Rebooting liberalism – part 3: Property is monopoly
This is the third and for now final part in my series covering topics from the book Radical Markets.
Before jumping into this blog post, I will say that I haven’t personally made up my mind fully about this particular part of Radical Markets. The concept I’m about to cover is called COST (common ownership self-assessed tax). There are some practical and cultural questions that remain unanswered for me. But I’m very intrigued, and with an open mind I believe there’s a lot of inspiration that can be drawn from these ideas.
The ideas of COST is founded on a few basic arguments. It’s important to understand these arguments before reading further about COST itself. For the purpose of this post, I’m not going to debate these in any detail. Economists at large generally agree on the significance of below arguments and that radical changes are needed to turn things around.
The first argument is that global inequality has reached an all-time-high. Metrics such as salary distribution and worker’s share of national income point in the same direction. While the poor might be getting a little less poor, the rich are getting much richer. Radical change is needed, or else inequality will just continue to grow.
The second argument is that capitalism has reached an historically bad spot. Normally, economic stagnation (increasing interest rates and high unemployment) and inflation (decreasing interest rates and high employment) are found on opposite ends of the financial cycle. But capitalism has now found itself in what some economists call “stagflation”. That is, the economy is grinding to a halt with stagnation and inflation at the same time. The tools provided by capitalism will not be able to solve this situation. Radical change is needed.
Important to underscore is that COST argues that truly radical change is needed to combat the issues above. Traditional liberalism, capitalism or market mechanisms do not have systems in place to solve these issues on a global basis.
Private property is a form of bad monopoly
We will be talking exclusively about heterogeneous or non-fungible private property of major items such as land, natural resources, patents and even some less major things like cars and large business assets (e.g. factories and big production equipment). These are kinds of private property that can’t (at least easily) be exchanged one-for-one. For example, different parcels of land have different characteristics, patents are unique by definition and production equipment is often unique and tailored for a certain kind of product.
In a radical market economy, this kind of property ownership is viewed as a bad form of monopoly. For example, it’s less productive for society if a private person is squatting a valuable piece of land in the centre of a capital city, while paying almost no tax, until he can sell it for a high price instead of using the land for something productive and more valuable. The same is true for many other forms of private property such as natural resources, patent squatting, radio spectrum etc.
These ideas aren’t new. In fact, they come from economists such as Léon Walras and Henry George, who helped shape our modern liberal society.
It’s often the case that the biggest hurdles for large infrastructure projects that could bring massive economical growth for society, is land rights and bureaucracy. To build a railway you have to buy-up lots of separate parcels of land. In this scenario, land owners are incentivised to “hold out” and ask for a price much higher than the true market value of the land (often many multiples), thus hampering economic growth for the better of society. In this sense, land owners have monopoly on their specific piece of land. But that’s not the definition of monopoly, you say!
Well, the Federal Trade Commission in the US defines monopoly as any entity who has market power over a market or service and therefore can raise the price of some good far above that of a free market.
Since land is heterogeneous (unique), itself can be considered a single market that the land owner has market power over. For example, it could be the only piece of land that fully separates two important villages, or a location that is uniquely suited for some other public good such as an airport.
What is COST?
The underlying goal of COST (common ownership self-assessed tax) is to achieve allocative efficiency. That means creating a economic system that encourage ownership where the most productive use of private property is the outcome.
The idea is that property owners self-assess how valuable some property is to them, and then pay tax on that value. The author propose an annual 7% tax (based on sound research). Further, the owner must always stand ready to sell the property at said valuation, listed on some kind of public record. This causes property owners to reveal the true value of their property—valued too low and someone might buy it from you, valued too high and the tax cost outweigh the benefits you are able extract from it.
This creates a very liquid and radical market for property. It also changes the basic parameters of private property—the right to use and the right to exclude. Under COST both rights are partially transferred to the public at large, hence the use of the term “common ownership”.
In practical terms, any person or company who would value a piece of land more than the current owner could instantly buy that piece of land (subject to inspection and reasonable handover period). They would of course have to self-assess their new higher value of the property and pay a tax on that, thus providing more tax revenue back to society at the same time. The entire purchase process could take place in some easy to use mobile interface that facilitates the transaction without any middlemen.
The author propose two uses of the tax revenue under COST. About half of the revenue would be returned directly back to citizens on a per capita basis as a form of “social dividend” or universal basic income if you may. And the rest would go towards a public fund for provisioning public goods, possibly controlled by Quadratic Voting.
At first brush, such a system might seem scary and unjust—rich people could just buy a piece of land whenever they wanted, you say! But as it turns out, it wouldn’t work like that. The author of Radical Markets goes into great length to prove with research and even mathematics why the system would be more fair. First of all, with COST it actually costs something to hold onto property, as opposed to today where taxes are low enough to encourage unproductive use of property such as hold-out schemes or “squatting” for maximal private profit. Further, if all property was up for sale at all times, not even rich people in aggregate could possibly afford buying and paying significant taxes on everything.
In fact, COST would most likely cause a large scale redistribution of property from rich squatters back to more productive uses for people and society, for example in the form of public goods.
Redistribution for a more fair society
As argued above, global inequality is on the rise. But one of the main reasons it hasn’t completely spiralled out of control yet is the redistribution of private capital, more commonly known as income taxation.
What if there was no capital redistribution at all? No tax revenue for countries at all? Would that cause a more equal or unequal society? I hope the answer is pretty obvious to people reading this blog.
The fact that we basically have no system at all (or very inefficient ones) for private property redistribution is kind of mind boggling when you think about it. One can easily argue that private property should be subject to a similar redistribution scheme as with private capital. COST is a radical concept, but radical change is what’s needed to turn around global inequality.
COST will lead to a more fair, equal and productive redistribution of property that in turn would dive economic growth.
While the basic ideas behind COST aren’t new, in this current form it’s largely unproven. Introducing these concepts to society wouldn’t be done all at once. And the land or housing markets certainly wouldn’t be first up for trial.
We will have to experiment with these ideas at much smaller scale first. One can imagine interesting applications for things like domain name ownership, crypto assets, game mechanisms, land parcels in Decentraland, real world patent ownership, natural resources etc.