bids from _all comers_, regardless of class or previous association with the company, and the evaluators of the resumes for the position must be the shareholders directly or chosen representatives, not the board of directors. The salaries of high corporate positions would then become competitive instead of political, and under competitive market forces, there is no doubt that the CEO, considering the commonplace skills required for the job, would probably make less money than the best engineer.
* Allow anyone to practice medicine or law: residency requirements and medical accreditation are instituted ostensibly so as to prevent fraudulent practice, but in the modern age, the internet should identify the frauds without any concerns. In practice, residency and bar requirements, and internships at law firms is simply a way for a professional guild to regulate its membership, to keep prices and wages inflated. Consumers might prefer an accredited doctor for brain surgery, but anyone can prescribe antibiotics, read an x-ray, or evaluate an ECG. Diagnosing rare diseases also doesn’t require anything more than an internet connection.
* Allow anyone to teach: the accreditation requirement is also a similar barrier to entry, although this does not get high wages, because it’s a government job.
* Allow anyone to do research: currently, government grants are required to go to those holding a PhD. This is a huge barrier to entry. A proven publication record and a good proposal should be sufficient, although in practice, agencies might prefer PhD’s.
* Require that all publically funded research must be publically available in full text form after a waiting period of 6months-1year. This is already standard in medicine, but it is not universal.
* Buy out the old research journals, and make their content publically available to everyone online. Pay off the publishers to get them out of the way.
* Institute a shorter patent term for nonmaterial patents— software patents and biological patents. These should have a term of 4 years at the longest.
* Reduce copyright terms to 10 years.
* Progressive corporate taxes: the larger the corporation, the more taxes it should pay, just as for an individual, to mitigate the social cost of the monopolistic power that large size brings. The goal here is to replace anti-trust legislation with an incentive for large corporations to break up into small ones. Then you wouldn’t have to worry about Amazon’s monopoly, Amazon would break itself up into little Amazons that would have different niches, just to save money. The niches would then expand, until they would compete with each other directly.
* Opt-in contracting.

Opt-in contracting needs explaining. When you draft a contract, you expect the government to enforce it, whatever the contents. The contract is in effect a personal piece of legislation that you impose on the government, and currently, the government accepts all contracts in an opt out fasion— the government opts out of enforcing certain contracts, like selling yourself into slavery, or selling your vote.

The idea of opt-in contracting is that the government has the responsibility to declare which contracts it will enforce ahead of time. This would be a collection spelled out in advance, so that nobody would be surprised or imposed on:

Standard contract classes would have to include:
* Exchanging a product for a fee
* Exchanging service for service
* Exchanging registered trade-secrets for non-disclosure.
* Giving a certain amount of money to an investment firm, with an expectation of return

But these standard contracts should not include

* Special price deals for certain corporations over others.
* Bundling contracts that require a separate service to be bought from the same source.
* single vendor lock-in contracts, beyond the ones that can be phrased as fee-for-service with a fixed term of service.

The list of enforcable contract templates will be long, but finite. If you wish to add a contract to the list, lobby your legislator, who will then be accountable to voters. If you drafted it yourself, go enforce it yourself.

The point of opt-in contracting is to remove the ability of large corporations to legislate to consumers through contracts. Standardization of contracts is usually industry wide, so consumers are helpless to alter the contracting requirements. The contracts are also full of unenforcable provisions that generally just scare off consumer litigation. If you expect the government to enforce your contract with the force of law, you have to ok the contract first, not wait for a court case.

Opt-in contracting can also solve the problem of natural investment firm monopolies. The government can easily stipulate what fraction of the profits on the investment may be taken for corporate profit, and what must be returned to the investor, in case of successful investment. It is also easy to require that the investor must be given a proportional say in the compensation package of the investment team.

The goal here is to remove the inefficiencies in trading and investing that have led to accumulation of wealth without corresponding performance. This is more difficult to deal with than other market inefficiencies, since it is essentially a property of market fluctuations that investment, even for ideal infinitely wise information agents, will be a risky business, with natural winner-take-all properties.

Opt-in contracting is not something anyone other than me proposes to my knowledge, but it is similar in spirit to the uniform commercial code of the 1950s, and the recent legislation regarding consumer protection. Both these legislations have been very bureaucratic, while opt-in contracts are simple to institute and uniform to enforce.

