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Eric Posner and E. Glen Weyl, Radical Markets: Uprooting Capitalism and Democracy for a Just Society

Peter Isztin
p. 873-880
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Eric Posner and E. Glen Weyl, Radical Markets: Uprooting Capitalism and Democracy for a Just Society, Princeton: Princeton University Press, 2018, 368 pages, ISBN 978-069117750-2

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Crédits : Princeton University Press

1This 2018 book by Eric Posner, a Professor of Law at the University of Chicago, and Glen Weyl, senior principal researcher at Microsoft, delivers on its promise, which is to rethink and reformulate the key institutions of what we might call the liberal order, that is, capitalism and democracy, along market-oriented but at the same time, radical (in the sense of proposing large changes in social arrangements and also as a reference to the 19th century radical movements) and egalitarian lines.

2Markets are often the subject of much criticism and vitriol. “Market fundamentalism” and “neoliberalism” are widely used epithets to criticize market-based solutions to social problems. Posner and Weyl partially run against this tide by arguing that markets are not fundamentally a source of inequality, inequity and exploitation, quite to the contrary: they can be used to harness progressive or radical social goals.

3The proposals presented in the book rely to a great extent on results in mechanism design and market design, in particular, auction theory. Posner and Weyl present “open auctions” as an ideal leading to both efficient allocation of resources and social emancipation. One of the heroes of the book is the late William Vickrey, but the radicalism that the authors build on goes back to the 18th century. Adam Smith thought that one of the advantages of a market society over the preceding feudal system is that it makes poor members of the society better off. Likewise, the lot of the poor has been a key preoccupation of the classical political economists and the so-called philosophical radicals of the 19th century. The book self-consciously builds on this tradition, but it does so by bringing the tools of modern microeconomics to tackle these same problems. Some of the radical forerunners Posner and Weyl cite have served as inspiration for the 20th century “right” (libertarianism, classical liberalism or “neoliberalism”) while others more often inspired the left. Yet, the authors argue, these authors, from Adam Smith and Jeremy Bentham through John Stuart Mill to the early marginalists (such as Jevons and Walras), and to Sidney and Beatrice Webb, all belong to a tradition that can be characterized as both liberal and radical. The authors thus attempt at reformulating the lost coalition of liberal radicalism by setting out proposals that are at once market-oriented, radical and egalitarian.

4The book certainly reads like an amalgam of different ideologies. Weyl himself has referred to the project as a kind of synthesis between socialist and libertarian sympathies. The Radical Markets project could be broadly classified as liberal. It contains elements (in particular, the Common Ownership Self-Assessed Tax) that are connected to the now largely out-of-favour market socialist tradition. Yet, translating these principles into policy ideas, we mostly get policies that are closer to the center than to the far-left of the political spectrum.

5It should be noted that since the book has been published, one of the authors—Weyl—has extended further the radical paradigm. He founded a network, Radical Xchange to facilitate what he calls liberal radical solutions to a wide variety of social problems.

6Every radical program starts with a criticism of the status quo. Many people would paint the status quo in modern Western countries as a system of mostly free markets and democratic governance. Yet, the authors claim, our present system is very far from a truly free market and also very far from an ideal democracy. Posner and Weyl argue, for instance, that market power is more prevalent in the economy than we would think. More provocatively, they even argue that one of the bedrocks of civilization, private property, is itself a monopoly. The chief “enemy” of the book is therefore monopoly power. At this point, let us mention another hero of the book, Henry George. Henry George’s Progress and Poverty (1879) was at one time the second highest selling book after the Bible. George is famous for his land value tax (LVT) proposal: to achieve both efficiency and equity, society should abolish all taxes and tax only the unimproved value of land (i.e. disregarding all buildings or improvements to land). Throughout the years, a number of economists have expressed sympathy with this idea. However, as Posner and Weyl note, the problem with the proposal is that separating the unimproved value of land from the improvements on land (if we tax the latter it does create distortions, unlike when we tax only the former) is much harder in practice than in theory. Still, Henry George is one of the inspirations behind the radical markets project, inspiring the authors’ proposal to radically reform the system of private property.

