Ayres on Governance: Some half-baked ideas that might be worth baking

we-the-people-consitution-usa-smaller

If I had the job of preparing a model constitution today, I would start with . . .

I’ve been writing a novel about the life of Christopher Marlowe, who did not die in a brawl in 1593 as the official history says. He lived outside of England under other names for nearly 30 years. During one episode, in 1614, he was persuaded (by his friend and patron, the Earl of Southampton) to buy two Venetian warships (with Southampton’s money) to intercept and  capture English pirates – under royal charter — who were interfering with commerce  in the Med. (Southampton  was a major shareholder in that colony). (The Earl of Southampton  was a major shareholder in that colony). Southampton’s idea was to use the captured ships and their cargos  to help the starving Bermuda colonists. They were starving because the governor, Richard Moore, had imposed martial law and was forcing all the colonists to work on defenses (against Spanish attack) rather than growing crops.  Marlowe (who was calling himself Gregorio de’Monti in Venice), went for it because he was hoping to be rehabilitated in England and to be appointed Governor –General of the Bermuda Colony, after saving it.

This amazing scheme actually succeeded, up to a point. The fleet of four ships, two of them captured, reached Bermuda and the colony was saved. The episode ended badly, because “Admiral”  de’Monti had a fight with the current governor of Bermuda, Richard Moore, about his “new ideas” of governance. (Moore  wanted to fight with swords, whereas de’Monti preferred to fight with words.) The King thought the “new ideas” were much too democratic and that the loot from the captured (English) pirate ships should not belong to the Bermuda Company, but should have been crown property. The colony was saved but Southampton lost his investment and Marlowe (de’Monti)  lost his chance to be rehabilitated…..well, that is another story. My point is that later, after returning to Venice, he continued to think about how a colony ought to be governed. In his last years, he wrote a model constitution. His model constitution contains many of the features of the current constitution of the USA.

But the current one is not working very well today. The electoral college is clearly obsolete. The mal-distribution of votes among the states is getting worse. The Republicans have won the US presidency while losing the popular vote by a margin of 2.6 million votes. The trouble is that these votes are concentrated in a few urbanized states, allowing a number of under-populated rural states to control the government. They, in turn, can pack the Supreme Court with extreme conservatives who want no changes. They would prefer the equivalent of a sword fight to a word fight. The future of democracy is under threat. It takes something like 6 votes in California to be equivalent to 1 vote in Montana or Wyoming. What has happened to “one man, one vote”?

Multiple votes

If I had the job of preparing a model constitution today, I would start with the votes. It seems Mark Twain explored this idea, in his “The Curious Republic of Gondour”.  The English novelist Nevil Shute built a plot around this idea back in his book “In the Wet” in 1953. He suggested that everyone adult citizen gets one vote by existing, but that ordinary people might “earn” up to five votes by education and civic activity (such as military or civil service) and that a sixth vote might be awarded by the Queen of England (and Australia)  for some extremely meritorious action, something like the Victoria Cross.

Thinking along those lines, I would modify Nevil Shute’s scheme. Voting should be compulsory. I would allow 1 vote for every citizen beyond the age of 16, up to 4 more votes for increasing educational attainments, as determined by examinations , plus up to 5 more votes based on payment of wealth taxes. (So the rich would get more votes by paying for them.) Alternatively, I would consider allowing a fraction – say 10% — of all votes to be bought outright (via an electronic bidding process) by individuals or businesses wanting to influence legislation. The results of such auctions should be public, of course. Such a system would be highly objectionable, of course, but still preferable to the existing one where votes – and presidencies — are bought by billionaires indirectly and secretly through political contributions.

As regards the examinations for voter qualifications, the first (level 1) would be a simple literacy test in the language of the country. Level 2 would be equivalent to high school graduation. Level 3 would be equivalent to college graduation (BA), level 4 would be advanced education at the level of a masters degree  and level 5 would be reserved for persons with advanced degrees in medinine psychology, science or advanced training in some non-degree course (such as airline pilot training or passing the bar examination in law. The examinations themselves would be designed and administered by specialists, and reviewed by committees  of the National Academy of Sciences, the American Medical Association, the Bar association or equivalents.

