Thursday, August 26, 2010

THoughtful Thursday, Voting Systems

Assume there are several candidates or alternative health reform plans on the table. Assume candidate A would win a one-on-one election with any other candidate. Candidate A is the Condorcet winner. If we have a binary tournament, candidate A will win. It does not matter what order they are paired up. Unfortunately, there may be no Condorcet winner, a cycle. Example with three voters, assume the preferences below:

In this case, the order matters. In the tree below where G runs against B and the winner of that race runs against N, N would win. If we had a different pair up for the first challenge, some other candidate would ultimately win. This is in game theory terms (Page 219, Osborne, A Course in Game Theory) Condorcet cycles are considered the first mathematical social choice theory. The Game Theory book goes on to identify top cycles, candidates that can beat every alternative directly or indirectly (A beats B beats C) one of these will win in any binary voting tree but we don't know which of these "top candidates" will win the election--it depends upon the binary decision tree.

Preference Systems

In conventional voting, the voters vote for one choice. That is people cast a vote either for B, G or N. I am sure everyone here recognizes the problem. The third person prefers N but whose second choice is G would be better off voting for G so as to ensure that the hated B does not wins, especially if the second column represented 34% of the vote. This is known in the social choice literature as "strategic voting."

Many voting systems ask us not to just give our "first choice" but simply to list our preferences. We need a voting system which decides who wins. The well-known Arrow Impossibility Theorem says that one can't find an ideal one. Any algorithm that takes as input everyone's preference order will have one or more of a list of certain undesirable properties. I will save that for another Thoughtful Thursday.


The Swiss system allows the legislature to respond to a initiative by the people, by proposing an alternative. Thus, when voting occurs on the initiative, the ballot has three choices:
  1. Whatever the people sending the initiative proposed
  2. the counteroffer from the legislature
  3. the status quo. The most voters vote for neither of the two proposed laws and the people are left with whatever was there before, e. g., if the subject was health and we did a plurality voting between possible health systems, the votes of everyone who wanted health reform would be split among the different health reform proposals. Thus, the votes of everyone who liked the health system just fine would be the highest plurality.
Unfortunately, in Switzerland, the legislature sometimes deliberately puts out an alternative. This is to split the vote for change. The people with nothing but status quo, which is what the legislature wanted in the first place.

(I read this online and I definitely recall printing it; but I cannot find it; and my attempts to search for the article again have failed.)

In the insurance wars of California, the Californians were very tired of high auto-insurance rates. Several proposals got the signature need to qualify to be on the ballot for a referendum. California handled it by approval voting, everyone got to vote for as many proposals as they liked or of which they "approved." The one with the most votes won. The one that got the most votes was a simple proposal to limit the percentage of money the insurance companies could charge over and above the cost of claims. That is, the insurance companies had to pay out a certain fraction of every dollar of premium.

I introduce the idea of parametric referenda. Each referendum might have one or more numbers. A tax law would have the tax rate. We know from Duncan Black's work that if there are a series of binary votes, we would end up with the median voter response. And we saw that with candidates and the "Left-Right" continuum in Hotelling's work. In the United States, on the "left-right" continuum, the country is at the median position of its voters.

One possibility is that there is a big vote for the structure, followed by a vote for the parameter. I wrote about this in one of the first articles on the health care system reform; there would be a big plebiscite with options such as the status quo, single-payer and perhaps the structure that was since enacted into law. Then once one of these won the approval voting, there would be an oportunity to choose the parameters by median. Assume the current structure was passed into law with a penalty for choosing not to be insured. In a second election, each voter would enter the amount that they felt the penalty should be and the median of those numbers would be the penalty amount enacted into law.

Each voter would decide which health structure to choose and would have an opportunity to engage in strategic voting. If they could accurately judge, say by polls, what the median would be for that system, each voter would decide which one they wanted. Another possible mechanism: The voters would enter preference orders conditional on parameters. That is a voter would say they prefer the current structure as long as the penalty is under $1000.00. And they would prefer single-payer as long as the taxes were less than $1000.00. How could the combinations of a vote plus an interval for a parameter be combined to choose a system and a parameter?

Voting Schemes for Which It Can be Difficult to Tell Who Won the Election, J. Bartholdi III, C. A. Tovey and M. A. Trick, Social Choice and Welfare (1989) Volume 6, pages 157 to 165.