I believe reforms in this spirit can replace antitrust legislation in toto, since the methods of operation of monopolies is through bundling contracts and sweetheart pricing deals, and you just don’t include this on the enforcable contract list, any seller will be required to sell to all corporate customers at the same price. This might be extendible to consumers too, but it requires thinking about whether it will have the unintended consequence of killing the student discount or senior citizen discount.

I also believe these reforms, or similar ones, could make progressive taxation obsolete, simply by eliminating those market inefficiencies that allow for non-innovative paths to accumulating wealth. Under these circumstances, if a new Walt Disney or Henry Ford arose, who created a new industry from scratch and stayed ahead despite fierce market competition, then one can say enjoy your success, and let them keep all their wealth.

But this requires constructing a functional free market which resembles the textbook one. This is a matter of conscious choices in the legal system. Until we get a functioning free market, we are living in a caricature of the thing, an odious mix of oligarchy for the wealthy and unendurable coercion under threat of starvation and homelessness for the poor. These things don’t happen in a textbook free frictionless market, but they do in the world we live in.

One needs equal opportunity for all, not only for the schmoozers that rise through the ranks by winning in office politics. Until such a time when this can happen, wealth confiscation and redistribution is the passable fix that allows the market to limp along.

These games started with an unearned endowment to each player. I would suggest that is a lot more like an inheritance than the wealth earned by much of the current “global elite.” Even if you believe that the current global elite’s wealth was not truly earned, I would bet that they think it is. This difference in perception might be important in how people act with respect to this wealth. An easy-come-easy-go attitude could explain some of the outcome. It might also say interesting things about inherited wealth and the upper classes of the 16th through 18th centuries.

Max

Hey Ron,

To begin, I will say that I doubt your ideas are unique. They essentially sound like a variation on market-failure economics with a dash of populism. In fact they sound a lot like arguments my dad uses (in general method and conclusions if not precisely language-wise). So if you ever felt lonely with your beliefs, have hope they actually aren’t too uncommon!

Now for the specific arguments you’ve presented here.

The most important thing is to get rid of a silly idea that people have about free markets— namely that if you can persuade someone to pay you some enormous amount of money, that this makes it a market price for your labor. This is false.

In a way you are correct. But I’ll wager not quite in the way you’re thinking. When violence or the threat thereof is used by one party to “persuade” another to give them a higher wage this is of course not a real market price.

However, every time someone convinces you to pay them without violence (against them or against competitors) however that is in fact the market wage. The distinction you make between “monopolist” and “competitive” price is kind of useless. The reason someone is willing to pay you your wage it is because it is that they believe you are the person who is cheapest for the skill set they desire. And let’s be clear here, every single person is a monopolist in the sense you’re talking about. Every single person has a unique personality and set of job, social, and ethical skills. Therefore, in a real sense there is no competition for any given person as there is no one who can precisely replace them. This is why the term “monopoly” outside of the context of a government-protected monopoly is actually fairly useless. There’s no way to set a hard, non-arbitrary definition for the term above the level of every single person on planet Earth being their own personal monopoly.

Now let’s cover your point on CEO skills.

CEO’s are only selected from other top-level management teams, preferably with CEO experience. This is because there is a social class of people who are “CEO material” or “high managerial material”, and only those people are allowed to run a corporation. These people are by and large the stupidest, the most incompetant, and the least ethical people, since in order to rise through the ranks, you need to be an unethical schmoozer.

Alright, so let’s assume for a minute this is true. Only idiotic jerks ever become CEOs. Let’s even go so far as to assume that the shareholders who make the decision of what CEOs to hire are also all in this CEO-class (big shareholders are often CEOs of some companies, though there are large non-CEO owners of capital). These people are, by your own exposition, back-biters and out for themselves. They would gladly screw over others to help their own position.

So why don’t they hire a bum off the street for $10 an hour to be CEO if that bum could do as well as someone paid $10 million a year? This would save a corporation millions!

