November 25, 2014

Joshua Kennon’s Seven Laws of Fair Economics

Joshua Kennon's Seven Laws of Fair Economics Image Copyright Thinkstock

Many of you have written to me and asked about my specific economic and political beliefs since I have a very strong tendency to play Devil’s Advocate, often writing about topics with the goal of getting you to think for yourself and make up your own mind based upon the data.  It’s a common enough request that I thought it fair to identify seven, core, fundamental beliefs I hold that would guide me if I were given absolute power to construct an economic system.  

This worldview was created over the past 15 years as I studied world, political, economic, and financial market history, psychology, biology, philosophy, and ethics.  It errs heavily on the side of individual freedom with a core tenant that society should invest in making equality of opportunity available to all, including by providing a good educational framework so that all children are given access to the job market and upward mobility regardless of the socioeconomic status of their parents.  Based upon the historical evidence and human nature, I believe that it is the fairest system possible with the highest probability of resulting in the greatest aggregate standard of living for the most people, while minimizing disenfranchisement.  

Joshua Kennon’s Seven Laws of Fair Economics

Rule #1: In a free and just society, if a man wants something, he must either create it himself or exchange with other people for something they desire or need.  Upon reaching adulthood, no man is entitled to anything but freedom over the body and mind God gave him.  

Rule #2: How, and where, money accumulates throughout a free civilization represents what the people actually value most, not what the elite thinks they should desire.  Therefore, a man should be free to determine how his own money and time is allocated, even if that means making sub-optimal decisions that result in his ruin or death.

Rule #3: No man has the right to outsource his costs while in-sourcing his profits.  This is not capitalism.  This is theft.  For example, buying a piece of land and destroying the environment is effectively forcing the next generation and society as a whole to pick up a portion of your operating costs.

Rule #4: Beyond a basic standard of living, all income should be taxed equally and fairly regardless of source at a low, fixed rate.  This ensures that the poor do not suffer under the burden of taxes they cannot afford and that successful enterprising individuals who work in productive fields such as engineering, manufacturing, and medicine don’t pay a higher tax rate than those who work in support industries such as banking, money management, and private equity.  It also removes the possibility of lobbyists negotiating special tax loopholes to lower the effective rate for their industry or constituency.

Rule #5: The total amount of wealth inequality in a society is not nearly as important as the standard of living experienced by the majority of families, provided there are electoral protections against undue influence of capital on politicians.  Our measures should be absolute not relative.  It is our responsibility to find ways so that each successive generation lives better in real, inflation-adjusted terms, than their parents did.   For example, we should consider the 20th century United States, during which wealth inequality exploded but lifespans increased and the standard of living for the average man rose 600%, an enormous success.

Rule #6: The primary roles of government economic policy should be designed to level the playing field not the final outcome.  Policies should include:

  • Maintaining a stable currency and full employment.
  • Building bridges of upward social mobility that make it possible to move beyond the class into which you were born.
  • Creating and maintaining escape, or “game over”, mechanisms such as fair bankruptcy laws, that make it possible to start over in the event of poor decisions or bad luck.
  • Rewarding and incentivizing capital formation and accumulation by industrious and entrepreneurial individuals so that rags-to-riches stories are possible.
  • Creating and maintaining mechanisms that prevent the accumulation of wealth in the hands of those who did not earn it, avoiding a modern day manifestation of the feudal system that existed during the European Dark Ages.
  • Preventing price fixing and unfair barriers to market by those in monopoly positions.
  • Establishing an education system that provides literacy and basic job skills as a fundamental human right for all children regardless of the socioeconomic background of parents. 
  • Enabling open and fair free trade between any two consenting parties. 
  • Protecting the individual liberty of all people regardless of age, race, political affiliation, sexual orientation, gender, creed, nationality, and family status. 
  • Ensuring equal pay for equal work.
  • Protecting against workplace abuses that violate the human rights of those who are least able to protect themselves due to economic vulnerability.
  • Enacting usury laws, such as the ones that were in force in the United States prior to the 1980’s, that limit the maximum interest rate charged to consumers to a multiple of the prime rate.
  • Regulating financial institutions just like electric utilities, water utilities, and telecommunication utilities.  

Rule #7: No single institution should be allowed to grow to be so complex or vital that it is “too big to fail”.

In essence, were I to create a system, it would be one that provided the opportunity and upward mobility for those who were willing to better themselves, learn new skills, and live within their means.  It would not guarantee success but it would guarantee the opportunity for success.  It would make sure that most of society’s rewards flowed to those who earned and deserved them, getting constantly recycled so it did not amass in the hands of a reincarnated Aristocracy determined solely by birth or credentials.  It would be a system that protected the poor and asked virtually nothing of them in terms of tax revenue.  You’d still have some folks with $50 million in a portfolio and others with only $5 in the bank but as long as the ladders of social mobility existed and remained open to all who wanted to take advantage of them, this would be a tolerable, and even desirable, situation.