Land ownership and inheritance

There was a time, not so long ago, when all wealth was attributed to land ownership.  Today, land ownership by individuals is relatively unimportant as a fraction of all individual wealth. However, as depopulated urbanization proceeds, urban land becomes more and more valuable, while rural land tends to be aggregated into bigger and bigger parcels, encouraging large-scale industrial-type technologies. Thus, I would limit ownership of urban land to a single-family house and small garden. Allowing more than that to pass by inheritance confers unearned financial gains.  I would advocate limiting rural land ownership to owner-occupied family legacy farms  and not-for profit institutions. Other land should be nationalized and leased, subject to land-use rules. Leases should be renewable, for periods based on investment, up to 50 years for large private structures. Land leases should be exchangeable in markets, subject to the above ownership limits. Homes built on leased land may be owned outright, (as in National Forest land in the US, today) .

Leased land would be subject to annual rents, based on appraised market valuations or revenues. These payments would replace existing real estate taxes.  I would also disallow private ownership of most agricultural and forest land, except for owner-operated legacy farms of not more than 1000 hectares

I would not allow large chunks of corporate wealth, consisting of shares in large companies, to be inherited directly by children of the owners. Wives should be entitled to continuing income, but not management entitlement (i.e. voting shares), unless they were acquired two years before the marriage.

Children should earn their way, not receive it by right from wealthy parents. A good education, plus a house (up to 100 square meters of floor area), some allowance for furniture, furnishings and personal jewelry plus a cash payment in current dollars, not above the average yearly salary earned by the parent over the previous ten years. This should be the limit of personal inheritance, except in the case of legacy farms or small legacy businesses such as restaurants, with ten full-time employees or fewer. (Employment of part-time workers should not be counted for this purpose). When wealthy shareholders in a large company die, their shares should be sold openly in the market, and the proceeds allocated (by the decedent’s will) among acceptable  non-profit institutions, such as charities, universities, libraries, scientific research centers, hospitals and established churches.

Corporate governance

It is important to distinguish 4 kinds of enterprises. The first (group 1) is the self-employed individual earning less than a fixed amount – say $50 K per year at present. The group includes temporary workers, free-lance drivers, home help, free-lance writers, photographers, artists and so on. The second (group 2) consists of small family businesses (possibly a farm), “mom and pop shops” serving local customers, restaurants, small local contractors, etc. This business employs fewer than 20 people and has annual revenues less than $10 million per year. The third (group 3) consists of medium-sized businesses, firms employing from 20 to 500 people, providing goods and services mostly within the region or country , with total revenues less than  $100 million per year. The fourth group consists of multi-national firms not in group 3.

An “employee” in the above classification is any person working part-time or full-time for the firm, whose hours of employment are remunerated by the firm. This would apply to part-time drivers “employed” by Uber or Lyft, for instance. It would also apply to part-time nurses or home-help, or cleaners or gardeners, provided by an organization that advertises and provides the service, and charges for it.  In general, the firms already in groups 3 and 4 need more regulation than those in groups 1 and 2. In particular, the employees of such companies need protection.  I believe that  representatives elected by the employees should be represented  on the boards of directors of public companies. This system has been implemented in Germany since after WW II, and it has worked very well, especially in keeping manufacturing jobs within the country.

Most business in groups 3 and 4 are well-established.  Some are family owned and managed, but as the size of the business increases, more and more of them become public companies, whose shares are traded on stock exchanges. However, there are always startups, some of which may be well-financed by venture capitalists. This group accounts for a significant fraction of economic growth. Startups, owned by early investors, deserve more lenient treatment than established public companies run by hired managers. The boundary between “private” and “public” should be when the original owners and partners (including venture capital funds) collectively own more or less than 50% of the shares. When the “public” owns more than 50% the above rules for public companies should take effect.

As regards compensation, the existing system for large public companies is usually that management salaries and bonuses are regarded as a “cost” and are allocated  by a subcommittee of the board, appointed by the CEO. Bonuses are often allocated based on “performance” as measured by stock price. This system has resulted in outrageously high (and unearned) salaries and bonuses for top management. In my “new” system,  gross pretax profits, after all costs except management compensation,  should be allocated among individual shareholders, employees, management and investments,  by the board of directors, including workers representatives. Under this system, workers and shareholders would would have a more direct ‘say’ in the matter and would share more of the benefits from improved performance and innovation.