Now you did note an aspect of classism involved, but in order for that to maintain itself this group of insincere and unethical individuals would have to show a remarkable degree of solidarity. The very first board of directors to replace their top management with cheap everyday Joes off the street will out-compete all their competition immediately. They will make a killing as shareholders even as they single-handedly destroy the rest of their class. Individually it won’t matter that CEOs no longer make much money as they would have already made a ton of money by initiating the scheme. Every other business would then be forced to follow suit or else be driven out of the market by prices they can’t compete with.

Indeed, even if you assert that every single board of directors in the entire developed world would resist doing this for class solidarity reasons (Japanese, German, Swedish, etc CEOs may not make as much as American ones but they still make a ton more than you’re $30,000 a year guess) this wouldn’t prevent a start-up from trying the experiment out. Indeed you could do it yourself! Start a business, make yourself CEO, and no matter how successful your business is never pay yourself more than $30,000 a year or any of your top management. CEOs (or their previous equivalents) have been making big bucks for as long as there have been successful joint stock companies. That just randomly picking guys off the street for the job has never been a significant practice despite the fact that if it worked the company would obliterate the competition should be a hint that this might not actually be the case.

But maybe you want to argue that the business world has changed and that this phenomena of CEO’s being overpaid is recent. Very well, if you do go down that route I want dates (at least to the decade) that the change started and the casual mechanism which made the change happen.

To Chris,

not all founders stay CEO’s, some lack the skills for the job, and have technical skills instead. In this case, they hire an outside CEO, and pay them market wages for CEO job.

The problem is that CEO compensation is outlandish because it has been tainted by the idea that one should be rewarded with a significant fraction of the profits that your decisions generate. In the case of a CEO running a multi-billion dollar company, even .1% of the extra generated profits is millions of dollars.

So by siphoning off corporate wealth into CEO pockets, you create an insane perversion of the pay of CEO’s— a person who is CEO is expecting compensation on the level of the corporation’s profit, not on the level of a competitive wage.

This distortion has been present since the beginning of capitalism, since we have never really had a competitive open market where _all_ positions are competitive, we have had capitalism for workers and low-level managers, with a form of profit-siphoning cronyism for the owners and high-level managers.

This leads to the idea that the class structure of capitalism is intrinsic to the system. In theory, it is not, since in theory, the corporate capital profit-maximization is independent of the individual salary-grubbing, and when both are independent, both are decoupled.

But let’s look at what would happen to a corporation that decide to pay market wages to it’s CEO. This means the CEO would lose the obscene compensation, and this would only gain .1% in extra profits for the company. But the loss of compensation would lead the CEO to lose social standing, he would become a class-traitor to the owners and managers. Even a CEO who doesn’t live a lavish lifestyle is considered a class-traitor today. Your shabby-paid CEO wouldn’t be admitted to the fancy clubs and schmoozing locations where politicians and other CEO’s gather, and your company would not realize an extra profit at all, you would just lost money.

This has nothing to do with CEO skills, and it has everything to do with the external social class structure which is maintained despite economic textbook assurances that it can’t be.
This is why it is difficult to fix this market distortion by any mechanism other than confiscatory taxation. But it should be possible in theory. Perhaps it is as simple as declaring that pay-packages for CEOs must be salary only, that high manangement cannot own stock or options in the company, as a form of insider trading. The use of stock and stock options is just a way of disguising how much you are paying someone, and so long as it is buried in the profit fluctuations, people can ignore it. But you can’t ignore the distorting effect of these high salaries on the market— every CEO now expects 5 figure salaries at least, and often 6 figure stock packages. This cuts down the class of available CEO’s to those already making such salaries. There is nothing competitive going on here, it’s a distortion of the unholy reinterpretation of corporate profits as something which somehow should translate to an individual’s salary. If you want a performance based bonus for a CEO, award that bonus in a big cash lump-sum, approved by shareholders. But don’t mix profits with salaries, this is a terrible no-no, and it distorts high-level management compensation profiles across the whole economy.

To rail against the class structure of capitalism, which is produced by this mingling of profits and salaries, has often been thought of as railing against capitalism itself. I would like to conceptually separate the two notions. One can support the capitalist system in its textbook ideal, without supporting the capitalist system in its current class-based implementation, which essentially dates back to the start of capitalism.