Image © Thinkstock

  • Gilvus

    Opportunity egalitarianism sounds great, but I don’t know if it will create the most aggregate happiness. For example, in a winner-takes-all system, the person in 2nd place may feel more bitter because his efforts (which were considerable) still amounted to nothing. But I can see you citing the illusion of choice as defense for this one.

    Ever heard of the Georgia Guidestones?

    • Joshua Kennon

      You may be right. I may have underweighted envy as a core part of human nature. It just strikes me as so irrational to be unhappy if you have everything you want just because the guy down the street has more money on paper or a nicer car. I don’t get that mindset. Envy is such a waste of time, especially when it is really just a proxy for social status and signaling theory for reproductive fitness. I’ve never lost a moment’s sleep because someone may or may not be richer than I am at my current age. All I know is if I continue to do intelligent things in a rational way, harnessing a few big ideas such as the power of compounding, things sooner or later work out. It’s that philosophy that led me to being better off in my early 20’s than most people are when they retire.

      As for the Georgia Guidestones, I was fascinated by them a few years ago. One of these days I’d like to get down there and see them. I think the whole population guide is way off because the planet could easily support 10+ billion people if we went to a sustainable system (imagine, for instance, that all energy came from the sun because we figured out the battery life limitations that allowed storage of massive kilowatt hours; virtually no pollution).

      • Gilvus

        I think this mentality is a by-product of modernization. For example, when my parents were growing up, a “bad year” didn’t mean their 401(k)s lost 50% of their value, it meant their lives were at stake from conflict, famine, drought, pestilence, or natural disaster. To them, moving to the U.S. and earning a stable life is already a huge, huge accomplishment. Their mentality has heavily influenced the way I see my world for the better.

        I have no data for this, because I can’t read Chinese and this is a new development – but I’ve been hearing that the up-and-coming generation of Chinese young adults are suffering a bad case of affluenza. While their parents developed fortitude and a hard work ethic in the aftermath of the Cultural Revolution, my generation grew up with microwaves, refrigerators, and all the marks of a “modern” life. Combined with the One-Child Policy (so parents would dote on and focus all their resources on their only child), Generation Y of Chinese folks are spoiled, materialistic, self-centered, and plagued with a sense of entitlement. I have an Indian friend who tells me a similar trend is emerging with Generation Y in India as well.

        I think the Georgia Guidestones were formulated in a time when Malthusian doomsaying was much more common (plus it was during the height of the Vietnam War). That probably accounts for the population control. Overall, I’m ambivalent toward the Stones’ message – makes me think of Brave New World. If you look on Google Maps, you’ll see they’ve been vandalized fairly recently.

        • Joshua Kennon

          You know, I might change it from “greatest aggregate happiness” to “greatest aggregate standard of living”.  It’s more accurate and adjusts for the fact that you are correct on me underweighting envy.  The more I think about it, that is a significant flaw … I’m not accounting for enough human envy.  

          Yep.  I’m going to do that.  I’m rewriting that line.  It’s more accurate.  Thanks, Gilvus.

        • Gilvus

          I like that. Maximum aggregate happiness would probably come from a Brave New World-type of engineered society (where certain humans are engineered to be outstanding or disabled, and everyone is taught to love the position they’re born into), but waaaaay too many basic human rights are crushed in the process.

        • innerscorecard

          Some young Chinese are, and some aren’t. The vast, vast majority of young Chinese are still very poor and hard-working. Those who are self-centered are part of that sub-group living in the coastal cities.

    • Joshua Kennon

      Gilvus: Sorry!  I went to hit “reply” and accidentally hit “edit” and posted my reply WITHIN your message.  When I saw what I had done, I went back in and deleted it and posted it as my own comment but just in case you didn’t get a notification, I did respond after fixing the mistake and restoring your original comment.

    • innerscorecard

      This was extremely wise. Reminds me of what Charlie Munger has said about envy.

  • Stilldvs

    Re Rule 6, subpoint “Creating and maintaining mechanisms that prevent the accumulation of wealth in the hands of those who did not earn it” – are we talking about rules to prevent inheritance or other trans-generational gifts?  While I might not respect the inheritor, I’d suspect this point could run afoul of Rule 2, since several persons would wish to allocate their time and resources to improve the standard of living of their offspring.

    • Joshua Kennon

      Without such a safeguard, in engineering terms, the system could self-implode because in a winner-take-all model, capital concentrates. In a model where creative destruction is flourishing, that is a good thing because money ends up in the hands of people like Steve Jobs, who came from nothing and yet was able to deploy the resources of a $300+ billion market capitalization empire to create even more new products. It was the profit from the iPod that made the iPhone possible, which, in turn, made the iPad possible.

      That is one of the reasons a “poor” person today has things such as heating, air conditioning, running water, an automobile, television, and a smartphone. Our standard of living expectations have grown so remarkably that, unlike barely more than a century ago, we complain about “living paycheck to paycheck” when our ancestors worried about starving or freezing to death.

