Automation is a bless and a curse. On one hand it liberates humans from dangerous, monotonous and boring work, while on the other hand it takes jobs from people and hence their source of income. The latter is not without consequences. Continue reading Automation: challenges and solutions
In economics externalities are the effects of one’s action on third parties. An externality can be positive or negative, and in general the occurrence of externalities is unintended. Negative externalities are those effects which cause harm upon (non-consenting) third parties.
Because of the harm principle the government is justified to create regulation to reduce the amount of negative externalities. There are several ways to do so. First the government can prohibit or restrict certain activities. Secondly the government can discourage certain activities.
One method to discourage certain activities is to impose a tax on such activities. The idea is that by making undesirable activities more expensive, people will either limit such activities or to abstain completely from it.
The first question is how much tax should be levied. There are several things to be considered: the cost of enforcement, the effective deterrent and the compensation of harm caused.
Every tax has to be enforced, and tax enforcement is not for free. Ideally the revenues of a tax should be larger than the costs to collect it. Once we know what it takes to enforce a pigouvian tax, we could determine the minimal tax liability.
A possible problem, however, might be that this minimal liability, does not actually deter people from performing undesirable activities. This because the benefits they can gain, outweigh their tax liabilities. Hence the tax should be large enough to cancel any net benefit. On the other hand, this second minimum could be lower than the costs of enforcement.
Another way to look at the height of tax liability, is to take the cost of compensating negative externalities into account. For instance if water wells have been polluted, there are costs involved in restoring the water wells. On the maxim “the polluter will pay”, it’s reasonable to charge those who have polluted with this costs.
On the other hand, pigouvian taxes are meant to prevent the occurrence of negative externalities. Economically, the costs saved by this prevention should be counted as a benefit. Consequently, it does not actually matter if the revenues raised by a pigouvian tax does not cover the costs of its enforcement, as long as this tax succeed in reducing negative externalities.
Also the success of a pigouvian tax should not be measured in terms of revenues generated, but in terms of harm reduced. In a best case scenario a pigouvian tax will generate zero revenue, because everyone quits producing negative externalities. A pigouvian tax should not be imposed solely for the purpose of raising public revenue. Nevertheless the revenues raised in this way, should be used for public causes.
Intro and recapping
In part two of our series on monetary reform we briefly discussed the role of banks within the Mordan banking system. There we argued against fractional reserve banking, and to distinguish between on demand deposits and time deposits. The difference between these two types of deposit, is that in the former case the account holder can withdrawn his money from this deposit at any time, whilst in the latter case the account holder deposits his money to the bank for a certain period of time, during which he can’t withdraw his deposits.
Subsequently, we argued that banks should only allowed to lend the money from the time deposits, but not from the demand deposits. In technical terms we can see that time deposits are loans, more precisely a mutuum, from savers to the bank. And demand deposits are just money given to the bank for save keeping.
In this post we will give a further discussion of the Mordan banking system.
What are banks?
The term “bank” covers a whole lot of different kinds of financial institutions, hence it’s necessary to specify several types of banks. First we should make a distinction between retail and investment banks. Retail banks offer financial services to consumers rather than to corporations. Investment banks are usually involved in raising capital for corporations in other ways than by providing loans.
Retail banks offer a wide ranges of services to consumers and businesses: save keeping of money, facilitating financial transactions, accepting savings from and providing loans to the public. It’s perfectly possible to separate these functions in separate banks, saving banks typically only perform the last two function. And we can also imagine a bank which only accept demand deposits and facilitate transactions (in return for a fee), we could call such bank a transaction bank.
Many retail banks also offer asset management to wealthy clients, but we believe that asset management should be separated from the ordinary banking.
Organization of the new banking system
We propose a strict separation between investment banks and retail banks. This means a total ban on so-called universal banks. Practically investment banks are prohibited from offering retail banking services, and vice versa. In order to maintain this prohibition investment and retail bank should not be allowed to be united in any way.
Besides we also propose a strict separation between banking and insurance companies (we will cover insurances in another post). It’s nowadays a common practice for banks to sell insurance policies in addition to their banking services, this is mostly only for the purpose of raising more revenue for the bank. We believe that it’s in the interest of the consumers if banking and insurances are clearly separated from each other.
Currently most banks are stock companies, owned by their shareholders. Consequently banks have more incentives to serve the interests of their shareholders rather of the interests of their clients. Therefore we propose that all retail banks should be run as consumer cooperatives, i.e. only cooperative should be able to obtain a retail banking license.