If there are several alternatives for the referendum, then there is a very good chance that there is no Condorcet winner. That means if referendum opportunity one is paired against referendum opportunity two, the second might win. Then, if that were paired against referendum opportunity three, then three might win. Had referendum one been pitted against referendum opportunity three and then the winner of that wrestled with referendum opportunity two, there would be a different outcome. Dodgson proposed taking the preference orders, and seeing how one could change them so that there would be a Condorcet winner. Depending upon how one rearranged the orders of each voter, one would get a different winner. If we arranged the table with N, B and G by flipping the middle column , we would get a Condorcet winner of N
For the millions of votes and preference orders, how could we achieve a Condorcet winner with the fewest swaps?

Kemeny suggested that we find a consensus order closest to voters preference orders as possible.

Unfortunately, both of these are NP-complete! This means there is no algorithm that will find the solution in less than polynomial time, or in general, it is intractable. (This is a bastardized and oversimplified view of this concept. I will talk about NP-complete in a future Thoughtful Thursday.) In other words, everybody could submit their preference sheets. And the computers would be grinding "forever," apparently in an infinite loop, not to end until well past the entire Universe has decayed into a soup of positrons. I briefly mentioned work on good approximations for Kemeny method?

Elections Can be Manipulated Often, by Ehud Friedgut, Gil Kalia and Noam Nissan

Looking back at voters voting for three candidates,such as the infamous B-N-G election, the three doctors found that the sum of the probabilities that a voter could manipulate the election is greater than C e 2. Manipulation sounds evil, but it simply means that voter might give a preference that isn't true. For example, saying G is their first choice when they really like N. This does not mean that every voter can do manipulation. Only that some can! So out of the United States 200 million voters, maybe only a few thousand might have the opportunity to manipulates.

Oh, and what is e. That is the percentage of times the social choice function differs from a dictatorship. If the rule is that the king makes the decision, then noone can manipulate the election as either their choice does not matter or for the king, whatever they want will be the result.

The good doctors were only able to extend the first two steps of the proof to the case where there were more than three candidates. They speculated that the bound would "decrease polynomially in " the number of alternatives.

It is also important to remember that the probability of manipulation is one that might land on only a few voter's laps, who might not be sophisticated or too high-minded enough to manipulate.

Marcus Isaksson, Guy Kindler and Elchanan Mossel, "The Geometry of Manipuation -- A Quantitative Proof of the Gibbard Satterthwaite Theorem"

The three researchers show that a social choice function has a probability of being maniulable of at least
0.0000001 e 2 / (n 3 q 32)
They define a manipulatin point that a particular voter x can report a preference set that isnot their true preference set but get a result they prefer. They show the probability that any given voter could manipulate the election is
e 2/ ( 2 n 3 q 6 (q factorial) 2)
Now as a practical sense this is a negligable probability. Even the main result that someone can manipulate the election decreases as the thirty-second power of the number of alternatives. It increases as the cube of the number of voters. 100,000,0003 steps is way beyond the time frame of moedern computers.

One should be concerned with coalitions of voters, voters all willing to follow a "guru" whether religious or political who presumably can also spend for the computer time to search millions of possibilities to find the best strategy.

Also, these results are for "neutral functions" where each voter has the same power. In other words, voter A voting a preference order v , voter B voting a preference order w or voter C voting a preference order z shold give the exact same result as voter A voting a preference order z, voter B voting preference order w and voter C voting prefernce order v. However, imagine a country of three ethnic groups forming a constitution. They might specify a mechanism to give equal power to the ethnic groups so a voter in one ethnic group effectively might have more power than a voter in another. Similarly, a system comparable to the United States Senate that counted voters by state , The alternative passed by a majority in the ost states wins, even though the states have different populations. This would not be a neutral election system!

The Computational Difficulty of Manipulating an Election, J. J. Bartholdi III, C.A. Tovey and M. A. Trick, Social choice and Welfare (1989) Volume Six 227 to 241

We know from Gibbard and Satterthwaite that every social choice system is manipulable. The above two articles discussed before suggest that sometimes it makes sense to simply search linearly through all the possible strategies for a manipulation strategy.

We know from Computer Science two things. Sometimes when one is trying to optimize, there are ways to accomplish this without searching all possibilities. For example, if one has a table of all the highways and one wants a computer program to find tte he best way to get from the proverbial A to B. There would be an exponential number of possible paths that one can take. But one does not have to search all the pathways. One can apply Dijkstra's algorithm. The computer would take steps proportional to the square of the number of highway segments. And there are proven techniques to simplify even that; one of these is A Star.

