Code Economy ch. 12: How do you LVT a Digital Land?

Welcome back to EvX’s Book Club. Today we are discussing ch. 12 of Auerswald’s The Code Economy: Equity: Progress and Poverty.

We have discussed before the Georgist notion that the increase in poverty that accompanies progress (or development) is due to skyrocketing rents in urban (that is, productive) areas, which lead to rentiers capturing an increasing percent of the wealth created by development.

Indeed, as has been noted elsewhere and in Auerswald’s discussion of Piketty’s Capital in the Twenty-First Century:

The much discussed increase in inequality since the 1970s that Piketty documents is primarily about one thing: the increasing value of real estate, an asset that is disproportionately held by the wealthy.

Auerswald has an interesting discussion of Total Factor Productivity (TFP) that I’d like to pause to discuss:

The calculation of TFP requires measures of aggregate output, capital, and labor. The measurement of each of these is inherently difficult.

Auerswald argues that TFP is particularly bad at measuring the value added by the internet. Quoting economics blogger Justin Fox:

Forty years ago the cost to copy [an S&P 500 firm] as about 5/6 of the total stock price of that firm. So 1/6 of that stock price represented the value of things you couldn’t easily copy, like patents, customer goodwill, employee goodwill, regulator favoritism, and hard to see features of company methods and culture. Today it costs only 1/6 of the stock price to copy all of a firm’ visible items and features that you can legally copy. So today the other 5/6 of the stock price represents the value of all those things you can’t copy.

(Or these companies are massively over-valued.)

In other words, if you owned a textile mill, the value of the company would be based on the value of the physical objects inside your mill. A mill with ten state of the art looms could produce twice as much cloth as a mill with only 5 looms. A mill with 100 looms would produce 10 times as much cloth. The comany’s value and its physical capital would be directly linked.

By contrast, if you suddenly became the sole owner of Twitter, your physical capital and the company’s value would hardly be related. What is Twitter’s physical capital? A bunch of computers in a building somewhere? An entrepreneur could not create a company with twice Twitter’s value by simply buying twice as many computers and putting them in twice as many buildings.

Whatever Twitter’s value may be, very little of it lies in physical equipment. Very little of it lies in buildings or land. Much of it, though, lies in digital land. Just as landlords derive their wealth from the benefits people derive from being near other, economically productive people, so Twitter’s value lies in the desire of people to be near other people in digital spaces:

Economic geography has taught us that the “best localities” will be the place where the returns to density are greatest… Land in “the best localities” increases in value because cities offer people tangible economic returns that derive from density and interconnection.

Please discuss the implications for

1. Third world mega-cities like Karachi or Lagos.

2. Immigration from third world to first world.

3. Digital real estate, like Twitter.

About the digital economy Second Life, Auerswald writes:

Second Life had nearly seven million registered users… Second Life sustained an economy consisting of the production and exchange of virtual goods and service’ it had a GDP equivalent to $500 million, benchmarked by $6 million per month of monetized trade with the real world.

I have been thinking about in-game economies for years, ever since discovering that many online games have their own currencies, which may or may not be legally tradeable for US dollars. But I had not, until this moment, thought of these games as actually modellable like real countries, with economies, exchange rates, and trade with the outside world.

Further:

The virtual and real worlds of entrepreneurship and work are converging in similar ways… “As soon as tens of hundreds of U.S. dollars were sufficient to start a business in Second Life, thousands of people began to tr. Compare this to the real world, where a primary source of funding for small businesses is a second mortgage.” …

Seven years later… The Economist published an article about entrepreneurial startups in the US titled “The Cambrian Explosion,” … This article described how an array of new platforms had dramatically lowered the cost of launching and growing a real-world business: “One explanation for the Cambrian explosion of 540m years ago is that the that time the basic building blocks of life had just been perfected, allowing more complex organisms to be assembled more rapidly. Similarly,t he basic building blocks for digital services and products… have become so evolved, cheap and ubiquitous that they can be easily combined and recombined.”