Not only is this proposal in line with our commitment to a cooperative economy, but also because a cooperative bank is owned by its own clients, such a bank will pursue the interests of its clients. Additionally cooperative banks are by their very nature protected against hostile take overs. Hostile take overs have a disruptive effect on the financial sector and hence on the economy.
The obligation of being a cooperative will not apply to investment banks or asset managers.
Of course these rules have to be enforced, there we propose the establishment of the Mordan Financial Services Authority (MFSA). This supervisory agency will be separate from both the National Monetary Authority and the MFK. The MFSA will supervise the entire Mordan financial sector, it will license banks and can retract those, and quite importantly it will have the authority to arrest bankers for noncompliance with the law.
On August 25th, 1991 a Finnish guy with the name Linus Torvald made notice for the first time of what would be known as first version of the Linux kernel, which was released a few weeks later. Though Torvald claimed that it was just a hobby, Linux would become a popular alternative operating system (OS).
In contrast to many other operating systems, Linux is open source. This means that everyone is free to use it, to change it if one desires so and to distribute it to others. However open source software (OSS) shouldn’t be confused with free software, though much OSS is also free.
The primary advantage of OSS is that because the source code is free, bugs are easier to detect and if one has found (s)he is allowed to repair the bug, and to distribute this improved version. The result is that OSS, and open source operating systems in particular, are often more reliable and less vulnerable for attacks than proprietary software.
A second advantage of OSS is that the licenses to use it are much cheaper than proprietary licenses. This is of particular interest for space settlers. Space colonization is expensive, and we should do anything to keep the start-up costs as low as possible. And since space colonization heavily depends on computer systems, and all computers need an operating system, using an open source OS such as Linux will significantly to reduce to costs of colonizing space.
During the last two decades OSS has proven to be a good alternative for its proprietary competitors. More than 95% of the worlds largest supercomputers are running on Linux, and these computers are expensive investments.
Critiques of open source software often argue that the high prices of proprietary software licenses are justified by its development costs. Well, this holds true only to a certain extent. Once a piece of code has been written, it can be reproduced at virtually zero costs. Of course the writers of software codes should be paid a decent price for their work.
But you pay your lawyer only for the hours (s)he has used for your case. Similarly we can pay programmers for the time they have put in writing their code. And the price-per-hour should take into account the relative complexity of the job.
Introduction Part 2: Full reserve banking
This post is the second part of our series on Space colonies and monetary systems. In the previous part we discussed the idea of debt free money of the corner-stone of the monetary system we propose. In this part we will discuss full reserve banking and why this is a necessary condition of a debt-free monetary system. First we will discuss the current system of fractional reserve banking, and why that system is problematic.
2.1 What is fractional reserve banking?
Nowadays most money is created as credit money by either central or commercial banks. How central banks can create money is quite straight forward: with a few keystrokes the employees of the central bank can create money, they can subsequently lend to the commercial banks. More people have difficulties to grasp how commercial banks can create money, and the non-banking citizens are not to blame. Bankers tend to make use of technical jargon, which might not be understood even by the bankers themselves.
Most people, who have never studied banking in any detail, will utter that it’s illegal for everyone, except the government, to create money, aka counterfeiting. For many centuries counterfeiting was considered such a severe crime, it was punishable by death in almost every country. People used to believe that the coining of money was a god given privilege of the king, Save for a few countries, counterfeiters are no longer be executed nowadays, but in many countries counterfeiters can face years of imprisonment for crime.
However, banks are privileged institutions, unlike ordinary members of the public, the government allows banks to create money. Before we can continue, we have to keep in mind that only cash money, i.e. coins and notes, are legal tender. For matters of law bank money is not “real” money, that is accepted nevertheless, is due the fact that if you want to have cash money you can go to the ATM: there you can convert your “bank money” into legal tender. If Alice owes Bob some money, then Bob is obliged to accept any sufficient cash payment as settlement of debt. However, Alice has all her money on the bank and she doesn’t want to go to the ATM, instead she transfer money from her account to Bob’s. Now Bob is able to convert Alice’s “bank money” into cash.
In real life there is much more bank money than cash, either in circulation or stored in bank vaults. If all clients of a bank would try to remove their money from the bank, most clients will be empty-handed because there is not enough cash to meet such demand. A fundamental question, is how it can be that there is much more bank money than cash? The story goes that in earlier times, when only coins were legal tender, people deposited their coins at a gold smith. If you carry large amounts of gold coins, you are taking great risks. Not only you could lose your money (and your life) by robbery, it is also quite cumbersome to carry heavy coins all the time. When you deposited your coins at the goldsmith you received a note, which stated the value of your deposit. Now if you want to buy something, you could give the seller your note(s). Subsequently the seller was able to redeem this at the goldsmith.
