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.

Land Value Tax and Coherent Ownership for Civilization

In a perhaps-not-weird coincidence, the villains in both of the children’s programs I saw today were land developers.

So I was thinking yesterday about the need for coherent ownership to ensure that countries remain nice places that serve the interests of their inhabitants, (the potential implications of which you can probably work out for yourself, especially if you’ve eve had to actually deal with a divided-ownership situation like an HOA,) and I got to thinking about the possibilities of the Land Value Tax (LVT) as a force for civilization and long-term efficient land management.

The LVT differs in important ways from a property tax, and should be the basis for our American tax system, rather than income tax + everything else under the sun, so I’m going to go into a bit of detail.

The LVT is a tax on the unimproved value of the land–not the value of the buildings, gardens, or other things you might build there.

By contrast, a property tax is assessed against the value of the whole property, including all of the stuff on it.

What this means:

Let’s say that you and your neighbor both own a chunk of land. Like most adjoining pieces of land, they’re basically identical–you have a few more trees, he has a few more rocks, but nothing major. Under an LVT, you each owe the same amount in taxes–a percent based on the sale value of the land itself, which is of course identical for the two pieces. If you build a nice house on your land, and your neighbor leaves his as weeds, you still get taxed the same. If you let your house become a decrepit ruin while your neighbor builds an apartment complex, you still get taxed the same.

When you are making better use of your land than your neighbor, you make more money than he does. When he makes better use of his land than you do, he makes more money.

Now, let’s suppose we have a property tax (as we currently do.) You and your neighbor start out with identical plots of land, and so equal taxes. But when you build a house and he leaves his as weeds, the value of the house is added to your taxes–and you now pay more taxes. If you let your house become a decrepit ruin while the neighbor builds an apartment complex, you now pay less in taxes and he pays more.

In other words, under a property tax, making better use of your land results in higher taxes, while making worse use of the land results in lower taxes.

The LVT lines up the landowner’s and society’s interests to incentivize efficient land use. The property tax puts land owners and society in conflict, by punishing landowners for making improvements to their properties.

America’s inner cities are a disgrace. I cringe to think of foreign tourists visiting DC and wandering into Anacostia, or one of its other slums. I cringe to think of anyone living in these places. (After you read that, go watch “Holes in my Shoes”–it’s available on Netflix–and consider the important differences.)

Washington, DC
Washington, DC
Detroit Book Depository
Detroit Book Depository
Detroit
Detroit

There is no reason why real estate in the heart of American cities should look like this. The value of the land is high–virtually identical to the value of land with mansions, skyscrapers, or factories–but these properties have been left, instead, to fall apart.

And while gentrification is generally supposed to be bad for the people involved, long term, I suspect that coherent land-use strategies would lead to greater general prosperity, benefiting the community’s poorer members by providing jobs and nicer housing.

If society wishes, certain tracts of land may be set aside for nature parks (as they currently are) or for use by people who may not wish to live in cities, like, say, the Pygmies or the San.

 

I have often commented that after centuries of decay, the only way to get a nice city is to bomb it to the ground and then rebuild from scratch:

Quang Tri City, Vietnam
Quang Tri City, Vietnam (PDF)
Shibuya, Tokyo
Shibuya, Tokyo
Ho Chi Minh City / Saigon
Ho Chi Minh City / Saigon
Berlin
Berlin

Obviously it would have been superior for the people if someone had moved all of them out of the way, first.

At least an LVT would help incentivize individuals to keep their own parcels nice. To keep an entire city nice, to deal with problems that emerge after centuries of use, like streets that can no longer handle the amount of traffic trying to use them or antiquated sewer systems, probably requires something else, like some form of coherent ownership that can step in and take control of whole neighborhoods, at least once a century.

Perhaps a workable system would be for one individual or small collection of individuals to “own” a city, but to lease individual chunks of it for one year, ten year, or longer chunks of time. During that time, the leasee would be free to modify the property however they saw fit, and the terms of the lease would mirror those of the LVT. When large chunks of the city eventually need updating, the owner could decline to lease out relevant parcels until they have had a chance to make the necessary changes.

Speculative ideas are speculative.