Auerswald then moves on to the matter of “big data,” which is a big part of how companies like Twitter and Linked In hope to actually make any profits. As I’ve mentioned, I’ve taken a side-tour into “Big Data” that I think was a useful complement to this book; Big Data is the best of what I’ve read so far, nothing has stood out as whiz-bang fabulous. The relevant summary version is that companies like LinkedIn and Facebook are really about the data they gather, rather than the fun you have looking at memes your grandmother reposted. That data, in turn, will probably have a variety of economic uses–though maybe not to you:

And yet, while a large number of people contribute to the value Big Data creates,a relatively small number captures most of the gains. Why is that?

Just as the rentier class gathers most of the benefits from living in a valuable city in close proximity to the engines of human productivity, so do the owners of digital platforms, like Facebook, benefit from the creation of data wealth by their millions of digital citizens.

Digital platforms are the new land; will they also be the new Monopoly?

Auerswald then makes a very interesting observation:

Physical land is yours if, and only if, you have both the right and the practical capacity to prevent other people from accessing it. The same is true of digital land. … That capacity for exclusion–the source of all monetized value derived from digital exchange–depends on the existence of reliable protocols for authentication and verification. … “Open leads to value creation… To capture value you have to find something to close.”

This is so important, I’m tempted to repeat it a few times. Exclusion is the source of all monetized value.

The “brand” (ie, Nike, Apple, Harley Davidson, Harvard,) is modern society’s solution to authentication and verification in modern, anonymous markets. Our ancestors, who engaged primarily in face-to-face transactions with people they knew from their own villages, had no need of brands. They didn’t worry whether they were being tricked into buying knockoff-brand potatoes from farmer Joe; they just bought potatoes.

In the modern economy, it makes a difference whether you get a real Apple computer or a knockoff with an apple sticker slapped on. It matters whether you get real Acetaminophen or a mysterious pill that may or may not contain morphine. It matters whether you buy a brand new Ford or a car cobbled together from the corpses of three totaled station wagons with a new coat of paint.

This, Auerswald argues, is why the government imposes such stiff penalties on people who violate trademarks–violation of the Trademark Counterfeiting act of 1984 can incur a fine of 5 million dollars or 20 years imprisonment.

Yet just as the advance of code has created brands, code is now in the process of undoing them. How? By converting trust directly into code–into algorithmic system for verification and authentication.

Basically, he thinks we’re going to blockchain and Yelp our way into a peer-to-peer economy where people’s online ratings serve as an effective substitute for brands–a world in which angry twitter mobs can crash one’s entire career by giving a bunch of one-star Yelp reviews.

Remember: everything else is downstream from territory.

That’s all for today. Bitcoin and the Blockchain are chapter 13.

Book Club: The Industrial Revolution and its Discontents, Code Economy, ch. 5

1. The Industrial Revolution and its consequences have been a disaster for the human race. They have greatly increased the life-expectancy of those of us who live in “advanced” countries, but they have destabilized society, have made life unfulfilling, have subjected human beings to indignities, have led to widespread psychological suffering (in the Third World to physical suffering as well) and have inflicted severe damage on the natural world. The continued development of technology will worsen the situation. It will certainly subject human beings to greater indignities and inflict greater damage on the natural world, it will probably lead to greater social disruption and psychological suffering, and it may lead to increased physical suffering even in “advanced” countries. –Kaczynski, Industrial Society and Its Future

The quest to find and keep a “job for life”–stable, predictable work that pays enough to live on, is reachable by available transportation, and lends a sense of meaning to their daily lives–runs though every interview transcript, from those who are unemployed to those who have “made it” to steady jobs like firefighting or nursing. Traditional blue-collar work–whether as a factory worker or a police officer–has become increasingly scarce and competitive, destroyed by a technologically advanced and global capitalism that prioritizes labor market “flexibility”… Consequently, the post-industrial generation is forced to continuously grapple with flux and contingency, bending and adapting to the demands of they labor market until they feel that they are about to break. –Silva, Coming up Short: Working-Class Adulthood in an Age of Uncertainty

The historical record confirms that the realities of the ongoing processes of mechanization and industrialization, as noted early on by Lord Byron, were very different from the picture adherents to the wage fund theory held in their heads. While the long-term impact of the Industrial revolution had on the health and well-being of the English population was strongly positive, the first half of the nineteenth century was indeed a time of exceptional hardship for English workers. In a study covering the years 1770-1815, Stephen Nicholas and Richard Steckel report “falling heights of urban-and rural-born males after 1780 and a delayed growth spurt for 13- to 23-year old boys,” as well as a fall in the English workers’ height relative to that of Irish convicts. By the 1830s, the life expectancy of anyone born in Liverpool and Manchester was less than 30 years–as low as had been experienced in England since the Black Death of 1348. –Auerswald, The Code Economy

On the other hand:

Chapter 5 of The Code Economy, Substitution, explores the development of economic theories about the effects of industrialization and general attempts at improving the lives of the working poor.

