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How about a Vitruvian capitalist reset?

Vitruvian Cropped

Editor’s note: In this third post of a multipart series, Tim Ferguson, founder of the Anacyclosis Institute, outlines a new approach to political economy named rationism, which I like to describe as “Vitruvian Capitalism”.

Solving precarity without aggravating dependency

The first post in our Anacyclosis series concluded that:

  1. The diffusion and reconcentration of wealth dictates the diffusion and reconcentration of political power.
  2. This observation reconciles with the theory of Anacyclosis, which anticipates that political evolution advances from the rule of one (kingship/tyranny), to the few (aristocracy/oligarchy), to the many (democracy/mob-rule).
  3. A self-sufficient, independent middle class capable of withdrawing its consent from the government is the condition precedent to an authentic democracy or democratic-republic.

The second post followed with these key points:

  1. No constitutional intervention so far implemented has stopped Anacyclosis at the democratic stage, because no constitutional intervention has preserved the independent middle classes.
  2. Middle class precariousness inflames political faction, destabilizing democracy, setting the stage for social regression to patronage, or advancement to authoritarianism.
  3. In order to halt political evolution at the optimal state of authentic democracy or democratic-republic, legislators must ensure the preservation of independent middle classes.

Informed by these conclusions, “rationism” was conceived as a method to create and preserve independent middle classes.

What is rationism?

Rationism is a proposal to benchmark household wealth to the national median household net worth by way of a prescribed mathematical ratio. Doing so, we believe, will ensure that the outcomes of the top households will rise and fall lockstep in mathematical proportion to the rise and fall of the median, promoting middle class stability and growth.

Properly administered, covered households – which collectively exert the greatest market influence – would thereafter be incentivised to cause the median to be raised, so as to raise their own outcomes.

It is a system, in other words, that is designed to generate positive sum returns for all.

But unlike Margaret Thatcher’s famous assertion that it’s ok to have a widening gap between rich and poor as long as all are better off overall, rationism would narrow that gap at the same time.

The idea instead is to encourage markets to raise the median productively via wages, diminishing the demands upon the social safety net.

If the market fails to achieve this, whatever is siphoned or diverted from the middle is then recovered from the top by enforcement of the ratio, with non-discretional allocations of proceeds to general interest benefit programmes, to some extent shielding appropriations from electoral patronage.

To put it simply, the more the median net worth goes up, the higher the tax threshold for the wealthiest households (lowering their tax burden). The more the median net worth collapses, the lower the tax threshold for the wealthiest households (increasing their tax burden).

Capitalism should be devoted to free enterprise, not great households

At the onset of the American Revolution, John Adams voiced its egalitarian principles:

Property monopolized or in the Possession of a few is a Curse to Mankind. We should preserve not an Absolute Equality.—this is unnecessary, but preserve all from extreme Poverty, and all others from extravagant Riches.

(Portrait Courtesy National Gallery of Art, Washington, DC.)

John Adams’s advice to “preserve all…from extravagant riches” sounds like a wealth cap to me. And not a very high one at that. Raise your hands if you think America’s Founding Fathers were anti-capitalist.

Quite to the contrary.

A good capitalist understands the beneficial effects of vast capital accumulation by enterprises. A better capitalist understands the baneful effects of vast capital concentration within households. The best capitalist obediently yields to any lawful intervention required to sustain the independent middle class.

After all, we want capitalism – and democracy – to last, don’t we? We don’t want opportunist socialist electioneers running businesses out of town with high tax policies, do we? We want people focused on their jobs rather than the next election for their livelihoods. We don’t want the Forbes rich list to become the people’s most wanted list.

One doesn’t become the enemy of capitalism by distinguishing between the utility of massive capital accumulation by enterprises versus massive capital accumulation by households. Nor by questioning whether the beneficial effects attaching to the latter also extend to the former.

If the accumulation of $5bn by an enterprise enables the construction of a manufacturing facility, the funding of clinical trials, or the launching of a joint venture, what does the accumulation of $5bn by a household enable?

Hubris, space vacations, and anacyclosis.

By making losers of the middle class, one becomes the enemy of capitalism by turning the people against capitalism.

By allowing general precariousness and distress to grow while a few accumulate obscene wealth encourages socialism, subsidies, safety nets, heavy corporate taxation, universal basic income, modern monetary theory, strongman politics, great resets, accelerationism and more to drown out the real lessons of the Roman Republic and the Soviet Union.

