Decentralizing capitalism

Last week, I blogged about Universal Basic Income (UBI), a system that would pay everyone an equal amount of money just for being alive. I mentioned that one of the main reasons I support UBI is because it has the potential to decentralize capitalism by enabling more entrepreneurship and enabling more people to participate in the economy. In today’s post, I want to look closer at this idea of decentralizing capitalism, including why that’s important and how we might go about doing it.

Capitalism

First, let’s establish a definition of “capitalism.” Wikipedia says:

Capitalism is an economic system based on private ownership of the means of production and their operation for profit. Characteristics central to capitalism include private property, capital accumulation, wage labor, voluntary exchange, a price system, and competitive markets.

The meaning of “capitalism” in the context of this post is actually-existing capitalism. Actually-existing capitalism is an economic system enshrined in law that closely resembles the system described by Wikipedia, but includes targeted (or sometimes blanket) interventions by governments that distort the “free market” nature of “pure” capitalism. This is what economists call a “mixed economy”. These interventions include: reducing protection for private property rights in some areas and increasing protection in others, inhibiting the price system is some areas and strengthening the price system in others, protecting voluntary exchange in some areas and prohibiting voluntary exchange in others, and more.

The end result of these government interventions in the economy is an incredibly centralized version of capitalism. This is the system that we’ll discuss here and that we aim to decentralize since this is the system that we live with today.

Why decentralize capitalism?

The main outcomes I hope to achieve by decentralizing capitalism are to increase individual freedom and reduce economic inequality. Increasing individual freedom is important because it means that people will have more opportunities to make a living and do things that make them happy. All human action is ultimately in pursuit of happiness, and the less freedom people have, the less options they have for making themselves happy. Reducing economic inequality is important for social cohesion and economic growth. Studies have shown that communities with high levels of economic inequality are less healthy and experience slower economic growth than communities with more equal wealth distributions.

With more individual freedom and more equitable wealth distribution, human society will be better equipped to flourish in the face of increasing complexity.

Regulations

The first centralizing force that must be minimized or eliminated to decentralize capitalism is government regulation. In a 2010 study, the Small Business Association (SBA) found that the annual total cost of federal regulations in the U.S. amounts to over $1.7 trillion. The hidden costs not included in the study are the opportunity costs to businesses that could afford to comply with regulations, as well as the opportunity costs for businesses that simply could not get started due to these regulations.

Proponents will say that regulations exist to protect businesses and the public from harmful business practices. However a consequence of regulation is often to raise the barrier to entry in any given industry by increasing the costs of starting, running, and growing a business. This results in many businesses failing sooner, or never getting started at all, centralizing economic power in the businesses (and their shareholders) that can afford to comply with regulations.

In addition to regulations that inhibit industries, there are also regulations that are designed to completely eliminate industries. The most prominent example would be drug prohibition, which in practice has not eliminated the drug industry but simply transferred control of it to criminals who often grow their market share and resolve disputes using violence and coercion. The costs of drug prohibition to society are great, and include not only the direct financial costs of enforcing prohibition but also the human costs that result from criminal records and violence in communities. These costs are mirrored in other prohibited industries.

Without one-size-fits-all government regulations determining what people can and cannot do to make a living, regulation would be left to individuals and their communities to create and enforce. “Peer regulation” would enable the same kind of innovation in regulations that we see in other industries, as the process of creative destruction and evolution is applied to regulatory standards and equilibrium is eventually reached.

Just as people can choose today whether they prefer Uber or Lyft’s standards for driver selection and passenger ratings, people will be able to choose from a variety of regulatory models and certified (or un-certified!) vendors when they’re deciding where to take their business. Without a mandatory barrier to entry, more businesses could start and grow. With more businesses, there will be more ways for people to make a living and more products that exist to provide happiness and solve problems.

Intellectual property

Another centralizing force that must be minimized or eliminated to decentralize capitalism is intellectual property (IP). IP includes copyright, patents, and trademarks, and is designed to create artificial scarcity of fundamentally abundant information such as software code, manufacturing processes, music scores, or even product concepts such as phones with rounded corners.

In the U.S., IP protection is enshrined in law by the “copyright clause” of the Constitution. This clause gives the government the power to protect IP to “promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” While it may appear that at least part of this clause is contradicted and superseded by the “free speech clause” of the First Amendment to the Constitution, the courts have not supported this conclusion and so IP remains in force in the U.S. and throughout the world thanks to native laws and treaties upholding IP protection.

The effect of IP laws is the artificial restriction on the distribution and use of information and the centralization of control over the distribution and use of information in the hands of IP owners. Anyone who wishes to use IP owned by someone else must pay licensing fees to the owner of the IP and any intermediaries involved in the transaction. IP protection is expensive to gain, defend, and comply with, and in the end results in fewer opportunities for inventors and entrepreneurs and less innovation in the marketplace of ideas and inventions.

Without IP, people would be free to copy and share information about creative works and industrial processes. Innovation would flourish as people begin to reuse and remix obscure or popular ideas, and there would be no artificial barrier to creating new solutions to challenging problems. New entertainment, new products, new services, and new processes would proliferate, and profits in the information economy would be diffused to millions or billions of creators instead of being centralized in the hands of a relative few “rights” holders. Again, more equitable income distribution, and more opportunities for happiness.

Rents

IP protection is a form of rent-seeking that creates scarcity where there is none. But what about rent-seeking where there actually is scarcity? The way capitalism has been constructed, property can be owned by an individual from the moment they take ownership until the day they die, whether they actually use the property themselves or not. For example, real estate. It’s not unusual for some people to have several houses around the world, which they might stay in only a few weeks or months out of the year. The rest of the time, the house is either rented out or it stays empty, save for a groundskeeper or cleaning crew that keeps dust from gathering.

Another example is farmland. Many farmers own hundreds or thousands of acres of land, far more than they could actually farm themselves. So instead they hire farmhands to help them work the land. These farmers get paid a fixed wage, and the farmer reaps all of the profits remaining from the operation. The result is that farmland becomes centralized in the hands of fewer and fewer farmers through the consolidating forces of competition, while farmhands continue to make meager wages by comparison.

A solution to the endless centralization of land and other property ownership in the hands of fewer and fewer rent-seekers is to eliminate legal protections for absentee owners and restore respect for the homesteading principle as a means of acquiring property. The system of property rights we have today is artificially constructed by the state, and could be changed to prevent the accumulation of property by absentee owners.

After abandoning property for some period of time – and to be fair, any period of time chosen would be as arbitrary as the indefinite period granted today, but could still certainly be made more fair and equitable – the owner would give up their exclusive rights and the property would then be open to homesteading by others. In more popular areas, this process could be managed in a way that prevents potential would-be homesteaders from fighting to claim newly-abandoned property while still giving everyone a fair chance at property ownership. The result would be more people who have a chance to homestead property as our ancestors did hundreds or thousands of years ago rather than paying rents on property they’ll never own, and property ownership would instead be more equitably distributed in the hands of people who are actually using the property.

That’s not all, folks

These three changes to the economy – the elimination of government regulations, IP protection, and rent-seeking – are neither perfectly conceived nor the be-all-end-all to decentralizing capitalism. It’s likely that the system that would result from these changes could hardly even be called capitalism at all, especially if our benchmark is actually-existing capitalism instead of the idealized capitalism described by Wikipedia. But what I am certain of is that the system would be more fair and equitable, while retaining the best features of capitalism that allow for innovation, progress, and the flourishing of human society. And that’s really what we want, isn’t it?

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