… John Barton, a Quaker, published a pamphlet in 1817 titled, Observations on the Circumstances Which Influence the Condition of the Laboring Classes of Society. … Barton began by targeting the Malthusian assumption that population grows in response to increasing wages. … He began by noting that there was no a priori reason to believe that labor and capital were perfect complements, as classical economists implicitly assumed. The more sensible assumption was that, as wages increased, manufacturers and farmers alike would tend to substitute animals or machines for human labor. Rather than increasing the birth rate, the higher wages brought on by the introduction of new machinery would increase intergenerational differences in income and thus delay child-bearing. Contrary to the Malthusian line of argument, this is exactly what happened.

There’s an end note that expands on this (you do read the end notes, right?) Quoting Barton, 1817:

A rise of wages then does not always increase population… For every rise of wages tends to decrease the effectual demand for labor… Suppose that by a general agreement among farmers the rate of agricultural wage were raised from 12 shillings to 24 shillings per week–I cannot imagine any circumstance calculated more effectually to discourage marriage. For it would immediately become a a most important object to cultivate with as few hands as possible; wherever the use of machinery, or employment of horses could be substituted for manual labor, it would be done; and a considerable portion of existing laborers would be out of work.

This is the “raising the minimum wage will put people out of work” theory. Barton also points out that when people do manage to get these higher-paid jobs, they will tend to be older, more experienced laborers rather than young folks looking to marry and start a family.

A quick perusal of minimum wage vs. unemployment rate graphs reveals some that are good evidence against minimum wages, and some that are good evidence in favor of them. Here’s a link to a study that found no effects of minimum wage differences on employment. The American minimum wage data is confounded by things like “DC is a shithole.” DC has the highest minimum wage in the country and the highest unemployment rate, but Hawaii also has a very high minimum wage and the lowest unemployment rate. In general, local minimum wages probably reflect local cost of living/cost of living reflects wages. If we adjust for inflation, minimum wage in the US peaked around 1968 and was generally high throughout the 60s and 70s, but has fallen since then. Based on conversations with my parents, I gather the 60s and 70s were a good time to be a worker, when unskilled labor could pretty easily get a job and support a family; unemployment rates do not seem to have fallen markedly since then, despite lower real wages. A quick glance at a map of minimum wages by country reveals that countries with higher minimum wage tend to be nicer countries that people actually want to live in, but the relationship is not absolute.

We might say that this contradicts Barton, but why have American wages stagnated or gone down since the 60s?

1. Automation

2. Emergence of other economic competitors as Europe and Japan recovered from WWII

3. Related: Outsourcing to cheaper workers in China

4. Labor market growth due to entry of women, immigrants, and Boomers generally

Except for 2, that sounds a lot like what Barton said would happen. Wages go up => people move where the good jobs are => labor market expands => wages go down. If labor cannot move, then capitalists can either move the businesses to the labor or invest in machines to replace the labor.

On the other hand, the standard of living is clearly higher today than it was in 1900, even if wages, like molecules diffusing through the air, tend to even out over time. Why?

First, obviously, we learned to extract more energy from sources like oil, coal, and nuclei. A loom hooked up (via the electrical grid) to an electric turbine can make a lot more cloth per hour than a mere human working with shuttles and thread.

Second, we have gotten better at using the energy we extract–Auerswald would call this “code.”

Standards of living may thus have more to do with available resources (including energy) and our ability to use those resources (both the ‘code” we have developed and our own inherent ability to interact with and use that code,) than with the head-scratching entropy of minimum wages.

Auerswald discusses the evolution of David Ricardo’s economic ideas:

By incorporating the potential for substitution between capital and labor, Ricardo led the field of economics in rejecting the wage fund theory, along with its Dickensian implications for policy. He accepted the notion the introduction of new machinery would result in the displacement of workers. The upshot was that the workers were still assumed to be doomed, but the reason was now substitution of machines for labor, not scarcity of a Malthusian variety.