However, the smiths soon discovered that people did not redeem the notes, instead the notes went into circulation: Alice used her notes to pay Bob, Bob to pay Caroline, Caroline to pay David and so on. Meanwhile the smiths had large deposits of gold in their possession. Knowing that only a few note holders would claim their money, the smiths came with the idea to lend the money to people against interest. Of course, lenders got the loans in notes. Now we have more notes than is back by deposits: the depositors have notes equal to the deposits, whilst the lenders have additional notes.
Of course, the smiths, now bankers, learned they could do this a multiple times. A certain amount of deposited money could be lend multiple times. Replace gold with coins and bank notes, and notes with bank money, and we get what is called fractional reserve banking. This system has certain benefits, but creates several risks. The two most important risks related with fractional reserve banking are: 1. Uncontrolled increase of the money supply; 2. Bank runs.
The problem of bank runs has been described above, unlimited growth of the money supply induces the risk of (hyper)inflation. In order to combat these two problems, most central banks impose minimal reserve requirements on the commercial banks. The ECB or the Fed might say to the banks in their jurisdiction, that they should have minimal reserves of 25%. For every hundred euro or dollar the banks keep, they should have 25 in reserve. By regulating this requirement central banks has to influence money creation by commercial banks.
Though this seems a great tool, but there two problems with these methods: First, the reserve requirements are usually quite low, sometimes as low as 1%. Second, banks are interpreting the reserve requirement creatively. As explained by economist professor Richard Werner if we have, for instance, a reserve requirement of 1%, then a bank should be able to lend of every 100 pounds only 99 pounds. But in reality the following happens:
Suppose that Alice deposits 100 pounds on her bank account. In theory her bank could only lend 99 pounds from it, since they should have 1 pound as reserve. But the bank will usually claim that the 100 pound is their 1% percent, now they can lend 9900 pounds instead of 99 pounds. The result is that 9900 pounds has been created by the bank.
2.2 Why fractional reserve banking is problematic
The money created by commercial banks is created as credit, as debt. This means that the money created in this manner, has eventually to be repaid to the bank. The following example will illustrate why this is problematic: suppose that Bob is a plumber, and he needs a new van. Bob has at this moment not enough money to buy the van, so he goes to the bank for a loan of 9900 pounds. He gets the loan, and inclusive interest Bob has to pay the bank 12,000 pounds. Now I am a factory owner, and I need to maintain the plumbing of my factory. Bob and I agree that he would to this for 15,000 pounds. For this necessary investment I get a bank loan, and eventually I has to pay back 18,000 pounds.
Since nowadays governments do not create debt free money, almost any money is created as credit. And has been illustrated in the previous example, in order to repay your debt, someone else has to become indebted. Because of interest, the total debt has to grow. Under the current financial system it’s impossible for all debtors to pay off their debts simultaneously. Every time someone pays of his or her debts, the debt has to be shifted to someone else.
And due to interest, especially compound interest, the total amount of debts is ever-increasing. One might ask why this is a problem. Being indebted is generally considered a bad thing, and people are almost always advised to pay off their debts as soon as possible. Not being able to pay off your debts is even worse. People who are defaulting on their debts, are risking to lose their possessions, since the creditors can by court order seize the debtor’s property in order to settle the debt. Businesses which has to default on their debts, face bankruptcy and their employees can lose their jobs, which causes even further financial problems. It’s for no reason that indebtedness is considered as negative. Therefore it’s important that governments will issue debt-free money in order to enable citizens to pay off their debts without shifting their debts to other persons.
Our commitment to government issued debt-free money is incompatible with the creation of credit money by commercial banks, even if both types of money would coexist. This because banks might create more credit money than the government will create debt-free money. Besides the negative consequences of indebtedness, fractional reserve banking has another problem. Since commercial banks are in control over the money supply, they might cause inflation by creating too much money.
Commercial banks pursue their own interests, not the public interest. For each individual bank it is attractive to create as much credit as possible, because so they can receive more interest. Simultaneously it would be better if the total money creation by banks would be limited, however no bank would rationally pursue such limit by itself. Consequently banks will create as much money as possible, this results in inflation. Also as argued by Professor Werner this private money creation causes asset bubbles, which will disrupts the functioning of the real economy.
