Internalizing Externalities
[[epistemic status: I present a rough outline, and appreciate all feedback, with the expectation that details require nuance and testing before action.]]
TL;DR—I seek the most complete policy for the internalization of externalities; I do not expect Donor NFTs to capture the entire scope of the externalities we face. Fundamentally, that internalization must act through some form of governance; we cannot expect each transaction’s values to be wholly aligned for all participants on their own. In contrast, the preponderance of value, for each constituent in a governing body which internalizes externalities, may give government-regulated-internalization traction.
An Example of A Cure?
Back in the ’90s, researchers identified that the high rate of accidents at intersections was partly diminished when the stoplights BOTH spent a few seconds glaring red, together. It was a simple fix to cut vehicle mortality by a quarter. Yet, not many mayors were reading those research publications, nor did they have the funding or motive to take action. It took a while for the stoplights to change.
Yet, what if you had written-up a Proposal: “Convert the StopLights Across America!” with an estimate of the value, cost-structure, and a ‘business plan’ for the activity? If only there was a place, like a Stock Exchange, or Kickstarter, where investors could bid toward that Proposal! Like Kickstarter, your money only moves into the Proposal once it hits its funding requirement. Unlike Kickstarter, you aren’t rewarded with just a mug or a toy. It must have a path to generating a return in order to pull investors toward it. The people who run the operations of the Proposal could try working-out some payment plan with each mayor, but that’s a fool’s errand. Instead, let a wealth tax absorb enough to pay the investors a return, as a percentage of the measured benefit to the public of that proposal.
So, if the government assessed that the total value to the public of all those avoided accidents was $10 Million/yr, then they would need to increase their rate of wealth tax that year by, for example, $3 Million. (A 30% return to the investors who funded public benefits seems fine to me.) That pile of money goes to pay all the normal costs of the operations of the proposal, (no CEO bonuses!) while ALL remaining cash goes to the investors as a dividend. Considering that the proposal would only have operating costs for the few years required to convert stoplights, while that benefit would be paid-out to investors year after year, the returns from funding such a Proposal would be competitive with business investments. That is the key concept: Helping others can be SO EFFECTIVE, that investors would WANT to put their money toward it. And, if the hope is to ONLY help in those ways which are most effective, then this naturally aligns the incentives of the investors toward that most-effective good.
“What about corrupt government?”
Yes, that’s basically the argument against everything, even though the government is already corrupt and ineffectual, so most changes would still be an improvement. I would rather dive into details of accountability, without expectation that “we would be able to pass that into law, here in the US”. Rather, I presume that we will have numerous opportunities to try our own variations of governance in a few decades, regardless of political inertia among land-dwelling nations. I plan for when we can make that move, because that is a far more likely future than one where the US changes course. (“Sea-steading” waits only for the cost of materials/fabrication and demonstrations of reliability, before the largest migration in human history.) In that light, yes, we can pile-on transparency and accountability, homomorphic encryption of person data, instantaneous updates from the whole public without waiting for elections, verifiable functioning of protocol and legislation (or else it is dropped!) all to help limit and dissuade corruption. We certainly can’t make all that happen in this country, but we know what we could do, once we have somewhere else to go.
The core concept I cling to is that, unlike mere privatization or government-awarded contracts, a Market for Externalities keeps a check upon the quality of the service provided, and the tax is fixed as a percentage by legislation. With government in the role of diplomat, justice, legislator, AND the research body that accounts for Proposals’ impacts, then the remaining tasks of bureaucracy could be devolved into a set of Proposals. Insofar as we can account-for and price-in externalities, we improve our allocation and decision-making, NOT just for philanthropic dollars, but for the whole pool of investments.
Where would you like more detail? What concerns do you have? What else could help? Thanks!
You might want to slow down and untangle some things if you want other people to be able to understand what you’re proposing. To me, your idea seems similar to:
Robin Hanson’s idea of “futarchy”—a conditional prediction market where investors analyze whether a given proposal will improve or harm the overall utility function that voters and representatives determine. If investors think a proposal will help, it is adopted. Futarchy has the advantage of working by itself, without needing a giant bureaucracy to constantly run (potentially biased/corrupt) studies on the impact of interventions like fixing stoplights.