7Indeed, Posner and Weyl describe a Georgist ideal at the beginning of the book: all private property on intangibles are subject at all times to open auctions. Thus, if I buy a piece of land, the next day someone else could also buy it if she offers a higher price, but the proceeds of the transaction would not go to me, instead, it would go to the government (or “society”). This way, property would always end up in the hands of those who value it most. The obvious problem with such a Georgist utopia is that it would completely kill incentives to improve one’s property, as the benefits from investment would go to the whole community, and not to the (temporary) owner. From that perspective, the utopia looks more like distopia. Or does it ?

8Posner and Weyl do not in fact favour the version of the Georgist utopia described above, for they understand the incentive case against it. Nevertheless, they advocate moving society in that direction. At this point, the reader might wonder why, as economists have generally regarded private property as an efficient institution, for both investment and allocative reasons. Contrary to that view, the authors show that private property can in fact harm allocative efficiency. The key idea is that many pieces of private property are not fungible, therefore the owner enjoys some market power, meaning he/she can sell the property at a price higher than his/her valuation. Now consider a potential buyer whose valuation is above that of the seller. Allocative efficiency would demand that the exchange takes place, yet if the asking price is above the buyer’s valuation and neither the seller nor the buyer know each other’s valuation, the exchange may not take place. Thus, allocative efficiency is harmed under the combined effect of monopoly power and information asymmetry on both parts. If buyers and sellers would know each other’s valuation, they would know whether there is room for Pareto-improvement, and a deal would be struck. Posner and Weyl propose a clever mechanism to solve this problem, the Common Ownership Self-Assessed Tax (COST). The idea was originally proposed by Arnold Harberger (hence they also call it a Harberger tax), but it was since then also independently discovered by Hungarian heterodox economist Tibor Liska. The basic idea is that owners should set a value on their property, based on which they would have to pay a tax. This would lead to a self-assessed value that is much lower than the actual value. Hence the second feature of the mechanism: the owner would have to be ready to sell the property at the self-assessed price. This by itself would lead to over-assessment. If the tax is set optimally, the two effects cancel out, so that each property would be assessed and sold at a price equal to the owner’s true valuation. To the present writer, the proposal is impressive, but one may worry that the loss in dynamic investment efficiency (although the authors account for this) would prove too large. In addition, the proposal rests on the expectation that the participants in the system—the government and the owners—will “get things right”. Nonetheless, the chapter will certainly make readers think harder about their commitments to capitalism and property rights.

9Maybe the authors’ proposal on immigration would be even more controversial to some readers. Immigration, both high- and low-skilled, could provide very large benefits, but the benefits mostly accrue to the migrants themselves and capital owners who employ their labour. Domestic workers, on the other hand, could end up on the losing end of the process, or at least, do not gain much from it. The authors’ proposal would change this situation: they would give the right to each (US) citizen to “sponsor” a migrant. Sponsorship would mean employing the migrant in their own home or business, or finding other sources of employment for her. In the latter case, the sponsor would receive part of the extra earnings of the migrant. And before we think that this would be unfair, consider that following this system, both high- and low-skilled immigrants from poor countries could earn many times their current wages in a country like the United States. Both the migrant worker and the sponsor could greatly benefit. Some critics have responded to the authors' immigration proposal that it would be akin to “indentured servitude”. I think that this view is mistaken. The most important difference between the two institutions is that the migrant could exit the relationship at any time (although maybe at some cost). Naturally, some would object that the migrant worker could be (non-violently) “pressured” into staying in or entering into the relationship, but such an objection is not much different from objecting to wage labour in general. Also, similar programs already exist. The only difference is that firms, rather than individuals, are allowed to sponsor migrant workers.