2.3 Full reserve banking
Theoretically full reserve banking is nothing more than raising the minimal reserve requirement to 100%. However, establishing such requirement has profound effects. Most importantly banks are no longer able to create credit money at will. We see that as a good thing. Nevertheless there are people who oppose full reserve banking, and they have a few arguments to defend their position.
First proponents of fractional reserve banking argue that if commercial bank are no longer allowed to create money, the money supply will become fixed and cannot grow proportionally to the economy and therefore full reserve banking would lead to deflation. Deflation is the opposite of inflation, and is generally considered by economists as a worse phenomenon than inflation. There is general consensus among economists of different schools that recessions are often caused by deflation. However, the risk of deflation can be avoided in a full reserve banking economy if the government will create an adequate amount money, which we have defended in part 1 of this series. This government created money will also be debt-free and since the government is a single agency it can control the money supply more effective than self-interested commercial banks.
A second argument raised by apologetics of fractional reserve banking against full reserve banking, is that under a full reserve banking system banks can no longer lend money to the public. However, this argument is only partially true. This argument is based a mistaken assumption: banks are financial intermediaries, between those who want to save/invest their money and those who wants to lend money. As we have seen above this is not true, since banks are creating the money they lend. In order to see why this particular argument is flawed, we should look how full reserve banking might work.
In line with the “Chicago plan” we should distinguish between demand deposits and term deposits. Demand deposits are those bank accounts which allow the client to withdraw his or her money at any time, whilst term deposits are those savings which cannot be withdrawn for a certain period of time. Under the Chicago plan banks are not allowed to lend money deposited on checking accounts, thereby establishing a full reserve banking system. However, money deposited as term deposits can be lent by the banks, but only to sum of money deposits. If Alice has a 10,000 pound term deposit by her bank, the bank can only lend 10,000 pounds to Bob (assuming for the sake of the argument that Alice is the only term depositor). Another way for banks to raise money they can lend is to issue bonds. The benefit of bonds is that the owners can sell their bonds if they need money.
Since the money on checking accounts cannot be lend by banks, the holders of these accounts will not receive any interests from it. This raises two question: Why will people place their money on the bank? and How will bank make money from checking accounts? The answer to the first question is simple: save keeping and enabling financial transactions. The answer to the second question is equally simple: for the services mentioned in the answer to the first question, the clients will be pay a fee to the bank.
If a full reserve banking system as described in the Chicago plan, will be implemented, it reasonably to believe that there will be two types of banks: first there will be banks specializing in checking accounts and related services, secondly there will be banks which will intermediate between savers and borrowers. The first bank type will be save for bank runs, since they are forced by law to keep 100% reserves and therefore are always able to give clients back their money. Though clients of the second bank type have to face the risk to lose their money in case their bank will go bankrupt, they can reduce this risk by spreading their saving over multiple banks.
Fractional reserve apologetics might argue in response to our counter-arguments, that though the government might be able to create enough money to prevent deflation, but that the money created and allocated by the government might not get at the “right” places. If the government will create and allocate the money supply, some people will have a money surplus, whilst other will have a deficit. However, in our proposal the people with excess money can lend their money to the banks, which will lend it to those who need loans. In this manner full reserve banking will have the benefits of the current system, without its main disadvantages.
In the next part of this series we will discuss interest-free loans by the federal credit bank.
A program of monetary reform The final statement of the Chicago plan, written by Paul Douglass, Irving Fisher and others. The Chicago plan as described here is one of the inspirations of our proposals for monetary reform.
Richard Werner: Banking & The Economy A video featuring economist professor Richard Werner, who explains how fractional reserve banking works in reality.
A key aspect of any society is its monetary system, and Space settlements are no exception. Though money-less societies have existed in the past, and to some extent even to this day, all modern economic systems use money. However, there are different monetary systems possible, and the choice for a particular monetary system has fundamental consequences for how the economy operates. Therefore it is of great importance to choose a monetary system that fits into our commitment to create a secular, liberal and humanist society.
In this post and its sequels we will give a sketch of the monetary system we propose for a future space-based Republic. The basic features of this system are: 1. government issued debt-free money, 2. full reserve banking and 3. a federal credit bank for providing interest-free loans. We will deal with feature 1 in this post, feature 2 will be the subject of part 2, and part 3 will deal with the third feature. Though some people might argue that monetary and banking systems are separate issue, we believe that these two concepts are fundamentally connected with each other.