We also know that many problems are NP complete. For example, if one wants the best path that visits every city, a Hamiltonian path, there is no polynomial algorithm to find the shortest one. (There are caveats--for another thoughtful Thursday or a quick clink on the Wikipedia Article). There are also approximations.

The same is true for the strategic voter wanting to know what they should enter at the voting machine, or internet voting computer. There is a polynomial time greedy algorithm for any voting system that is monotone. That simply means that the voting system is more likely to report candidate j is the winner of the election than candidate i if a particular voter indicates J higher in preference. And the conventional plurality voting system such as in our famous N, B G election. That means that assume a person prefers N to G to B, and also knows every other voters' preferences, they can consult their computer program to find out whether to vote for N ior G. It is also true for some other schemes:

  1. Positional or Borda count. Each voter sends a list in rank order, and these ranks are added. The one with the highest is voted.
  2. the winner is the candidate who is preferred in the most pairwise elections
  3. the winner is the candidate who would have the most victories - the most defeats in pairwise elections-- Copeland's method.
I will prepare a table of all the proposed voting systems and their properties for a future Thoughtful Thursday.

But a minor variation of Copeland method, which by the way the United States and International Chess Federation works, is NP-complete. It deals with ties by looking at the candidate who defeated the highest scoring candidates. That IS NP-complete. And as seen from the "Future Thoughtful Thursday List" there are many others.


The participatory methods I proposed earlier take advantage that large numbers of alternatives are our friend. If the alternatives are every conceivable combination of factors and penalties for a gun code. If the alternative for a tax code are every combination of rate tables and factors such as number of children and amount of one's mortgage, then we can overwhelm the above results in an exponential or even infinite number of alternatives.

That means we don't have a few proposals from the legislature or for which somebody bothered or paid to get 100,000 signatures. the voter can select their preferences from every logical combination! This lowers or eliminates the probability that someone can find a way to vote strategically!

For Future Thoughtful Thursdays

  1. Arrow's Impossibility Theorem
  2. The California Insurance Wars.
  3. Mark Allen Satterthwaite, "Strategy-proofness and Arrow's Condition: Existence and Correspondence Theorems for Voting Procedures and Social Welfare Functions Journal of Economic Theory Pages 187 to 217, 1975
  4. G. Kalia, "A Fourier-Theoretic Perspective for the Condorcet Paradox and Arrow's Theorem" Advances in Applied Math 29 42 to 426, 20002
  5. Allan Gibbard, "Manipulation of Voting Schems: A General Result" Econometric 41 587 to 601 1973
  6. V. Conitzer and T. Sandholm,"Universal Voting Protocol Tweaks to Make Manipualtion Hard" in IJCAI 781788 2003, 781 to 788.
  7. V. Conitzer and T. Sandholm , "nonexistence of Voting rules that Are Usual Hard to Manipulate" AAAI 2006.
  8. V. Conitzer and T. Sandholm, Journal of the ACM, August 2007.
  9. Ariel D. Procaccia and Jeffrey S. Rosenchien. Junta Distributions and the Average-Case Complexity of Manipulating Elections In Hideyuki Nakashima, Micahel P. Wellman, Gerhard Weiss and Peter Stone. Fifth International Joint Conference on Autonomnus Agents and MultiAgent Systems (AAMAS 2006)
  10. J. S. Kelly, "Almost all social choice rules are highly manipulable, but a few aren't. Social Choice and Welfare 10, 1993.

Thursday, August 19, 2010

Thoughtful Thursday: Review Peter Elkan "New Model Economy"

Review of The new Model Economy: Economic Inventions for the Rest of the Century by Peter G. Elkan, review by Kenneth E. Boulding. in Journal of Economic Literature, September 1984, Volume XXII, Number Three

Peter Elkan says there are two current approaches to a government regulating the economy. They are setting legal rules like the new Financial Reform bill. The other are various macroeconomic effects such as the Fed setting the interest rate. But Peter Elkan proposed a "grand palever" among all the other interest group to divide the economic pie. Kenneth Boulding proposed a macroeconmic mechanism: wages are paid in yellow money, we buy goods in green money. The Fed sets the conversion rate between the two to control inflation. I proposed a system of two types of money. Type A was to allocate scarcity to buy goods and Type B was to express satisfaction with goods and services One received Type A money in proportion to the amount of type A money one received. My goal was to deal with goods whose marginal costs were small or zero--the empty seat in the Amtrak or the music one downloaded.