      But if Steve Jobs’ wealth remains completely intact through the subsequent generations, who have created nothing, the resulting power would result in a system of tyranny that is virtually identical in its practical effects to feudalism. If you take $7 billion earning 10% net of taxes per year, you’re talking about $700 million in annual income without ever touching the principal. Even if society took a 55% cut (which is always reduced because of intelligent use of trust funds, foundations, etc.), his offspring will still be among the ultra high net worth for generations; easily the top 0.01%, or the 1% of the 1%.

      The flaw in the current system is that it taxes the estate, the person who died who already paid tax on the money. Instead, I think it should tax the inheritor, just as if he had received that money from a paycheck. In other words, I think all source of income, whether dividends, interest, rent, wages from manual labor, a salary paycheck, or inheritance, should be taxed at the same rate when someone earns it.

      There is an argument to be made for charging a tax rate of 2x the prevailing rate on inheritance since it is the only form of income that is “non-virtuous”. If someone earns dividends, interest, rent, or profit, it is because they (in most cases) lived below their spending capacity and invested in the economy. If someone picks up a tool belt and builds houses or fixed pipes as a plumber, he is helping built the economy. If someone sits at home and receives a check through no merit of his or her own other than genes, the income source isn’t as compatible with a virtuous meritocracy. But I’ll leave that for others to debate.

      Alternatively, you could abolish all existing taxes and replace it with a flat tax of 25% nationally and give an exemption for all amounts under a certain income level (e.g., if $20,000 is the poverty line, everyone gets a rebate equal to $5,000 in cash mailed to them on January 1st of each year to reimburse them for the taxes they paid on their basic living costs; that way, it isn’t regressive). The problem here is, it wouldn’t solve the wealth accumulation problem because the portion of income spent for the massive fortunes we’re discussing will always be minuscule – a rounding error – compared to their cash generating capacity.

      All of that is to say that, in the final analysis, the slightly reduced incentive system caused by some equalization of inheritance taxes to paychecks and investment returns would be more than offset, by several magnitudes in my opinion, by the value of adding a safeguard to the system that prevented concentrations of wealth by those who have contributed little or nothing to society. Even such a tax would still leave them rich enough to never have to work a day in their lives. It’s an opportunity trade-off thing since we live in an imperfect world.

  • FratMan

    Hey Joshua, I’m thinking back to your Barnes & Noble post and I was wondering–have you ever made a poor investment that wasn’t due to unforeseen technological disruption? 

    • Gilvus

      I too, would like to know if Josh Kennon is capable of making mistakes. If not…he’s probably an investing machine and we will hail our new robotic overlords before long :-)

  • FratMan

    I’ll probably never get an inheritance in my life, but I don’t think that they should be heavily taxed–in fact, I don’t think they should be taxed it all, since estates represent what someone had left over after a lifetime of government taxation. Think about it, somewhere along the line, someone had income, paid taxes on that, invested it, had to pay taxes on that, bought the nice house, paid taxes on that, bought the nice furniture, paid taxes on that. At some point, enough is enough.

    Obviously this wasn’t the case, but let’s say the only reason Steve Jobs wanted to start Pixar or give us the MacBook, iPad, iPhone, iTunes, etc. was so that he could give it all to his son. Essentially, he would be advancing civilization by improving our efficiencies and making something ‘good’, and this would give him an enormous amount of claim checks on society–this is fair, since he provided society with something that it wanted, and the billions of dollars in the bank account would indicate that he had yet to exchange those claim checks for consumption of his own desire. If his sole passion and desire were to pass it on to his son, who are we to tell him no? 

    I don’t necessarily buy the argument that the wealth of this country would accumulate into the hands of a few if there were no estate tax–William F. Buckley once said that if every Rockefeller had the national average 1.8 kids who, in turn, spent money as though he were a Rockefeller, by the fifth or sixth generation, there would be a Rockefeller of modest means. If you inherit a lot of money without work, you’re probably going to blow it like the A&P heir did (although maybe not in such spectacular fashion), and if you’re capable of maintaining a $1 billion fortune you didn’t earn, more power to you–a lot of people can’t do that. In fact, most people have poor records of spending unearned wealth. But if Steve Job’s sole desire of advancing civilization was to pass wealth to his son, a free society shouldn’t be allowed to ‘correct’ Steve’s priorities and passions through heavy taxation.

    But that’s just a small quibble. As usual, I agree with 99.999% of what you say. 

  • http://www.facebook.com/shaunconnell Shaun Robert Connell

    I see you changed your goal to the greatest aggregate standard of living below. That’s actually a very interesting standard. I probably agree with the vast majority of your political conclusions, though happiness and standard of living don’t at all factor into account — my reasoning begins with the notion of natural law, as explained and defended by Blackstone.

    As for taxes, a consumption tax that doesn’t include food or medicine would push our economy away from consumerism and toward a producer economy.

    • Joshua Kennon

      The idea of a consumption tax with the caveats you mentioned – not being applied to basic necessities such as food or medicine – interests me a great deal.  That’s the key; it can’t be regressive, which those carve-outs would provide.  The question becomes: How do you manage the carve outs?  How do you stop lobbyists from making their way to Washington to argue that a cough drop is really food or that a car is a basic necessity?  That’s the big trouble that needs to be solved before it would be sustainable. 

banner