The prospect of great wealth must always exist to reward innovation and entrepreneurship. A high degree of economic inequality isn’t always an indication of exploitation. Inequality can also serve as a measure of economic vitality and success, insofar as the economy represents something more than feudal rentierism. Some level of inequality is essential to a healthy economy.

America’s founders incorporated this philosophy into America’s constitution, which authorises Congress 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.

Key word, limited. For limited times.

Not even the most ardent devotion to capitalism requires any incentive greater than that calculated to induce entrepreneurial risk-taking.

Even more so in a competitive market, where multiple ventures strive toward the same goals. Slick cell phones, search engines, social networks, operating systems, and electric vehicles do not owe their success to any one man or small group of men. They owe it to all of us.

For, without the middle class, who would pay for them?

No gains for the middle, no gains for the top

In view of these principles, the rationale for Rationism becomes clear.

Going forward, the top households should be anchored to a prescribed multiple of the national median household net worth, such that those controlling the market could thereafter enjoy future gains only in mathematical proportion to the rise of the median.

A household wealth cap anchored to the national median net worth cannot be ignored or evaded by covered households. This is because – unlike income which says nothing about inflation, taxes, debt, expenses, etc. – the aggregate effects of all economic activity are registered by the net worth.

Every pay cut, every tax hike, every price increase, the effects of inflation, every layoff, every racial disparity, every job expatriated, every machine, robot, and algorithm used to reduce the wages and wealth of a flesh-and-blood worker – every direct and indirect technique depriving workers of a single dollar – is ultimately factored by the calculation of the national median household net worth.

For these reasons, not only does the application of a median-top household wealth ratio create market incentives to raise the median ceteris paribus, it nullifies any benefits that would otherwise accrue to the top households from the adverse economic impacts of immigration, racial disparities, outsourcing, and automation. The greater the cumulative negative impacts that automation has on wages, for instance, the more the median would be depressed, and the more the top household cap would be correspondingly reduced.

The ratio incentivises the top households to ensure that capital doesn’t abuse labor, and a failsafe if it does, for whatever is withheld from the middle would be recovered from the top by enforcement of the ratio.

For America, we think a ratio of 10,000:1 is a good starting point. The national median household net worth (2019) is about $120k, implying a $1.2bn threshold, satisfying any reasonable entrepreneurial incentive. In America, around 650 households would be covered at 10,000:1, implying revenues of around $4 trillion, although I’d argue for grandfathering existing fortunes.

With the benefit of experience, the market will discover the optimal ratio to generate maximum distributive force until the threshold of diminishing returns. Sufficient experience obtained, this plan could one day empower legislators to backsolve with relative precision for a target-size middle class.

You want the middle class to be as big as possible per Aristotle, say 75 per cent? Hari Seldon, the maths genius from Isaac Asimov’s Foundation Trilogy, will whip out his calculator, ask a few questions, and tell you what the median-top social aspect ratio needs to be in XYZ society for 75 per cent (assuming he doesn’t tell you it’s impossible, which he has been known to do).

Until that day, the markets decide.

The method of raising the median – or not – is left to the market to determine via negotiation between enterprise and covered households. Rationism doesn’t create a mandate, only an incentive. It entails no new business regulations or taxes. Adequately enforced, legions of new taxpaying households created, it could actually pave the way for fewer business regulations and taxes.

As for the method of ratio enforcement, taxation may not be the only technique, but is likely the most practical. The power of taxation enables legislators to discourage capital flight without frightening off foreign investment.

To the extent the median declines to raise the median, those in control of the market share the risk of failure with everyone else by virtue of ratio enforcement. At the end of the day, if the market, operating under freedom of contract, in arm’s-length negotiation with the top households, not under duress, isn’t moved to raise the outcomes of the top households, why should anyone else be?

In any event, if the market fails to raise the median with a ratio in place, there’s no reason to assume that it would have done better without a ratio. But, even if any given ratio fails to induce markets to raise the median, rationism still promotes our original objectives.

Enforcement of any ratio via taxation raises revenues. This answers at least in part any failure by the market to raise the median, by generating revenues to serve the general interest in proportion to the general necessity via whatever programs the market’s failures demand.

