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Radical Markets versus Sensible Politics

REVIEW ESSAY

Radical Markets:
Uprooting Capitalism and Democracy for a Just Society
by Eric A. Posner and E. Glen Weyl
Princeton University Press, 2018, 356 pages

Market-based reforms were used in the 1980s—really invented as a concept in the run-up to the 1980s—to counteract the excesses and failures of post–World War II social policy. At the time, marginal income tax rates in excess of 70 percent had shifted income into unproductive tax-optimization vehicles instead of savings and investment. Excessive urban rent controls were a disincentive to the maintenance and construction of urban real estate and were contributing to urban blight and even crime. Wage controls and legal structures designed to encourage collective bargaining in industries with no natural need for it had excessively curtailed business flexibility and adaptability. Poorly designed welfare benefits had distorted the incentive to work. The corporate economy was tilted towards businesses deemed stable enough to receive large bank loans that rapidly depreciated in the then prevailing high-inflation environment. The stagflation of the 1970s was seen, and rightly continues to be interpreted, as (in large part) a product of the over-regulation of the postwar economy and the overreaching of its prevailing Keynesian, social-engineering-friendly policy attitude.

In all of these cases, what is often called classical liberal economics solved prevalent economic problems. The basic rationale behind these market-based reforms was that the market pricing mechanism, with its extraordinary ability to sort through information and optimize for preferences and opportunities, needed to be freed to allocate real estate, labor, and business capital. Inflation could be reined in with a less accommodating monetary policy that targeted price stability above all else. The discipline of capital markets would better channel savings to smaller, faster-growing industries and companies.

These arguments, most prominently advanced by Milton Friedman and Friedrich von Hayek, gained currency because they described reality. Poorly designed policies of all kinds indeed had been enacted during the postwar era, and they had been legislated to achieve impossible goals: universal, high-wage employment; rapid economic growth without recessions; tightly limited income disparity; even low rent in all urban districts. During this period, reducing government distortions of the market pricing mechanism—and the underlying reality it reflects—was at least a partial antidote to the collateral damage of social policy utopianism.

The economic problems of today, however, are of an entirely different nature than those of the 1970s and 1980s. Today’s most advanced industries are not dominated by a handful of large, heavily regulated and unionized companies with limited flexibility to adjust labor and capital allocation. Instead, the United States faces a crisis of diminished domestic capital investment despite having an extremely flexible corporate sector. The United States does not have runaway consumer price inflation, but rather runaway asset valuations. Monetary policy does not encourage capital allocation to high volatility, inflation-proof real assets but rather to low-volatility and low-return industries whose cash flows can be leveraged to produce something close to acceptable absolute returns. The American labor market could hardly be described as overburdened by collective bargaining or wage control outside of the government sector. Urban land in the most economically dynamic American cities, rather than facing a crisis of underinvestment, is so expensive as to pose a meaningful tax on labor—even as real estate prices everywhere else in the United States remain depressed.

In other words, what might be thought of as market-based reforms, at least in the 1980s classical liberal sense of the term, do not seem like they offer solutions to today’s most pressing economic problems—because the problem set has changed. If the past decade has demonstrated nothing else, it has shown that the United States will be poorly served by rehashing the economic policies that worked to win the Cold War, but which started to sputter in the 1990s and led to the low-growth economy of the 2000s.

To give a sense of the problem: How would capital markets deregulation alone channel more savings into domestic investment? How would increasing corporate responsiveness to capital markets address the questions of concentration, lack of domestic investment, monopoly rents, and normative privacy rights controversies in the technology sector? Is the excessive regulation of the American industrial labor market the reason that American heavy industry is losing ground to more regulated competitors such as Germany and even Japan? And how can one maintain optimism that the government can address these inherently political problems when the U.S. Congress is incapable of achieving even a thin majority consensus on something as simple as the federal budget with any regularity?

Magical Markets

In Radical Markets: Uprooting Capitalism and Democracy for a Just Society, Eric A. Posner and E. Glen Weyl confront this hard reality: the weakening of the U.S. economy during the post–Cold War era and the political system’s seeming inability to contend with it cannot be fixed by the menu of economic policies that worked in the 1980s.

They elaborate America’s economic and political malaise in a thorough introductory chapter that memorably and plausibly compares America’s economic and political trajectory to that of Brazil: characterized by mysterious but prevalent economic underperformance, political turbulence, protected monopoly rents, high inequality, and an economy increasingly focused on domestic consumption and raw materials export to the exclusion of other more promising or high-value industries. The core issue is that, despite Americans being richer than ever before, the economy and domestic wages are both growing more slowly than in any previous economic expansion.

