A dynamic limit to the top
A few weeks ago as I was scrolling on twitter, I came across this tweet from naval, a person I greatly respect.
It deals with an issue that made quite a noise, the issue of taxing unrealized gains. If you own a big part of a corporation whose market price has been increased within the last year, you will be taxed for the yearly gains even if you haven’t sold any stock. In case though that the price increase is just the result of excess money printing, or currency devaluation in other words, and not a result of real growth, you are essentially taxed for fake gains, and you have to pay a tax despite the fact that your real wealth hasn’t been increased at all. Essentially paying the tax reduces your real wealth, thus the term confiscation.
This tweet put me into thinking for while. Given the current state of our world, with all of human’s glorious achievements, with the mesmerizing future promises, but also without any guarantees for what will happen in the following decades, how do you think about such a measure? How this kind of wealth confiscation or any other form of artificial limit to the top, would affect the economy and consequently the society as a whole?
The optimum economic goal
Well, if we want to be able to characterize something as good or bad we have to first define what goal we want to achieve and then examine how this thing affects it. Does it work for that goal, or does it work against it? So what would be an economic goal we should strive for? My answer to this question is clear.
The optimum economic goal at this point of human history, should be to maximize the total wealth creation rate.
One might naturally ask, why the hurry? Why we need to optimize for speed? Yes, we should become wealthier but maybe we can sacrifice a bit of speed for some rest along the way. Well, I wouldn’t agree, and the reason is that there are no guarantees for the future. We might have the illusion that civilizations move constantly forward by default. Sadly, this is not true at all. Just look at the greco roman world and what followed afterwards. The dark ages. Centuries of stagnation and human misery. Yes, it’s not that easy for our modern era to be extinguished, but our Rome is not impregnable. Not yet. We must strive to make it and protect its glorious achievements and all of its mythical promises. Promises of abundance, freedom, peace, happiness, eternal youth and unlimited potential.
Comparing wealth states
If we can agree that this is a fair goal to pursue, we would probably also agree that if the collected funds are used in a way that increases the wealth creation rate more than not collecting them at all, then this artificial limit to the top might be something positive. Not only for humanity as a whole, but for the taxed individuals too despite the fact that they will possess a smaller slice of the total wealth in the new wealth state. The reason is that the remaining of their money will have been magically upgraded, or in conventional terms, the purchasing power of money would have been increased.
This can become more clear if we think of an extreme example. Let’s compare a Pharaoh of ancient Egypt with a humble modern day millionaire. Which one would you prefer to be? The Pharaoh might own half the world’s wealth, but his wealth, represented by the money he owns, can’t purchase a car, air conditioning, antibiotics, not even sunglasses. You get the point. Despite the fact that the modern day millionaire owns just a tiny fraction of our world’s wealth, his money is vastly superior in comparison with the Pharaoh’s money. We compare two wealth states with thousands of years of distance with each other, and the humongous wealth difference makes the point clear. I think that in the modern environment of exponential growth, we can have large enough wealth differences between let’s say, 20 or 15 year checkpoints. No matter how much money you had 15 years ago at 2005, you couldn’t buy a smartphone because there was none. And 15 years before that you wouldn’t know what the internet is let alone using it. These new products and services are the result of a wealth creation process.
This wealth creation process constantly increases the potential of the monetary unit, enhancing its ability to satisfy human needs by making more and better products and services available as time passes. (This could be a nice introduction to the satisfaction unit parity, a method for measuring wealth and comparing wealth states)
But how can we use the collected funds to accelerate wealth creation? Let’s first examine how wealth is created. Wealth is created by human activity. It is mostly created by people with dreams and the characteristics, skills and means needed to make those dreams reality. Scientists exploring unsolved mysteries, engineers working on smart solutions, artists writing poems, entrepreneurs getting in new ventures, are all examples of humans who create wealth. Usually these people do what they do, driven by their internal desire to reach their full potential. They want to achieve their personal goals, fulfilling their sense of purpose along the way. I would argue thus, that
Wealth is created by people trying to reach their full potential.
If this is true, then a process that empowers as many people as possible, contributes the most in the wealth creation process. Apart from that there is also something else which is fundamentally important. A system that maximizes the wealth creation rate should be sustainable across time. It should be able to run indefinitely until a better alternative comes along. If there is a major revolution against it, it might be violently overthrown, slowing down the wealth creation process. Fundamentally revolutions are driven by a common sense of injustice, the sense that you are not receiving what you truly deserve in life and that you are deprived of the opportunity to chase it. This means that a good system must provide people with the opportunity to get what they deserve in life. But what does someone really deserve in life? My answer to this question is this:
Everyone deserves the opportunity to reach their full potential.
Which is remarkable if it is true. It would mean that a process that empowers as many people as possible, not only maximizes wealth creating activities, but also minimizes the risk of revolution by giving people the opportunity to get what they deserve in life.
Empowerment versus incentives
If we still agree, then assume for a moment that we have found out how we can use the collected funds to empower as many people as possible. Then the question becomes, how much money we must allocate to this purpose? Or in other words, how much wealth of the top should be redistributed to wealth rate increasing activities? The answer to this question could be given by the solution of an optimization problem.