It is a fact that most shares in large firms are now managed by large investment funds, like Vanguard or Blackrock, not individuals. In fact, over 70% of all trades on the stock markets are now made by mutual funds, hedge funds and so-called ‘private equity” under central management, using computer algorithms rather than individual judgment. This favors short-term decision-making, focused on stock prices, rather than long-term investment strategies.  It also favors specialized ”private equity” and “financial engineering” that often hurts long-term activities such as research, product development, health and safety, and human resource investment (education and training). Over-emphasis on maximizing “shareholder value” needs to be curbed, especially where is involves borrowing or share buy-backs. Certain rules, such as “carried interest” that favor such activities need to be modified.

Public sector

Public sector is another word for government. Who is the government and how should it be financed? There is a fundamental issue as to how responsibility for government services and government regulations (which are unavoidable) should be divided among levels of government. There are functions that only a central government can ensure. Public safety is one. Enforcement of laws –and of legal contracts — is another. Environmental protection is a third. The absence of laws (anarchy) is incompatible with civilization. Some laws need to be national (if not global). Social security, criminal justice, education and health care, financial regulations and environmental regulations must apply to everybody. Educational standards, and health standards must also apply to everybody. These things require national (or global) governments. On the other hand land-use, cultural investment, land use, and other topics should be decided locally. There may be intermediate (regional) issues that would justify regional governments.

I recognize that many people fear and loathe the idea of “big government” keeping track of everything they do, and all it entails. This seems to be a legacy of Friedrich Hayek’s huge anti-socialist best-seller “The Road to Serfdom”, published 70 years ago. Hayek’s book, in turn, influenced Milton Friedman (the “Chicago School” of economics”,  Allen Greenspan, Ronald Reagan and many other opinion-leaders. The ‘bottom line’ of Hayek’s gross mis-representation of history is that democratic socialism inevitably leads to communism and tyranny (e.g. Hitler). While the Scandinavian countries have long ago disproved this hypothesis, the underlying assumption that government is “the problem, not the solution” (in Reagan’s words) remains deeply imprinted on a large number of right-wing U.S. politicians today.  Its modern incarnation is the anti-tax dogma characteristic of the pre-Trump Republican party.

Reliable information is needed to enforce laws, ranging from voting rights to tax collection.  As regards financing the government, the payments for land leases (roughly comparable to real-estate taxes today) would be a major source of revenue. I would also advocate taxes on financial transactions, including money transfers. The nominal corporate income tax in the US is higher than other countries, which leads to storing profits in tax-havens overseas, and “inversions” whereby US firms move their headquarters to countries like Ireland to escape US taxes. The obvious conclusion (to Republicans) is that US corprate income taxes should be lower, perhaps around 15%. But my feeling is that foreign corporate taxes should be higher. (Most governments in Europe rely primarily on the value-added tax (VAT) instead of the tax on profits. Maybe the US should follow suit. In any case, excessive borrowing should be discouraged, and taxing the money that currently goes for interest payments by businesses and individuals would be one way to do that.) The least desirable tax is a tax on labor, while the most desirable tax is a tax on natural resource extraction and consumption. Consumption that generates pollution – such as the combustion carbon-based fuels – should be heavily taxed.  Certain socially undesirable activities, such as the consumption of tobacco and narcotics, should also be taxed heavily, but not prohibited absolutely. (This approach is working in Portugal).

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About the author:

robert-ayres

Robert U. Ayres is a physicist and economist, currently Novartis professor emeritus of economics, political science and technology management at INSEAD.. He is also Institute Scholar at the International Institute for Applied Systems Analysis (IIASA) in Austria, and a King’s Professor in Sweden.   He has previously taught at Carnegie-Mellon University, and as a visiting Professor at Chalmers Institute of Technology. He is noted for his work on technological forecasting, life cycle assessment, mass-balance accounting, energy efficiency and the role of thermodynamics in economic growth. He originated the concept of “industrial metabolism”, known today asindustrial ecology” with its own journal. He has conducted pioneering studies of materials/energy flows in the global economy.

Ayres is author or co-author of 21 books and more than 200 journal articles and book chapters.  The most recent books are Energy, Complexity and Wealth Maximization (Springer, 2016), The Bubble Economy (MIT Press, 2014)  “Crossing the Energy Divide” with Edward Ayres (Wharton Press, 2010) and The Economic Growth Engine with Benjamin Warr (Edward Elgar, 2009).

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