1 Debt-free money
First of all, we propose that space governments will have monetary sovereignty, e. g. they will issue their own currencies instead of using foreign currencies and also they won’t pledge the national currency to foreign currencies. If a space nation has no sovereign currency, it will not be able to implement its own monetary system.
Secondly, we propose a system of pure fiat money, which is money not backed by any commodity. Some readers might wonder how money with no intrinsic value would ever be accepted, this is an important question. The answer is given by what is known as modern monetary theory: taxation drives money. By mandating some payments in a specified currency, the government creates an effective demand for said currency. We will explain this by an appropriate example.
As the regular visitor of our site might know we support a land value tax as the primary method to fund government. It’s our opinion that all land in a space habitat should be the property of its respective government, but space governments will be able to lease their land to private parties. Since the government is the owner of the land, it is therefore capable of demanding that the lease has to be paid in the national currency. Subsequently the landholders will have a demand for some national currency, they have to earn this somehow. A landholder might, for instance, choose to become a farmer and to trade his crops for national currency. In their turn the buyers of these agricultural products will demand that their wages to be paid in national currency. And the end everyone will demand to be paid in national currency, and consequently the national currency will be generally accepted.
The requirement that the land value tax has to be paid in the national currency, also implies that so-called legal tender laws are superfluous. Legal tender laws are those laws which demand that a person must accept national currency as payment for debt. As we have seen, any sane person would accept the national currency because it is demanded by everyone else regardless of whether he is obliged to accept the national currency. Therefore legal tender laws could be abolished, or rather space colonies should not introduce such laws in the first place.
Now we know that taxation drives money, it follows that the government can create money, just by printing it. Once the government has imposed the obligation to pay land rents in national currency, it knows people will accept it in payments. And since the citizens has to get national currency somehow in the first place, they will be eager to sell goods and services to the government.
Since the government can print money at will, there is no need for the government to borrow any money, ever. This means that money issued by the government is debt-free, the government also pays no interest over it. The cautious reader should, however, be concerned about inflation. However, if the money supply grows proportionally with the economy, then inflation would be near zero. The problem of (hyper)inflation occurs when the government will print money at a faster rate than the growth of the economy.
It’s clear that even if the government can create money at will, it cannot afford to create an unlimited amount of money at a given time. According to modern monetary theory the growth of the money supply can be regulated by the government: by collecting tax, money is destroyed and by public spending, money is created. If more tax is collected than is spent, then the money supply will decrease. And if more money is spent than taxed, then the money supply will be increased.
Economists who support this theory, argues that in case of high inflation the government should raise taxes and to cut spending. Of course the problem will arise that if politicians control the money supply, they will use the tools of spending and taxing for political rather than economic reasons: decreasing taxes and increasing spending during the time just before an election. Therefore an independent agency should be created which decide whether taxes will be raised, and how much money the government is allowed to spend. Politician will be in charge of deciding how they spend the money, not how much.
Todd Altman has proposed an interesting idea: pegging the national currency to the consumer price index. If the general price level rises with, say, five percent, taxes will be raised also by five percent, whilst spending has to be cut down.
Richard Werner: Debt free & interest free money A YouTube video featuring economist Richard Werner, who explains how debt free money will work.
Modern Monetary Theory Primer An introduction to modern monetary theory on the “New economic perspectives” blog.
On “Republic of Lagrangia”
Although Space colonization and genetic engineering are separate concepts and the creation of space habitats is perfectly possible without the use genetic engineering, we believe that genetic engineering is a key technology for the success of Space colonization. Continue reading Space colonization and genetic engineering
The post is a sequel to The problem of taxation. Part One. If you haven’t read that post, we urge you to read it first. In this post we will give a justification of the Land Value Tax (LVT), subsequently we will investigate how Space governments can establish a fair rental value. Thereafter we will propose a method to deal with defaulters. Finally we will address briefly the discussion of additional taxes.
Although we use in this post the term “land value tax”, we have explained in part one that a LVT is not a tax in an economic sense (however, it might be in a legal sense). Secondly, the discussion in this post is concerned primarily with land, however our argument applies equally to things like broadcast spectrum licensing.
Justification of the Land Value Tax
There are two defenses for implementing a Land Value Tax (this is actually a misnomer): 1) the classic Georgist defense and 2) Ronald Burgess’ theory of public value.