Maximize the wealth creation rate by modifying the wealth redistribution degree. The redistribution degree should be small enough so that it doesn’t destroy the system’s incentives
- Objective function: wealth creation rate, maximize
- Design variable: redistribution degree
- Design constraint: the redistribution degree must be smaller than an incentives critical value
The redistribution degree constraint protects a fundamental property of the system, which is the incentives of people who create wealth. This optimization problem would be useful until the point where the total available wealth is so large that the redistributed amount is enough to empower all people to their maximum potential. From that point on, no more gains could be extracted by increasing it further and all new wealth could be used as incentives. This process means that the wealthiest people of our society will be losing a part of their wealth within the following decades, but in return the wealth creation will be accelerated and as a result their money will be upgrading faster, giving them access to an increasing variety of new and better goods and services. From a point on, they or their ancestors would regain again their unlimited potential. At least, there will be no reason to restrain it as far as this goal is concerned.
Matching opportunity with potential
Let’s begin by noting something. At this point, opportunity is scarce. The system has limited wealth and only a portion of it can be used to give people the opportunity to reach their full potential. Apart from that, not everyone has the same potential and this implies that not everyone deserves the same opportunities. This might seem initially unfair, but it actually isn’t. If you have the opportunity to reach your full potential, you would feel satisfied chasing your goals and fulfilled if you achieve them. Therefore, you probably won’t care much if someone else is receiving more of it, the same way that you don’t probably care to receive additional food if you are already full. Matching opportunity with potential is an extremely difficult task. In contrast to the typical social benefits that have another goal, the policies that increase the wealth creation rate should be focused on the people with the biggest unused potential.
I also believe that all human beings should have at least access to shelter, food, medical care and education by default, but at this point, our system can’t provide these to everyone without destroying the incentives that are necessary for its further development. This further development can create the necessary additional wealth that will transform these promises to reality.
Having said that, lets have a look at some possible ways with which we can increase the wealth creation rate by empowering as many people as possible. I’m pretty sure that there are more and better ways I haven’t heard or thought of yet. Chances are that proposals like these seem awkward and unrealistic when you first hear about them. This is normal. This is the nature of new things.
Universal basic income fund
This proposal is more suitable as a replacement for the typical social benefits and less focused on maximizing the wealth creation rate, but deserves a mention because it can empower people massively. The proposal has certain advantages but significant risks too. The collected money could fund a part of the universal basic income. Essentially all citizens receive a monthly income large enough to cover their basic needs, no matter what. This policy is usually proposed as a solution in case of massive technological unemployment, where most jobs are replaced by intelligent automation. Apart from that it is an empowerment policy too, since it can give people a safety net and push towards more risk taking, giving people the opportunity to work on whatever is important to them.
On the other hand, it is a risky policy that can backfire if implemented too early. A sustainable universal basic income assumes that a huge part of the total wealth is produced by automation instead of human labor. Essentially it is an achievement of a society that has reached or is close to reaching to abundance, freeing up humans of the necessity to produce their wealth with labor. If it is implemented too early though, it might make people to withdraw themselves from unfulfilling but essential jobs that can’t be automated yet, slowing down the wealth creation process. We are clearly in the path of automated abundance, but there is still a long way ahead. For this reason I think we should be very careful with such a policy.
The idea is to give more people the opportunity to take risk. Risk taking is more common for people with few responsibilities. Changing course in life, is a quite risky thing to do and as we grow up and make families, the responsibilities grow along too, making a change in course a lot harder. This is why most of the companies are founded by people in their 20s or 30s, while the vast majority of older people, settles in unfulfilling paths. Yet most people in their 40s, 50s, or even 60s are both energetic and dreamy apart from experienced, with much unused potential. There is a good chance, that by unlocking that potential to have a large increase in wealth creation.
So, the idea is to create a fund which these people will have access to, at least two times in their life. When someone asks for funding, they start receiving a monthly income for a specific time, for example a year. The goal is to enable the beneficiaries to take risks, by providing a safety net. They should be free to use the money as they like. Ideally the funds would be used for retraining, or prototype building or any other course changing activity that can empower individuals. The number of times someone is entitled to access funds, should be small enough so that they don’t do it without a good reason. It should feel like a big missed opportunity if you take the funds and waste it. On the other hand, it should be more than once too, because we must take failure into account. Failure is an important part of success, and we should give people the opportunity to fail and learn from it. The details of such a funding mechanism and the beneficiaries profile should be further discussed.
Quadratic payments fund
Quadratic payments is a proposal for financing certain activities, like the production of public goods. The idea is that there is a funding pool which magnifies the contribution of the community to these activities. For example, if a specific public good asks for funding by the community, the collected sum will be doubled using funds from the pool. The number of contributors is an important factor for determining the amount that will be used from the pool. The more the contributors the bigger the extra funding. I think that there are some wealth creating activities like the development and maintenance of open source software, that could be improved and accelerated by using funding from such a pool.
Don’t forget that the main goal is to use the collected funds to maximize the wealth creation rate by empowering as many people as possible and any proposal that contributes to that goal should be discussed. Have also in mind that a very common theme in startup investing is that most of them fail, but the ones that succeed compensate for the others many times over. I have a sense that this theme will apply to people empowerment too. Most people will not succeed in producing more wealth, but the ones that will, will compensate for the rest many times over.
In any case, I argue that we shouldn’t take future growth for granted. We should strive to achieve an efficient and sustainable system that maximizes the wealth creation rate and minimizes the risk of revolution, by empowering as many people as possible. Within that framework, I hope that this post might have something to offer.