Each chapter of the book offers a separate policy brief on topics including the dysfunction in the strongest U.S. property markets; the problem of falling wages and global wage competition; the low rate of corporate investment in the United States; and the problem of tech sector behavior and rents. And, most controversially, the book addresses the U.S. government’s seeming inability to make political decisions of any kind in a chapter titled “Radical Democracy.”

Radical Markets is at its best in pointing out the sectors of the economy that are most in need of dramatic reform. Yet although Radical Markets asks the right questions, it comes up extremely short when it tries to offer solutions. The most interesting, problematic, and misguided contention made in Radical Markets—and what makes the book an exemplification of America’s crushing ideological rigidity instead of a departure from it—is the book’s core claim: that markets can only solve these problems by being pushed to their most radical extremes, often to patently implausible extents. Thus we see Posner and Weyl arguing for legally enforced, perpetual auctioning of all property; a program allowing Americans to sponsor and compel rents from guest workers; and other remedies that seem worse than the problems that they are intended to address.

Reading Radical Markets, one hopes that the authors are offering these policy prescriptions as a kind of ironic literary technique, an effort to demonstrate how unlikely it is that markets without laws and prudent political choices can solve America’s serious economic problems. Posner and Weyl naively imagine that our problems are simply failures to allow markets to work their magic. Rather than accepting that the bad equilibria prevailing in American markets reflect bad American policy choices (i.e., that the market reflects a larger reality—the basic classical liberal contention) and asking how to make better choices, Posner and Weyl assume that our bad choices are merely results of imperfections in prevailing market mechanisms and organization.

Blaming Market Design Instead of Blaming Ourselves

To give an example, Radical Markets proposes that a solution to the global race to the bottom in wages can be found by allowing Americans to sponsor, host, and personally extract captive rents from foreign migrant laborers who are not subject to all American labor laws. The basic logic of such a system, in the telling of Posner and Weyl, is that the gains from the use of global labor could thus flow more directly to Americans instead of being intermediated by corporations.

Alas, migrant labor sponsorship practices of this nature will almost certainly lead to slavery-like abuses in the countries that practice them, and little could be more antithetical to the basic American ethos of equality under the law. Business arbitrage of Western labor standards in order to reduce production or service costs is a real problem, but it is not born of market failure. Rather, it is born of the American government’s unwillingness to adopt policies that would regulate or curtail this labor-standards arbitrage and effectively address the effects of global competition in many industries requiring scale. Fields in which the United States has been compelled to engage in industrial promotion, such as aerospace, are often less prone to these problems, but they are the exceptions that prove the rule.

Another proposal advanced in Radical Markets is that all property should be permanently available in public online rental auctions. The authors present this as an update of Henry George’s program—a way of implementing his land tax proposals via something like the 1990s-era eBay. But while George proposed a tax on unimproved land (in lieu of taxes on improved property and income), the authors advocate for an open-ended, state-compelled auctioning of usage rights for all property.

Although such a system would quickly adjust to demand for land use, it would also ignore basic American ideas of property rights. It is also hard to see how the American property market would be made more just, or in any way improved, if families could be evicted from a homestead that they had built and worked for generations because of, say, environmental activists’ revealed preference to suspend agricultural production by overbidding for land.

It would also be beside the point. The real estate markets in select major American cities indeed pose a tax on economic growth. But the problem is the concentration of economic growth in a few select industries and thus cities—not the fact that ownership of private property includes unpriced externalities better captured via rent than ownership.

Urban land in most American cities, including large cities such as swaths of Los Angeles, Dallas, Chicagoland, greater Philadelphia, and Atlanta, is relatively inexpensive. Smaller metropolises such as St. Louis, Baltimore, Detroit, and others have yet to recover from the financial crisis or other dislocations even prior to that. The American economy is increasingly dominated by a few industries and therefore cities: health care (Boston), finance (New York), technology (San Francisco), energy (Houston), government relations (D.C.), and entertainment (parts of Los Angeles). The aforementioned industries receive either implicit or explicit government sponsorship. It is no coincidence that these are the only cities in the United States in which real estate costs pose an exaggerated tax on labor.