The first approached is based on the fact that land is a fixed quantity, that land cannot be destroyed or created by man. This statement might seem contrary to space colonization, which aims at the expansion of humanity’s living space. However we have to consider that though the Solar System is large it is still finite. Suppose that we should build a Dyson sphere, a sphere with a radius of one astronomical unit, we “create” an area much larger than the surface area of the earth but it is not infinite. Further we do create the space itself which occupied by the Dyson sphere. Land, in a Georgist sense, are the coordinates in space we occupy in space. Space itself is not created by man.
In the Second Treatise of Government English philosopher John Locke explained how people can become owners of land. According to Locke land becomes one’s property if one has mixed his labour with it, the rationale is that you own your body and hence [the fruits of] your labour. However Locke placed a restriction on the amount of land one can appropriate. This Lockean proviso states that one might appropriate land with the condition that there will be left enough land of sufficient quality for other people.
This proviso leads to a problem: if more and more people are appropriating pieces of land, the amount of unowned land will decrease. If simultaneously population is increasing, there will be at some time not enough land for some people. In Anarchy, State and Utopia (ASU) American philosopher Robert Nozick argued that because of this all previous appropriations are unjust. In order to solve this problem Nozick proposes a weaker version of the Lockean proviso (Nozick 1974: p.176-177).
However, this weaker proviso is still problematic and is also unnecessary. Earlier in ASU Nozick introduced his principle of compensation: if someone is violating your rights, then you are, according to Nozick, entitled to compensation by that person (Nozick 1974: p.78-84). If under the original Lockean proviso the appropriation of all lands is unjust, then the landholders are obliged, in Nozick’s theory, to pay compensation to the landless. Since there is no one-to-one relation between any particular landholder and landless person, it’s up to government to collect this compensation and to distribute to those whom are entitled to it.
A second defense for implementing a LVT is presented by British economist Ronald Burgess. According to Alfred Marshall the value of land is composed of two parts: the public and the private value of land. What is the public value of land? We can answer this question with an example: suppose I own an apartment complex in London, I can sell the building or more accurate the land on which it stands for a certain price. If I, however, would own that same building but now somewhere in the emptiness of the Sahara, I can sell it now only for a much lower price than in the previous case. Why? In the Sahara there are no public services, while in London there is a multitude of services.
The value of a particular location is partially determined by the amount of services available in the surrounding area. Infrastructure, schools, shops, police, hospitals etc. are all factors which increase the value of a certain plot of land. Suppose I own a plot of land outside a big city, at some day the city’s subway line is extended to my neighbourhood. As a result of this subway extension land prices are tripling. Without any effort on my part, I can make a nice profit by selling my land. This what is called the public value of land.
However, this increase in land value is due to public investments, not mine. Therefore it is perfectly reasonable if the community, which has paid for those investments, should benefit from this, according to Burgess (Burgess, 1998: p.98-102).
One might ask what the private part is. Well, this is the part of the value of your land which is the result of your own efforts. According to Burgess this is the part to which you are entitled to and which cannot or should not be sized by the government.
Since the investment in (certain) public services is related with the increase of public value of land, the imposition of a LVT which collects all public land value should raise enough money to fund public spending. Consequently, there is no need for the government to tax people’s private income or private property (Burgess, 1993: p.106-107).
How to calculate the LVT?
An important question is, of course, how we can calculate the value of land within a space habitat? The problem is that space colonization is about settling “new” area, in which almost by definition are no market prices to base our calculations on. We might set an arbitrary price, but this might be to low or to high. In Progress and Poverty George discussed the use an auction to sell land to highest bidder, however he rejected this because he didn’t consider it necessary to expropriate current property holders. Instead he preferred to tax the unimproved value of their land.
However, since there are in space no existing landholders, allocation of land through auction is a good idea. In fact this is also a simple method for determining a market comparable value. The auction of land inside a space habitat is a kind of multi-unit auction, an auction in which several items are allocated to sever bidders.
Multi-unit auction are either uniform or discriminatory price auctions. As explained on Wikipedia:
A uniform price auction otherwise known as a “clearing price auction” is a multi-unit auction in which a fixed number of identical units of a homogenous commodity are sold for the same price. Each bidder in the auction may submit (possibly multiple) bids, designating both the quantity of units desired and the price he is willing to pay per unit. Typically these bids are sealed – not revealed to the other buyers until the auction closes. The auctioneer then serves the highest bidder first, giving them the number of units requested, then the second highest bidder and so forth until the supply of the commodity is exhausted. All bidders then pay a per unit price equal to the lowest winning bid (the lowest bid out of the buyers who actually received one or more units of the commodity) – regardless of their actual bid. Some variations of this auction have the winners paying the highest losing bid rather than the lowest winning bid. (Wikipedia, visited at April 5, 2013).