Eliezer Yudkowsky’s idea of a kickstarter-like mechanism to coordinate social change in order to escape inadequate equilibria. (To my knowledge, such an experiment hasn’t really been tried, except in things like the Free State Project assurance contract.)
The general idea that it would be nice to tax negative externalities (called a “pigovian tax”), and other tax-efficiency ideas like the fact that it would seemingly be nice to tax land value instead of property value or wealth instead of income (although wealth taxes, so appealing in theory, run into notorious difficulties in practice).
The concept that regulations should be adopted if they are able to pass a cost-benefit test and should not be adopted if they can’t. Cost-benefit analyses are naturally doomed to be incomplete and uncertain for the same reason that all utilitarian analyses are hard, but they still seem like a big step in the right direction to me. This idea, at least, has progressed far enough to get partially implemented and become the source of partisan political disputes. Note that this kind of bickering and hypocrisy when deciding what gets included in a cost-benefit calculation is exactly what your proposal would also have to deal with.
The idea that we can use mechanism design to create systems where private actors (rather than government officials) identify the best proposals that benefit the common welfare, and those proposals are then paid for by a tax levied on all. This is the core vision of the innovative “quadratic funding” mechanism that is being used by gitcoin to support development of the ethereum cryptocurrency ecosystem.
I think it would help if you clarified how your idea relates to some of these. One of the most unique ideas of your scheme is trying to compensate the originators of a valuable social proposal by awarding them a share of the broad (but otherwise diffuse) societal benefits benefits their idea produced. Is there some way that we could get that benefit using some clever kind of mechanism design, instead of relying on a bureaucracy to figure out how to dish out the prizes? (Even if not, having a stronger government focus on giving out retroactive prizes for people who produced socially-valuable innovations would probably be a great idea! In general it would be amazing to see a stronger focus on aligning incentives and internalizing externalities throughout government… the question I suppose is how we get from here to there.)
Finally, I am definitely NOT saying “this has all been done before, nothing new here”. Rather I think all of the ideas I linked to are very promising, and indeed I find it a little depressing to me that there is such a plethora of good ideas for governance reform, and yet they have so rarely been tested out in the real world. I strongly share your hope that in the coming years, there will be more opportunities to experiment with these reforms on a small scale and test them out for the first time. In the meantime, maybe we can get involved in helping develop them further and helping advocate for their adoption!
Thank you for your detailed response! I am glad when we explore the design-space; to find a decent idea, we must find the patterns amongst many.
In regards to each specific option you mentioned:
futarchy hopes to create a prediction-market, and reward those who make good predictions, yet it does nothing to reward those who invest in the implementation of beneficial projects, the key difference.
Eliezer is looking for a way to coordinate crowd actions; again, the people who invest time and resources are not rewarded directly and materially for funding those benefits.
pigovian taxes, for negative externalities, are included in my line of reasoning, yet they miss the key point again: material reward for those who invest in beneficial projects.
partisan cost-benefit discussions are commonly among elected officials prior to knowing the truth; I contrast that with verification that policy performed as expected, carried-out by apolitical experts randomly assigned, by metrics agreed upon in legislation, in line with the concepts of principled negotiation (see Bill Ury’s classic “Getting to Yes”). I have no expectation that a legislature should ever determine the worth of each proposal—they’d never finish! And I would be glad to pass a ban on political parties at a Constitutional Convention, though I know that won’t happen. Instead, I expect we will need to start from scratch, in which case a foundation of apolitical metrics is better than none.
quadratic funding is nice, to balance the interests of the majority, yet again it does nothing to directly and materially reward those who invest in the solutions. A hope that the coin functions better, maintaining its value or increasing in value, is only a secondary reward, and that reward is focused in the hands of the largest holders.
So, the key difference I have with all of those mentioned is that I propose an incentive for regular, self-interested investors to pay for benefits. That certainly would not happen in each other method. (And yes, those taxes and dividends would be retroactive, similar to the prizes for social good you mentioned.) Without material rewards for the investors, we will only pull a few tens of billions in philanthropic dollars toward benefits every year, while my goal is to internalize externalities in totality or close to it.