If there were more engines of economic growth, and thus more diversified urban migration and geographic distribution of economic benefits, it is unlikely that, say, San Francisco or Boston real estate costs would present the type of economic challenge that they currently pose. And if Phoenix were to host a large solar energy research and manufacturing sector as part of a plan to improve the national energy grid, it is unlikely that its real estate would be so depressed relative to San Francisco’s—or that more Americans would not be moving to Arizona. Addressing bad market-driven economic outcomes in the real estate market requires reorienting demand for American property by widening America’s economic pursuits. Even much needed, smaller-bore market reforms such as relaxing the most strenuous zoning regulations in some urban areas would make at best small differences.

In a manner similar to its prescriptions regarding real estate, Radical Markets makes the argument that large technology companies should perpetually bid for Americans’ personal data. As a result, payments from online platforms would become a substantial source of income for the underemployed. Such a proposal might go some way towards sorting out the discrepancy between the revenues of large technology platforms on the one hand and the economic benefits provided to their users on the other. But it would not address the issues of privacy rights, copyright, and network-effect-related dominance that have emerged over the past twenty years as the internet has matured—and as the largest internet companies have become the largest corporations in the S&P 500.

Rather than asking what the laws regarding online platforms should be, and how today’s legal vacuum might be filled, Radical Markets instead demonstrates how lucrative it is to operate an online platform in the absence of updated laws—and suggests simply splitting the rents. Aside from the fact that such a solution would probably create any number of follow-on economic problems, including the likely collapse of the ostensible golden geese amongst the online platforms, it would not solve the core political question: what should the political response to corporate concentration be?

Probably the most original and important policy analysis in Radical Markets addresses the problem of passive investment in publicly traded companies and its effect on corporate behavior. Posner and Weyl argue that an investor who passively owns shares in, for instance, all of the telecom companies in the S&P 500 through an ETF is incentivized to prefer a general rise in telecom industry earnings. This investor is thus also likely to be highly averse to price competition between telecom companies, which might benefit one company at the expense of the sector overall. In other words, Posner and Weyl argue that passive shareholders of a diverse set of stocks within a given sector will demand oligopoly pricing from the companies and not innovation or risk taking. To remedy this problem, they propose that institutional investors should be banned from holding shares in more than one corporation within a given sector in order to minimize these bad incentives.

Indeed, there is no question that corporate behavior in the United States over the past twenty years has been surprising: despite a massive increase in the enterprise values of corporations and a staggering growth in corporate borrowing, domestic rates of capital investment in the United States have been historically low—particularly as a percentage of stock market capitalization. It thus stands to reason that this state of affairs is related to the incentives of corporate management, who after all direct business strategy.

But it is not clear that corporate risk aversion and low rates of corporate investment can simply be attributed to shareholder diversification within a given sector and passive investment vehicles. After all, we live in the age of the activist investor and private equity. And very few activist investors (or private equity investors) tend to demand that the corporate targets of their activism take more risks and engage in greater amounts of capital-intensive, long-term investment.

Whether the investors are passive or active, the prevailing tendency is to demand the structuring of corporations for the most efficient and predictable corporate cash flows. This is related to the still growing role that institutional investors play in the ownership and direction of American business. A variety of financial incentives and institutional pressures tend to push fund managers to favor short-term performance and low-volatility returns. More broadly, so long as defined contribution pension plans continue to grow, so too will risk aversion amongst institutional investors eager to find ways to capture stable rents on these large capital pools. Finding a better way to fund the retirement of Americans requires making very difficult political choices. Until those choices are made, however, the savings pools will grow, and the corrosive transformation of American business into a stable cashflow machine will continue.

Filling a Void with Nothing

The common denominator in the book’s shortcomings is that Radical Markets avoids addressing politics even as it addresses obvious problems of political choice. Instead the book advocates the replacement or avoidance of political choice by rejiggering market mechanisms, hoping to spread the wealth from rents born of underlying political dysfunction or neglect. But the failure to make important political choices is what underlies America’s economic problems, and not simple market failures. Radical Markets proposes to fill a political void—with nothing.

To their credit, the authors of Radical Markets are, at bottom, aware that many of our economic problems boil down to political choice, and hence they propose a new system for making political choices called “Quadratic Voting.” In this system, voters accrue allocations of credits to vote in referenda over the course of their lives. Voters are able to use their credits to purchase multiple votes on a particular issue, but the individual voter’s cost of purchasing votes increases by a quadratic factor as he or she purchases more votes in any single referendum. The underlying principle is that voters should be able to express differing intensities of interest on any given issue. The authors hope that this method will produce a less impassioned and more reasoned set of voting outcomes.