It’s not hard to see how this would work for the owners of Space habitats. Suppose that in a O’Neill cylinder we have some 10 square kilometers for lease. We organise an auction and we ask potential lessees to submit a bid. In this bid they announce what amount and for what price per unit they are willing to lease a plot of land. The price is the rent to be paid per period (once a year, once per month).
A discriminating price auction works in the same, only in this case people do not pay the same price (say 10,000 per hectare). Instead the highest bidder pays the second bid, the second bidder the third bid etcetera.The question which auction gives the fairest price is a complicated one and is the subject of auction theory.
In order to deal with inflation, we suggest that the price as determined in the way described above should be corrected each year. One way of correcting the rental price to the rate of inflation is to fix it to the consumer price index. If this index increase by, say, three percent the rental price will rise by the same amount. If, however, the index will decrease, the land rents will also decrease. In this way public revenue is protected against inflation. Of course this annual adjustment will be communicated beforehand to the prospective lessees.
Failure to pay
Another issue we have to address is the possibility that some landholders might refuse to pay the land rents they owe to the public. We are familiar with tax evasion, tax avoidance and the like in our current tax systems, so it is reasonable to assume some people will try to forsake their obligations. There it will be necessary to have a method to deal with reluctant landholders.
A LVT has one benefit compared with modern tax systems: land cannot be hidden. Whilst people can decide not to report (part of) their income or use all kind of elaborate schemes to avoid to pay income tax; landholders cannot hide their land from the government, nor can they avoid to pay (some) LVT by using legal persons as strawman. Unlike the tax systems we are familiar with, the LVT system does not provide for a different treatment for corporations. One might decide to rent land through a trust, but that will not change the amount of rent.
In order to collect the LVT, the government has to register all landholders and some landholders might try to avoid registration. However, if some piece of land is not registered as already rented by some one, the government is free to rent it to someone else. Therefore landholders have a strong incentive to register.
So the only way landholders can avoid to pay their rent is simply to refuse to pay. What should we do in this case? Our proposal is simple: first we should send the landholder a reminder to pay within a reasonable period of time. If the landholder has not paid after this period, his tenure will be revoked and he will be evicted from his land. Subsequently the landholder will be placed on a blacklist, which means he cannot rent another piece of land as long as he has not paid to money he owes to the public.
We see no reason why we should waste our time with prosecuting and imprisoning reluctant landholders. Just revoke their land and blacklist them, until they come to terms.
This is a good moment to ask whether we should have another kind taxation as source of revenue. (This phrasing is, of course, wrong since a LVT as we endorse, is strictly speaking no tax.) The first question is whether is will necessary at all, however I will address this issue in another post.
One kind of taxation we consider to be appropriate are the so-called pigovian taxes. Actually these are also no taxes, they are called tax mainly because of legal reasons. In fact a pigovian tax is a monetary compensation for externalities caused by some one. Many activities have negative consequences for third parties, an example is pollution. Since this is an infringement on the rights of these third parties, they are (at least according to Nozick’s principle of compensation) entitled to some compensation.
However, often there is no clear direct relation to the person who cause a negative externalities and the people who suffer from it. Often we only know that some people cause the externalities and some people suffer, therefore it’s up to the government to collect this money and spend it in such way to reduce the effects of the externalities.
Nozick, Robert 1974. Anarchy, State and Utopia. Basic Books, New York.
Burgess, Ronald 1993. Public Revenue without Taxation. Shepheard-Walwyn (Publishers) Ltd, London.
Bas Lansdorp, the founder and director of “Mars One”, thinks that it will be possible to fund a manned mission to Mars through a reality soap. In order to defend this Mr. Lansdorp is tireless in referring to the Olympic Games. However Mr. Lansdorp ignores the financial reality of the Olympic Games.
If you are seeking an opportunity to invest your money, the Olympic Games are a very, very bad choice. According to The Guardian the estimated costs of the 2012 Olympics were at least 11 billion pounds, and according to Wikipedia the 2012 Olympic had no net loss OR profit. The article also shows that most OGs since 1976 were break even, or had a profit of a few million USD.
Of course, we aren’t sure how reliable these figures are, but these and other data suggest that the Olympics have a very low or negative return on investment. The reason why we are sceptical in regard of the figures of the costs/profits of the Olympics is that both politicians and the IOC have interest to lie about the real costs of the Olympics.