10Posner and Weyl also have a plan to drastically reform democracy, through a procedure called “quadratic voting”. In short, each citizen would get an equal amount of “voice credits”, which they could use to purchase votes. The price paid would be equal to the square of the number of votes being purchased. Such a procedure, unlike the one-man-one-vote system, would allocate political influence to those who value it the most, allowing citizens to express the intensity of their preferences. The authors claim that this system would be more amenable to the interests of minorities, who often have more intense preferences on a given issue, but nonetheless lose out in a simple majority system. The authors’ vision of democracy can be contrasted with that of proponents of “deliberative democracy”. Deliberative democracy theorists would charge the Radical Markets project with downplaying the importance of deliberation in democratic societies. As a matter of fact, the book does emphasise preference aggregation and not so much preference formation through deliberation or persuasion. I would stress though that quadratic voting might provide greater incentives for persuasion than current systems of democracy do: if I can persuade my fellow citizens that my favoured policy is the right one, I need to purchase fewer votes than otherwise for it to succeed. Moreover, although I do not wish to venture into the debate on different concepts of democracy, political life in reality is ruled less by public deliberation aimed at finding out what the “common good” is, than by what James Madison called individuals' “passions” and “interests”. The clash of these interests and values leads to the formation of public policy. This view is reflected in the pluralist tradition of political science and in many economic accounts of democracy (such as that of Becker, Buchanan and Tullock, or Olson). In such models, deliberation and persuasion are not necessarily used to finding out some collective social good; instead, they are used to advance one’s interests and values. In my view, this latter tradition is a more realistic program for democracy, than the ideal of deliberative democracy.

11Overall, I am excited about the prospects of quadratic voting, but I differ from the authors' point of view in several ways. First, it is not entirely clear that quadratic voting would solve the “rational ignorance” problem of democratic societies. Rational ignorance provides us with an argument for putting more decisions in the hands of experts and elected representatives rather than in the hands of the electorate. Furthermore, recent events, such as the nomination of Donald Trump as the nominee of the Republican Party, the election of Jeremy Corbyn as the leader of the Labour Party and the Brexit vote, rightly or wrongly, increased scepticism toward direct democracy. Therefore, I would have liked more discussion of how quadratic voting fits into the traditional representative vs. direct democracy dichotomy, or how it transcends it. One related point where I differ from the authors is that I am more positive about certain “aristocratic” institutions within a democratic system. Take the US Supreme Court, for example. The authors might well be right that currently Supreme Court justices have too much power (it is in fact remarkable how much sway justice Anthony Kennedy, long the “swing vote” within the Supreme Court, has held over the affairs of the United States). Yet these institutions, apart from defending individual rights (something which quadratic voting might also achieve), channel the “wisdom” of a quasi-technocratic elite. Aristocratic or technocratic institutions can also temper overheated policy debates. While the authors purport to extend the paradigm of decentralized order in both the economic and the political spheres, to some extent they also require a technocratic application of its principles. The authors build on the tradition of mechanism design and market design, a paradigm that channels technocratic expertise to construct rules so that individuals will act in a way that maximizes social welfare or fairness. However, it is not clear whether radical markets institutions require more technocracy than what is already present in most market democracies. (Interestingly, Glen Weyl has recently published a critical assessment of technocracy; Weyl, 2019). The COST, for instance, is in essence a decentralized mechanism that leaves little room for expert (or other) discretion—unlike the current practice of takings by the government. Likewise, quadratic voting is certainly a decentralized mechanism and if applied broadly, it puts more decisions in the hands of the electorate than current systems of representative democracy. Quadratic voting also allows voters themselves to become “experts” in certain areas: the institution would, as Weyl has pointed out in correspondence, incentivize specialization in certain public issues. Radical markets institutions therefore require technocracy in their design, but little technocracy and mostly decentralization in their ordinary functioning. This, of course, could also be said of many of our current institutions. Definition and adjudication of property rights and other important institutions of the market economy require the knowledge of experts to “design” certain elements of the system.