Regardless of its procedural merits or deficiencies, however, this solution to the problem of political dysfunction is based on a mistaken premise—the widespread doxa that American politics is plagued by a hyperintensity of partisanship and a lack of compromise. One hears this all the time: if only American politics were less partisan, common sense could prevail in government. This might be true for some issues. But it does not explain the lack of national dialogue on many of the most important policy questions, including almost all of the issues raised in Radical Markets.

On a more fundamental level, it is debatable whether voting should represent opinion on particular issues (voting to determine a Rousseauean “general will”) rather than function as a check on the power of the magistrate (a Madisonian “check and balance”). But even granting that voting in the United States includes a good amount of signaling about the electorate’s actual policy preferences (at times a heroic assumption), what’s to say that the American electorate is being presented with a realistic or even relevant set of problems for government to address, or objectives and goals for government to achieve? Plebiscites and referenda are only as good as the questions that the leadership puts to the people for votes.

There is a different conclusion to be drawn from Posner and Weyl’s survey of seemingly economic issues. Namely, the economic problems confronting the United States stem from a national inability or unwillingness to confront and address the changes in the world following victory in the Cold War. Reality has changed since 1991, but public policy discourse has not.

Recent elections have centered on such issues as compassionate conservatism, the Social Security lockbox (the latter is at least technically an issue!), the war on terror, hope and change, being with her, and making America great again. All of these slogans could prevail in a referendum. And none would likely be rejected in a system of Quadratic Voting. Yet all but one (Social Security’s viability) are meaningless, and none are particularly pressing. None address Posner and Weyl’s list of domestic policy challenges, all of which have confronted the United States for the past twenty years, let alone the foreign policy challenges that have emerged over the past decade as China’s military and economic power has increased.

The opportunities of the 1990s—building a globalized economy, growing American corporate returns via exposure to faster-growing foreign markets, completing welfare reform and the war on crime, the integration of post-Soviet Russia into Europe—are no longer today’s imperatives. Indeed, some of these have morphed into contemporary political problems.

A more serious discussion of America’s national priorities would have to touch on the new realities of what has been called the post-post–Cold War world. Along with the problems identified in Radical Markets, these would include: (a) the revitalization of the American economy, both in terms of the manufacturing of advanced technology products and pushing the frontiers of material science; (b) ensuring a modus vivendi between the United States and China while confronting the deterioration in America’s technological edge vis-à-vis China; and (c) reducing the share of the American economy devoted to health care while bringing life expectancy up to the standards of other Western countries. And no doubt many other issues could be named that would all be more significant than what is typically featured in public discourse.

It is not as though the American electorate is incapable of weighing and judging important questions of this nature. Within the last century there have been elections decided over issues such as how to address the persistence of the Great Depression and whether nuclear weapons should be used in otherwise conventional war, along with other matters of tremendous national significance. Even issues of national debate which in hindsight were based on bad information, such as fears about the “missile gap” in the Cold War, were at least substantive in their nature.

Opinions on these matters were not moderate, and corresponding proposals for national action were not characterized by uniformity or consensus. Indeed the acrimony surrounding these issues was more severe than what is on display today, belying the claim that contemporary politics is plagued by excessive partisanship. Perhaps contemporary politics only seem so partisan because the issues being debated with passion are so often trivial or purely doctrinal.

Markets Cannot Substitute for Politics

Individual rights and free markets are goods in and of themselves, and securing these private goods is a noble pursuit of government. They are also a powerful combination as a matter of national policy: a large part of America’s success over the past century has been attributable to the free market allocation of economic resources and a political system and national culture that preserve the constitutional rights of the individual. This combination allowed the United States to overcome powerful tyrannies such as the Soviet Union and Nazi Germany, both of which were able to command the totality of their respective national resources. The power of these totalitarian states to marshal resources, however, could not compete with the ability of the American market to invent, apply, and produce.

The market system excels at incentivizing economic efficiency, finding and commercializing uses for advanced technologies, and allocating resources to suit preferences. Increasing domestic market freedom might also advance the nonutilitarian goal of securing the rights of citizens. But a more perfect market system in itself is not a substitute for an awareness of national priorities or the strategic pursuit of national goals. Markets solve problems of complex information and sorting. They are not a replacement for prudent political choice.

This article originally appeared in American Affairs Volume II, Number 3 (Fall 2018): 53–63.

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