David Warsh: 'Radical Markets' in Somerville?

  David Square in Somerville, Mass.

David Square in Somerville, Mass.

 

I live in Somerville, a city near Boston that is rapidly gentrifying.  It seems like a pretty good place to think about the implications of  Common Ownership Self-Assessed Tax, or COST system, that Eric Posner and Glen Weyl sketch out in Radical Markets: Uprooting Capitalism and Democracy for a Just Society (Princeton, 2018) The example they give is Rio de Janeiro, but their notion of “perpetual auctioning” easier to imagine think in a place close to home.

Here’s the “thought experiment” the authors propose.

“Suppose the entire city of Rio is perpetually up for auction. Imagine that every building, business, factory and patch of hillside has a going price, and anyone who bids a price higher than a going price for an entity would take possession of it… [Assume] that the auctions are conducted via smartphone apps that automatically bid based on default settings, eliminating most of the need for people to constantly calculate how much to offer.  Laws ensure that obvious sorts of disruptions don’t occur (for example coming home to find your apartment is no longer yours). Incentives are in place to care for and develop assets, and ensure that privacy and other values are also preserved.

“All the revenue generated by this auction would be returned to citizens equally, as a ‘social dividend,’  or used to fund public projects, which is how revenues from oil sales in Alaska and Norway are used.’’

What would happen? The slums on Rio’s picturesque hillsides would soon disappear.  Whoever bought them wouldn’t be planning to build rickety slums (though what the acquirers might have in mind isn’t described). Where would the slum-dwellers go?  Transformed by those “social dividends” into a vast middle class,” they would rent apartments in the skyscrapers that would replace the ritzy shops and condos that now dominate in the center of the city.  The rich, meaning “people who own a lot of businesses and land,” would disappear, because “if everything was up for auction, no person would own such assets.” Instead “their benefits would flow equally to all.” And with the radical diminution of inequality that would ensue from steeply progressive taxation, crime would drop, gated communities would disappear, street life would be restored, and trust in public life would flourish.

Not, I think, in Somerville.

In the pure, thought-experiment form of the COST scheme, everything would be owned in common and the right to rent it would be forever on the auction block – a little like the old Soviet Union, but with individuals rather than planners making and timing decisions.  In practice, the authors say, some combination would probably be required, as in the United States, where government owns vast tracts that it rents out as parcels for drilling, timbering, grazing, and so on, while private property law governs all of the rest.

This isn’t the world of John Lanchester’s biting 2012 novel of contemporary London, Capital, with its increasingly sinister declarations slipped under neighborhood homeowners’ doors: “We want what you’ve got.”  It’s much worse than that.  In a city like Somerville, individuals and businesses would be required to list their homes and factories on a city Web site and, for each, enter a price for which they would be willing to leave – or accept a default based on the history of the house. This is a reservation price in the lingo of auctions; it is the “self-assessed” value of the property, in Posner’s and Weyl’s scheme. It also sets the owner’s annual tax bill – the portion that the city would keep from the sale, at whatever the tax rate happened to be. Residents could adjust their reservation price up or down at any time during the year.

Meanwhile, would-be buyers would search online for houses they might like to acquire, much as they do now with Web sites like Zillow, with one critical difference: Every house would be for sale at the listed price.  You could buy it out from under the owner with a few clicks and move in after a “reasonable period of time.” A footnote explains that the authors have in mind mainly a system of business taxation. They describe their example of Rio as “fanciful,” and say that they conjure markets for personal possessions like homes and automobiles mainly to make their account “vivid.”

Weyl works for Microsoft and teaches at Yale University.  Posner, son of former U.S. Appeals Court Judge Richard Posner, is a professor at the University of Chicago Law School.  Their book contains several other novel proposals, each of which probably merits a column. If I understand it correctly, the essence of their property scheme, is a highly generalized second-price auction, coupled with the steep progressive taxation.

They dedicate their book to economist William Vickrey (1914-1996), who identified the mechanism and described its virtues in a celebrated paper, “Counter-speculation, Auctions, and Competitive Sealed Tenders,” published in 1961.  In a second-price auction, the winner pays only the second-highest price bid.  The idea is to elicit honest offers, to prevent participants from shading their bids. He suggested using the method to auction off government bonds.  But houses out from under their owners? “Most novel concepts initially seem far-fetched,” the authors write. “[B]ear in mind [Vickrey’s]  idea is already used to assign the advertising slots of Web and Facebook pages all of us visit every day. Every few seconds these slots are reallocated to the highest bidder…”

In 1996, three days after he was recognized, with James Mirrlees, with a Nobel prize in economics for his work on moral hazard in public finance, Vickrey died, preventing him, the authors say, from articulating a grand vision such as their own. (See the splendid biographical memoir by Jacques Drèze.) Instead, they cite a similar scheme propounded by University of Chicago economist Arnold Harberger in a speech in Chile in 1962.  He had in mind a way of circumventing widespread bribery of tax assessors by homeowners eager to understate the value of their property:

“If taxes are to be levied… on the value of… properties… it is important that assessment procedures be adopted which estimate the true economic value.   The economist’s answer … is simple and essentially fool-proof: allow each… owner… to declare the value of his own property, make the declared values… public, and require that the owner sell his property to any bidder … willing to pay… the declared value.  This system is simple, self-enforcing, allows no scope for corruption, and creates incentives, in addition to those already present in the market, for each property to be put to that use in which it has the highest economic productivity.’’

As Tim Harford slyly observed in the Financial Times, “This system [of Radical Markets] has enormous potential — simple, fair, progressive taxes and a more dynamic economy.   It would be much easier to develop new infrastructure, build new homes, buy your neighbor’s garden, and pour concrete all over twee villages to build monorails or airport runways.”

Posner and Weyl locate resistance to their idea of using perpetual auctions to erode private property “barriers to trade” in, among other impediments, the “endowment affect.”

Richard Thaler, of the Booth Business School of the University of Chicago, won a Nobel Prize for describing the emotional attachment to what you already possess. The authors say the endowment effect seems characteristic of those who lack time and ability to make swift trading decisions. That sent me to the library, where I spent part of a pleasant afternoon leafing through Measuring America: How an Untamed Wilderness Shaped the United States and Fulfilled the Promise of Democracy (Walker, 2002), by Andro Linklater. Nearby was Utopian Ideas and Movements of the Great Depression: Dreamers, Believers and Madmen (Lexington, 2013), by Donald Whisenhunt.

The way it works now is that Somerville gentrifies at its own rate.  People wait to sell their homes until, for one reason or another, they are willing to let go. Rents are rising rapidly, driven by home sales.  A record 871 new units are under construction.  Property rights in the city are not absolute, of course.  There are zoning and building-code restrictions.  A 1 percent sales tax has been submitted to the state legislature for approval,  given that homeowners reap windfall gains thanks to local improvements (better schools, new rail lines) and changes in tastes (more people moving in from the suburbs). That’s about as far as it goes. Meanwhile, Posner and Weyl want most of the rest of our property rights.  Shoot the moon!

David Warsh, a long-time columnist on economics and politics and an economic historian, is proprietor of ecnomicprincipals.com, where this essay first appeared.

  The  Somerville Theatre  is an independent movie theater and concert venue in the  Davis  Square neighborhood. It was started off as a vaudeville house and movie theater. The theater now operates as a live-music venue and first-run movie theater.

The Somerville Theatre is an independent movie theater and concert venue in the Davis Square neighborhood. It was started off as a vaudeville house and movie theater. The theater now operates as a live-music venue and first-run movie theater.