Marx vs. Ayn Rand: A Floating Galt's Gulch?

In Ayn Rand's novel "Atlas Shrugged", Galt's Gulch is the place in the Colorado mountains where America's innovators, disgusted with government regulation, retreat from the world, resulting in apocalyptic economic collapse. But as this article reveals, it's not to the mountains that they're planning to escape, but to the sea.  It's called "seasteading", the creation of manufactured sovereign island nations in international waters to be populated by silicon valley libertarians. An organization called "The Seasteading Institute" promotes the concept.

The idea is to escape stifling government regulation. But wait, what do people like these silicon valley innovators actually do when they have the chance to create their own micro-environment, in condo developments and gated communities for example? Do they welcome non-conformists with open arms? Not exactly. What they actually do in such cases is impose increased regulation far beyond what government imposes. If you don't believe me, try starting a garage-based business in a gated community and see what happens. You'll be fined, restraining-ordered, and pretty much driven out of Dodge. It's highly ironic that some of the most famous silicon valley mega-stars started in garages in middle class neighborhoods, but once they struck gold, these same people moved to highly regulated communities that prohibit the very thing that enabled them to get started.

These so-called seasteads would inevitably suffer the same fate. Messy home-based start-ups would not be tolerated, nor any sort of real nonconformity. In fact, many creative types these days are gravitating to places that are anathema to libertarians: Boston and New York City. Supposedly suffering from stifling taxation and over-regulation, these cities are actually highly tolerant of disruptive innovators, especially immigrants. Compared to them, floating islands founded by silicon valley billionaires would be as dull and insipid as Palm Beach, hardly the sort of places to attract the brilliant nonconformists they themselves used to be. What everyone forgets is just this: the billionaire innovators, when they started, were poor. They didn't start out rich.

Floating enclaves created "of the rich, by the rich and for the rich" are unlikely to lead to anything even remotely interesting.

Marx vs. Ayn Rand: A Hyperloopy Tax Idea

In my previous post, I talked about Thomas Piketty's book "Capital in the Twenty-First Century" and the heated debate it has incited over the rapidly increasing disparity in wealth between the wealthiest 1%, who own one-third of everything, and the rest of us, and how that may end up "killing the goose that lays the golden egg" for everyone, the wealthy included. This article in today's "Bloomberg Businessweek" contains a good review of the debate and concludes with the very valid point that, in the modern world, it's a practical impossibility to tax the rich to any significant degree due to the mobility of their wealth and the political power they wield.

So I have a tax idea that is truly worthy of the title of this blog--a truly "hyperloopy" idea. You may not be aware that the United States is among the small number of countries that impose income tax on their citizens and residents even though they may no longer live or work in the U.S. Well, you can take that a step further. The United States, or any country for that matter, can impose any tax it wants on any person who resides anywhere in the world on any basis and for any reason, even though that person has never been a citizen of the taxing country, and even if that person has never resided in that country nor in fact ever had anything whatever to do with that country. The Independent and Sovereign Republic of Kiribati, an island nation in the Pacific Ocean, for example, may perfectly well pass a law imposing a tax of 1% per year on assets exceeding, say, 100 million dollars, owned by any person anywhere in the world, whether or not they have ever heard of Kiribati let alone so much as made a phone call to anyone there. There is no international law that prevents it.

Of course Kiribati wouldn't get very far trying to collect such a tax unless a wealthy person had the misfortune to land in that country unawares. If more important countries started adopting such taxes, though, things could start to happen. Tit-for-tat taxes by one country on another country's citizens would be resolved by agreeing to tax treaties, which is exactly the endgame that's needed in order to tax the uber-wealthy. In fairness, a credit should be allowed against such a tax for all other taxes paid by the individual to any jurisdiction, but it would guarantee that the wealthy would pay at least 1% per year of their assets in taxes, which, if I understand Piketty correctly, is just the amount of taxation needed to prevent catastrophic accumulations of wealth.

Marx vs. Ayn Rand

A new book by French economist Thomas Piketty, "Capital in the Twenty-First Century", has created a sensation and incited renewed debate over Ayn Rand's philosophy of radical capitalism, which is the prevailing economic philosophy in the U.S. Radical capitalism rejects any sort of social or economic engineering by government, preferring to leave such matters entirely in the hands of private corporations. In Ayn Rand's most famous work, the novel "Atlas Shrugged", the wealthy, the "job creators", are depicted as so overburdened by government that they "drop out", resulting in economic collapse.  Piketty's view, on the other hand, is essentially Marxist, which holds that unregulated capitalism leads inevitably to extreme wealth inequality, social instability and war.

Both Marxism and radical capitalism seem to be gross oversimplifications. In "The Communist Manifesto", Marx and Engels argue convincingly that unrestrained capitalism cannot but lead to universal misery, then conclude that communism is the only solution. Communism of course is not the only solution, and was in fact very nearly the worst possible solution, as the utter failure of that grand experiment in state ownership of industry has proven very convincingly. But radical capitalism seems to suffer from the inverse error--the assumption that the uber-wealthy are so important to the world economy and so over-sensitive that the only solution is to coddle and pander to them to prevent them from running away and leaving the rest of us to suffer the consequences of our supposed laziness and stupidity.

The first question that comes to mind is this: run away to where? The wealthy depend for their happiness as much as the rest of us on the efficient functioning of the world as a whole. There is simply no castle on a mountaintop anywhere on the planet that a wealthy person can escape to and live in blissful isolation from the consequences of economic apocalypse. But consider the other question: what would happen if the wealthy did stop managing their assets? In the U.S., the wealthiest 1% (some 3 million people) own about one-third of all U.S. assets. Mostly they are passive investors, leaving others to make the day-to-day management decisions. Let's say that they all got fed up, sold those assets and went to live on mountaintops. Would the economy really collapse? Of course not. It's giving the wealthy much too much credit to say that global disaster would be the inevitable consequence of losing their supposed business acumen. They don't make many business decisions themselves. They have professionals who decide what to invest in. So to accept Ayn Rand's view of radical capitalism, you have to believe that the global economy depends on the top 1% making good decisions about which investment advisers to trust. The idea that these people are in some sense "running a business" is a romantic myth. Almost none of them run businesses in the sense that most of us understand it--deciding what to do and how to do it. Who does run the business of America? The answer: most of the rest of us.

The real crime of rising wealth inequality, though, is that it's inefficient, which means that there is less total wealth than there should be. This is a double whammy for the rest of us. Not only are the wealthy taking more and more, but the pie is actually getting smaller, leaving ever smaller crumbs for everyone else. A rising tide would indeed lift all boats, but as a result of rising inequality, the tide is going out.

Wealth inequality leads to inefficient allocation of capital because the wealthy are irrationally conservative when deciding how to invest. If you have a billion dollars, rationally speaking you ought to be willing to invest some of that in risky ventures, because if things go badly and you end up with just 500 million left, you can probably still get by OK on that. In fact, the wealthy are very much more afraid of losing their money than most of us and so are extremely conservative about investing it. (The one exception I can think of is Elon Musk, but he's very much the exception.) The riskiest investments, which are also the ones that produce the greatest growth and employment, are mostly made by people with quite ordinary levels of wealth, people who are not yet wealthy but want to be. Because growing income inequality squeezes out these upper-middle-class investors, that powerful engine of growth gets stalled. Add to that the fact that, relatively speaking, the wealthy save more and spend less of their wealth than the rest of us, and the result is low rates of growth.

Don't drink the Kool-Aid. Whether you are in the top 1%, the bottom 1%, or anywhere in between, extreme wealth inequality is hazardous to your health.