Enter Henry George, with a radically different perspective:

“Like a flash it came over me that there was the reason of advancing poverty with advancing wealth. With the growth of population, land grows in value, and the men who work it must pay more for the privilege.” …

George asserted that increasing population density, (not, as Malthus claimed, population decline) was the source of increased prosperity in human societies: “Wealth is greatest where population is densest… the production of wealth to a given amount of labor increases as population increases.”  The frequent interactions among people in densely populated cities accelerates the emergence and evolution of code. However, while population growth and increased density naturally bring increased prosperity, they also, just as naturally, bring increasing inequality and poverty. Why? Because the fruits of labor are inevitably gathered by the owners of land.

In other words, increasing wages => increasing rents and the workers are right back where they started while the landlords are sitting pretty.

In sharp contrast with Karl Marx, … George stated that “the antagonism of interest is not between labor and capital… but is in reality between labor and capital on the one side and the land ownership on the other.” The implication of his analysis was as simple as it was powerful: to avoid concentrating wealth in the hands of the few, it was the government’s responsibility to eliminate all taxes on capital and laborers, the productive elements of the economy, and to replace those taxes with a single tax on land.

Note: not a flat tax on land, but a tax relative to the land’s sale value.

I was glad to see Henry George in the book because I enjoy George’s theories and they are under-discussed, especially relative to Marxism. You will find massive online communities of Marxists despite the absolute evidence that Marxism is a death machine, but relatively few enthusiastic Georgists. One of the things I rather appreciate about Georgism is its simplicity; the complication of the tax code is its own, additional burden on capitalists and workers alike. Almost any simplified tax code, no matter how “unfair,” would probably improve maters a great deal.

But there’s more, because this is a dense chapter. Auerswald notes that the increasing complexity of code (ie, productivity) has lead to steadily increasing standards of living over the past two centuries, at least after the Industrial Revolution’s initial cataclysm.

Quoting economist Paul Douglas, some years later:

“The increased use of mechanical appliances in offices has tended to lower the skill required. An old-fashioned bookkeeper, for instance, had to write a good hand, he had to be able to multiply and divide with absolute accuracy. Today his place is taken by a girl who  operates a book-keeping machine, and it has taken her a few weeks at mot to become a skilled bookkeeper.” In other words, the introduction of machinery displaced skilled workers for the very same reason it enhanced human capabilities: it allowed a worker with relatively rudimentary training to perform tasks that previously required a skilled worker.

…”Another way of looking at it, is this: Where formerly the skill used in bookkeeping was exercised by the bookkeeper, today that skill is exercised by the factory employees who utilize it to manufacture a machine which can do the job of keeping books, when operated by someone of skill far below that of the former bookkeeper. And because of this transfer of skill form the office to the factory, the rewards of skill are likewise transferred to the wage-earner at the plant.”

This is a vitally important pint… The essence of this insight is that introducing more powerful machines into the workplace does more than simply encode  into the machine the skills or capabilities that previously resided only in humans; it also shifts the burden of skill from one domain of work to another. … A comparable shift in recent decades has been from the skill of manufacturing computing machines (think IBM or Dell in their heydays) to that of creating improved instructions for computing machines’ the result has been a relative growth in programmers’ wages. The underlying process is the same. Improvements in technology will predictably reduce demand for the skills held by some workers, but they also will enhance the capabilities of other workers and shift the requirements of skill from one domain of work to the other.”

The problem with this is that the average person puts in 15-20 years of schooling (plus $$$) in order to become skilled at a job, only to suddenly have that job disappear due to accelerating technological change/improvement, and then some asshole one comes and tells them they should just “learn to code” spend another two to four years unemployed and paying for the privilege of learning another job and don’t see how fucking dispiriting this is to the already struggling.

The struggle for society is recognizing that even as standards of living may be generally rising, some people may absolutely be struggling with an economic system that offers much less certainty and stability than our ancestors enjoyed.

A final word from Auerswald:

… work divides or “bifurcates” as code advances in a predictable and repeatable way. The bifurcation of work in a critical mechanism by which the advance of code yields improvements in human well-being at the same time as it increases human reliance on code.