12The part of the book I found least convincing is when the authors assess the importance of market power (both monopoly and monopsony power) in the modern economy. For instance, the authors claim that big tech companies such as Google or Facebook have monopsony power over their customers, who “sell” their private data to these companies, providing essentially free labour to these companies. Yet consumers’ data are actually useful for these companies only once collected and processed: much of the data are created by the tech companies. To be sure, Posner and Weyl acknowledge this point, but still they argue that users’ raw data have a positive marginal product so that firms should be expected to pay for them. In this vein, the authors argue that users should form “data labour unions” to improve their bargaining position vis-a-vis the giant tech companies. At this point, I am still unpersuaded that these companies and their practices are as problematic as the authors claim. Facebook or Google provide us with high-valued services in exchange for our data. Why they should further pay us is not straightforward to me. Posner and Weyl use the term “techno-feudalism” to describe this state of affairs: after all, medieval peasants provided free labour to their landlords in exchange for in-kind benefits. I am not sure the analogy holds with modern tech companies. At the very least, these firms' market power depends on how contestable these markets are and whether substitutes are available to the consumers. On both counts, I am a lot more optimistic than Posner and Weyl. Platform markets face network externalities, but these externalities could be overcome by insulating tariffs that make earlier users of a platform internalize the marginal externality created by them, as suggested by Weyl himself in an earlier paper (Weyl, 2010). Furthermore, whether companies’ market power has in fact on average increased in the United States is a subject of debate among economists. Having said that, I am very much persuaded by the authors’ argument that antitrust agencies should look into certain labour market practices, such as non-competing clauses and “non-poaching” agreement between firms. These practices can in fact increase the market power of firms over their workers, though I would stress that non-competing arguments can also be used to facilitate firm-specific human capital investments (see Mario Rizzo’s post on this; Rizzo, 2018). In addition, the authors could have looked at some other solutions to the monopsony problem, that are often problems of entry as well as mobility. Tearing down regulatory barriers to entry and mobility (think specifically of overly strict occupational licensing and land-use regulation) should be an important venue for tackling market power.

13A further general point I would like to make is a Hayekian one. The book is, at least at first reading, very much in the tradition of what Hayek calls constructivist rationalism: certain institutions of society are broken and should be reconstructed along technocratic rational lines. In this respect, the book can be criticised as promoting an overly technocratic project. However, I would stress that the authors heed Karl Popper’s advice, who advocated piecemeal planning and experimentation as opposed to large-scale reconstructions of society. Likewise, Posner and Weyl suggest gradual and local experimentation with the ideas they propose. This is very welcome from authors who indeed propose some truly radical changes.

14Although not on one of the main topics in Radical Markets, the last chapter of the book is quite interesting. Posner and Weyl ponder the possibility that Artificial Intelligence might become able to fill the role the price system currently plays in efficiently “directing” the allocation of resources. Artificial Intelligence is increasingly capable of gauging our preferences based on our previous choices. Amazon suggests books to us based on what we have ordered previously and Netflix recommends shows that people who made similar choices to us have watched. However, AI can at times miss the mark when it comes to our preferences. I may have ordered a book on Amazon on a friend’s recommendation, but at the end of the day did not like it. Amazon’s system will still interpret my purchase as my being interested in similar purchases. By contrast, the price system responds to actual revealed preferences, and is remarkably efficient in mediating sudden changes in supply and demand. For the time being, AI systems are at a disadvantage on this and I find it harder than the authors to believe that they will ever get as good as prices. But regardless of what we think of such “science-fiction” scenarios, at the end of the day the authors and I agree that markets are still the best tools we have for allocating scarce resources. And the book shows how they can have even greater potential than many of us have previously thought.

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Bibliographie

George, Henry. 1879. Progress and Poverty. New York: Doubleday, Page & Company.

Rizzo, Mario. 2018. The “New” Monopsony Argument and the Suppression of Wages. https://thinkmarkets.wordpress.com/2018/06/08/the-new-monopsony-argument-and-the-suppression-of-wages/. Posted June 8, 2018. Consulted September 3, 2019.

Weyl, E. Glen. 2010. A Price Theory of Multi-sided Platforms, American Economic Review, 100(4): 1642-1672.

Weyl, E. Glen. 2019. Why I am not a Technocrat. https://radicalxchange.org/blog/posts/2019-08-19-bv61r6/. Posted August 19, 2019. Consulted September 3, 2019.

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Peter Isztin, « Eric Posner and E. Glen Weyl, Radical Markets: Uprooting Capitalism and Democracy for a Just Society », Œconomia, 9-4 | 2019, 873-880.

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Peter Isztin, « Eric Posner and E. Glen Weyl, Radical Markets: Uprooting Capitalism and Democracy for a Just Society », Œconomia [En ligne], 9-4 | 2019, mis en ligne le 01 décembre 2019, consulté le 25 janvier 2020. URL : http://journals.openedition.org/oeconomia/6984

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Peter Isztin

Cornivus University of Budapest. isztin.peter@gmail.com

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Les contenus d’Œconomia sont mis à disposition selon les termes de la Licence Creative Commons Attribution - Pas d'Utilisation Commerciale - Pas de Modification 4.0 International.

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