The truth is that the IOC is able to run “profits” from the games, whilst all costs resulting of the externalities caused by the Olympics are shifted to the government. All great part of the costs of the games are hidden, indirect costs. These are often hard to estimate and easy to keep out of the books. And more importantly the IOC never takes responsibility for them.
When Mr. Lansdorp is referring to the Olympics, he takes great risks. More and more people are realising that the Olympics are, financially speaking, a huge scam, where the IOC takes all earning, whilst shifting all costs to the taxpayer. By associating himself with ruthless criminals, he gives not only the Mars movement but the general Space movement a bad name.
See also our post Mars One for a critical review of Mr. Lansdorp Mars program.
Since the 1970s advocates of space colonization have believed that building space power satellites and transporting space based solar power would be the raison d’être of space colonization. However we do not believe that space based solar power (SBSP) will have any future for terrestrial application.
The first reason why SBSP will not be a core export product for Space Settlers, is public acceptance. A central part of all SBSP proposals is microwave transmission of power, although this wouldn’t be dangerous for people, a lot of people are afraid of anything related to radiation. An example, in the Netherlands there is broad concern about the health effects for people living in the neighbourhood of overhead power lines. Given that the Netherlands are a densely populated country, a few million people live within two kilometers from an over head power line. Although no scientific study has ever been able to provide conclusive evidence that living near an overhead power line is actually bad for your health, many people believe it is.
Some space advocates believe that we can “educate” the masses through tv shows like man-made marbles, I think this will be a dead-end. It is quite unlikely that it will be possible to educate the masses in this way. First of all, only a selected group of people actually watch this kind of tv shows, and these people are probably already convinced of stuff like SBSP. Secondly, the stronger one’s beliefs are the harder it will be to change these beliefs. Especially beliefs related to health issues are quite strong and therefore difficult to change.
Changing public opinion is difficult and we believe that space advocacy groups shouldn’t waste their time and funding to attempt to eradicate radiophobia.
Another issue is whether SBSP is actually necessary. Back in the 1970s photovoltaic technology was in its infancy, solar arrays had low efficiencies and were quite expensive. It was in this time that people like Peter Glasser and Gerard O’Neill were proposing to solve the global energy problem (the 1970s were the age of the oil crises). However, since then both the efficiency of solar cells has been improved and their production costs have been decreased.
In order to provide the world with sufficient energy, we need actually a surprisingly small area: some 62,500 square kilometers or about 2.63 percent of the surface area of Algeria. Of course it will be bad idea to concentrate all of the world’s power plants in the Sahara, but we could spread the solar power plant about the world. In the USA, we could cover a great part of Nevada, Arizona and New Mexico with solar arrays, Western Australia is another place suitable for solar power plants, in Latin America Chile’s Atacama desert will be an attractive site.
An exciting development are the so-called solar islands designed by a Swiss company. Oceans cover two-thirds of the surface of the earth, and are exposed to a large portion or our intake of solar power. So it is a logical idea to harvest solar power at sea.
In a previous post we have discussed the future of Japan’s energy supply, in that post I mentioned the possibility of using synthetic fuels:
One way to do this, is by producing hydrogen through electrolysis. But hydrogen has some severe drawbacks. First the very low density of hydrogen gas requires either storage under high pressure or liquefaction to very low temperatures, which might cost more energy than can be delivered. The storage problem of hydrogen is one of the greatest obstacles for the transition to a hydrogen economy.
An alternative for hydrogen would be the production of synthetic fuels through the Fischer-Tropsch process from hydrogen and carbon monoxide gas. CO gas can be obtained by electrolysis of CO2 from the atmosphere or sea water. There is also current research of creating fuels directly from water and CO2. Both methods will produce hydrocarbons, like methane gas [main component of natural gas], or alcohols like methanol. These synthetic fuels can easily be transported and because the synthesized fuels are chemically similar to “mineral” gasoline, they do not suffer from the transition paradox. This is the problem that no one will buy hydrogen cars if there are no hydrogen gas station, but no one will build hydrogen gas station if no one drives hydrogen cars.
There is no reason why the production of synthetic fuels couldn’t be done on solar islands.
For more information about solar islands see:
It is hard to imagine that Space Based Solar Power will ever been accepted by the broad public, due to concerns about radiation. Any effort to change this attitude is probably wasted energy. Further it is questionable whether SBSP is actually a necessary part of the World’s future energy supply.