August 10, 2008

Creative Capitalism on Profit-Maximizing Governments, Mobility and Taxes

 Arnold Kling writes about profit-maximizing governments on Creative Capitalism:


Assume that the leader of a territory, whether the United States or Zimbabwe, is elected by shareholders, each of whom may or may not be a resident of the territory.  In each territory, the leader would control fiscal policy, monetary policy, and regulations.  She could set tax rates at whatever level she liked.  Some of the tax revenues would be used to fund internal investments.  However, the remainder would be disbursed as dividends to shareholders. 

Shareholders would be looking to maximize their returns.  If the leader engages in arbitrary confiscation, she may be able to pay a nice short-term dividend.  However, such a policy will lower the society’s wealth and reduce future dividends.  Shareholders would prefer a more farsighted policy.  A leader who protects property rights and invests in public goods probably will generate a higher share price.

A poorly-run country, such as Zimbabwe, probably would be taken over by investors seeking to profit from a turnaround.  These investors would buy up shares and install new management.

This is one of the many possible models for how seasteads are run – as profit-maximizing governments.  Some shareholders will be residents, while others may be investors.  Or shares could be restricted to residents, or even granted in proportion to the duration of residency (a full-time resident has 52x the shares of a 1 week/year timeshare owner).

Kling makes a key point:

Norms and institutional processes matter more than motives.  If you can remove some of the institutional impediments to creating wealth, then a lot of poverty will be eliminated without changing anyone’s motives.  Conversely, if the institutional environment entrenches ineffective leaders and fails to restrain violence, then no improvement in motives will achieve better outcomes.

This idea is at the heart of our philosophy, and it is why I do not consider seasteading a utopian movement.  Our belief that we can make a better society is not based on a vague hope that we can find the right people or motivate them in the right way.  Instead, we are counting on changing the systemic incentives that lead to bad government, so we can get better outcomes from the same people with the same motives.

While economist Martin Wolf does not agree with Kling’s idea, his response offers some support for the idea that dynamic geography will inherently lower taxes:

In all, I think this is a really silly idea of a kind I associate with the wilder reaches of American libertarianism. But there is a kernel of truth in it, also noted by professor North. The greater is the mobility of factors of production, the more regulatory competition there is among states. Competition among states matters. This has surely explained the improvement of policies and institutions around the world…The higher the elasticity of supply of the factors of production, the bigger the economic costs of higher taxes and so the lower the income-maximising tax rate for the ruler.

If we can increase people’s mobility, it will shift the balance of power towards the individual and promote cooperation among providers of government services.  This is true even if the people in the government are the same people with the same motives and the same powers!  That is the beauty of changing something as fundamental to a system as mobility – it alone is enough to alter the behavior of the entire system.