But unlike subsidies and safety nets originating in the faction, electoral bribery, and demagoguery of conventional politics, all revenues raised by ratio enforcement would derive from a hard-wired feature of political economy, not owing their existence to political patronage.

To further immunise the programme from electoral patronage, the initial allocations of those revenues should be non-discretionary, solely to general benefit programmes (e.g. education or retirement programmes) or separate, independent governmental departments (e.g., states, provinces, counties, municipalities).

Ultimately, rationism would apply one of capitalism’s own techniques to capitalism’s compensation regime: a long-term incentive plan. No performance, no payday.

The Rationist: articulating the American implementation

In 1776, the America’s top household probably owned less than 1,000x the national median household net worth. Today, America’s median-top social aspect wealth ratio exceeds 2,000,000:1.

As noted, I would roll America’s social aspect ratio back to 10,000:1 by constitutional amendment, with provision for future downward adjustment to a specified minimum floor.

In fact, here’s a draft.

To defend this hypothetical amendment and the theory of rationism, I have written a series of essays entitled the Rationist. In the expectation that it will present an interesting thought experiment for its readers, The Blind Spot has agreed to host these ideas in the hope of stimulating a constructive debate.

This theory is not communism. It’s not socialism. It is capitalism wearing a seatbelt. This is rationism, as applicable to the people of the United States as the people of the United Kingdom – or even the Metaverse.

Izabella helpfully described rationism as Vitruvian Capitalism for its adherence to the architectural principles of proportion and balance.

She’s quite right. In De Architectura, Vitruvius advised:

The architect’s greatest care must be that his buildings should have their design determined by the proportions of a fixed unit.

It’s no different for political science. The fixed unit – the building block – for every state should be 1x the median household net worth, one middle class unit.

Woe to any democracy that builds too high above the foundation.

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4 Responses

  1. Makes sense – but how do you deal with the international system: 200 states in a race to the bottom re: taxation, wages, regulations etc. in your implementation?

  2. This is very interesting and worth debating. I look forward to reading the rest of the series.

    A minor branding point: I wonder if some people will, when they first see the term “rationist,” mistakenly think the papers are advocating for “rationing” which has negative connotations (e.g., shortages, fixed amounts), rather than “ratio-ing.”

  3. I think you are going in the right direction.

    Please consider this approach, too.

    The United States enjoyed the fruits of a strong middle class during the ’50s and ’60s. Compensation of employees averaged around 50% of gross domestic product (https://fred.stlouisfed.org/series/W270RE1A156NBEA). By the 2000’s the percentage had fallen under 45%. That 5% decline times current GDP of about $24 trillion is a shift of $1.2 trillion away from labor.

    Apply a top line tax to all revenue equal to the shortfall of employee compensation that is less than 50% of GDP. Give that shortfall directly to employees.

    As of March 2022, employees received about $11 trillion in wage and salary disbursements (https://fred.stlouisfed.org/series/A576RC1). $1.2 trillion in revenue tax/$11 trillion in wages and salaries would provide an estimated 10% increase in earnings for every employee.

    The economics of such a transfer would favor domestic labor over the disintermediation by foreign labor in the United States. Businesses that sell foreign manufactured goods would be paying back some of the cost of the country’s loss of domestic jobs. The transfer would provide an additional incentive to domestic businesses in that domestic labor will be subsidized by the transfer of revenue to wages.

    It would be wrong to frame such economics as a war on trade. Years with hundreds of billions of dollars in trade deficits in the United States refutes Ricardo’s comparative advantage. Businesses have already begun to bring jobs back to repair their fragility to foreign supply chains. International trade is good when it’s good for citizens of each country.

    A more balanced, diversified and robust domestic economy would likely serve monetary policy well. Changes in rates in our country have no direct effect and weak secondary effect on foreign based companies. Currently, low rates and swelling money supply have served to inflate prices for things we don’t make and can no longer import in sufficient quantity.

    I believe the need for more and better paying jobs is at the heart of what we call populism. Current low unemployment and rising wages in the United States point to a better balance between labor and capital. The approach I suggest provides the incentives to continue in that direction and, most importantly, keep us there. It would be a normal self-regulator on the economy.

    It seems to me reasonable that gross domestic product be shared equally between labor and capital. The middle class of the United States seemed strong during periods when such was the case.

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