This is a critical distinction, because there are a few hundred trillion dollars sloshing around in businesses and real estate, NOT because the investors like capitalism—rather, they like a high rate of return! :0 Due to the efficiencies available in the space of positive externalities, we can give investors that rate of return, while keeping the lion’s share of the benefits in the public. Investors would look at their distribution of assets and say “oh, I was only holding this real estate as a HEDGE against inflation, I’d rather put my cash into a diversified portfolio of public benefits, because they earn an annual return of greater than 12%!” That’s how we can get tens of trillions thrown toward beneficent work. Just give them enough cash back that they are happy. (...and, that shift in assets would lower the price of urban real estate, once they clear out of it!)
[[It’s also worth noting that the article you gave to dismiss wealth taxes only showed that “European countries had all kinds of weird exemptions, while they didn’t exclude basics like your farm or small business, so some people suffered… they also let the millionaires leave—which they did.” Elizabeth Warren’s wealth tax plan, in contrast, is shown in that same article to address those concerns. Compared to the disincentives from sales tax and income tax, I’d prefer a progressive-rate wealth tax only, with a hefty cut taken from those who leave citizenship behind.]]
I see some form of governance as essential to enforce taxation; and that taxation is the only reliable means to gather the broadly-distributed value of most positive externalities, in order to reward investors. Without that reward-structure, we’re leaving tens of trillions of dollars on the table, when we could be spending that on public benefit. So, what might that governance look like? A smart contract, binding sea-steaders into a loose federation, perhaps? I look forward to any other ideas that come up! It should seek to internalize as much as possible, ideally leaving no externality untouched, so that pricing is an accurate representation of public value, and allocation is efficient. Then, I wouldn’t be so worried about markets ruining planets. :)
Your post/idea reminds me of “Social Impact Bonds”: https://www.goldmansachs.com/insights/pages/social-impact-bonds.html
Seems sorta similar except instead of private investors it’s an open market for regular people to make a profit from their good policy investments.
Ah, now that I’ve started looking further—an assessment of those Social Impact Bonds, here. They note ““Using a single outcome to define success may miss a range of other benefits that might result from the program—benefits that also have real value but will go unmeasured” (Berlin, 2016)” which is in-line with what I’d said elsewhere on the idea: whatever we don’t measure, tends to bite us in the butt. (That includes which groups we listen to!)
The report also mentions: “By design, nearly all of the early SIBs were premised on government-budget savings. Indeed, in those deals, payments to investors depended on those savings.” This would be a huge hinderance, with the only evaluated benefits being ‘costs to gov’t avoided’. Only by including as much of the real externality as feasibly measurable could we hope to incentivize the right solutions.
So, though SIBs are essentially the same mechanism I mention, they do seem to be falling short for reasons I’d expected and planned around. A singular legislative document, setting taxes to match whatever the percent benefits happen to be, with a devoted branch of the executive determining externalities with transparent metrics, statistical safeguards. Investors might also feel that “this is like a government bond”, if we give them a stronger institutional commitment. One-off policy goals find their funding pulled regularly, in contrast, which would spoil the potential of the investment. I’d guess I’m SIB-adjacent?
Thank you VERY much for bringing this to my attention!
And, I would say this is almost-exactly what I had in mind! (The “investor” I referred to is merely the role; any normal person could throw a dollar in the pot, becoming an investor; and any community could propose benefit-plans.) If those “government priorities & funding” were enshrined as a mandate to regularly-updated public concerns, funded with a singular tax-rate that is raised or lowered to match the total quantity of benefits, then I couldn’t tell the difference between our plans.
I see vast change becoming possible, when you can earn a competitive return from public good, funneled through taxation for efficiency and fairness’ sake. It’d bring a few orders of magnitude more resources to bear on our troubles. (And, if we manage to internalize most externalities, then pricing is a decent representation of real cost, which would provide systemic gains to efficiency.)