But Elkan became more complicated, regulating imports with some sort of forward contract. And he proposed identifying "utility" goods. The British did this in World War II. Thus, they would produce a large amount of functional but unfashionable glass frames so everyone who needed glasses could have them. The sortition jury would give these a low or zero excise tax.

I was impressed by another point that Kenneth Boulding made. In 1932 and 1933, real rates of interest were three percent but companies were losing three percent. He was surprised the economy held together as well as it did instead of totally collapsing. He claimed that businesses kept going hoping things would get better and from "benign force of habit." I wondered whether business might have lost more money shutting down completely due to the sunk costs for their factories, for which they presumably would still owe interest on debt or at least the costs to mothball and pay property taxes.

Obviously, I will get the book by Peter Elkan for another Thoughtful Thursday.

Sunday, August 15, 2010

Miscellaneous from Recent Periodicals

I blogged reports of China's Real Estate Boom and land buggle. Many Chinese State owned companies are winning auctions for land on which they are building luxury residences and retail outlets. In 2008, 59% of land auctions was won by state-owned companies -- up to 82%. 90 of 125 state-owned firms have real estate divisions. Land prices jumped 750 per cent. State owned banks made 1.4 trillion loans, double the previuos numbers. Municipalities are part of the problem. They are forbidden from buying real estate directly. But they do borrow money to build infrastructure on land they already own. They hope to sell the land at greatly increased prices. (Page A1, A5, "State-Owned Bidders Fuel China's Land Boom", David Barboza) New York Times, Monday August Second 2010 Volume CLIX NO 55,120


Paul Krugman has advocated in his blog increasing the money supply, monetary stimulus to overcome the inflatiohn. One in six Americans rates are v are unemployed or underemployed and the average length of joblessness is thirty-five weeks. Apparently, policy makers are defining our expectations downard accepting that. Foreign investors are still buying foreign bonds and federal interest. And he said that we should increase inflation to stimulate the economy. He suggests that we might allow inflation to reduce unemloyments. Dr. Krugman is concerned that in the near future, the government will declare the high unemployment structural, the long-term unemployed will lose their skills and social capital, making a self-fulfulling prophesy. An alternative is targetting spending.

Paul Krugman, "Defining Prosperity Down" Page A15 New York Times, Monday August Second 2010 Volume CLIX NO 55,120


I reported earlier the Marmot study of WhiteHall employees, as people rose up the hierarchy, they had better health, even though all enjoyed job security and the same National Health Service. This argued against hierarchies, and possibly reporting to sortition juries rather than "a boss" is better for one's health. Wired reported that hierarchies in baboon's led to increased stress hormones and bad health. Dr. Elizabeth Gould showed that stresses reduces dramatically the birth of new neurons in the brain. Epidemiologic studies with humans, that showed that having control over one's job demands improves health, but having to follow orders is detrimental.

"Under Pressure" by Jonah Lehrer Wired, August 2010, 18.08, page 130 to 146.


Factoid: The Average American House is 2,438 square feet. Page 074, Wired, August 2010, 18.08


A Wired reader suggested that passengers in an airplane might collectively brainstorm to solve the world's problems as "they all just sitting there." They should collectively serve as the sortition jury, say on taxes that a person or business should pay or help choose a tax code. And the real source for crowdsourcing should be mass transit; mass transit takes longer than driving with starts and stops and not being able to take the most direct route. Of course, there is enough time outside travelling time and Participatory democracy can occupy the unemployed.

Wired, August 2010, 18.08 , Page 017

Thursday, August 12, 2010

Thoughtful Thursday: General Equilibrium Models

Journal of Economic Literature, John B. Shoven and John Whalley "Applied General Equilibrium Models of Taxation and International Trade" September 1984, Volume XXII, Number Three, Page 1007 to 1051

The demos is voting on the tax structure and its parameters. They need to know what their preferences for a tax code will do for the budget deficit and to the broader economy. We tax income 30%. Will revenue go up or down? This is the famous Laffer curve, beautifally explained by Dr. Krugman Equilibrium Models solve non-linear equations representing demand and supply, production curves, how much will people work if taxes go up? how much will they save? Drs. Shoven and Whalley give as example: simple model with a manufacturing sector and a nonmanufacturing sector, labor and capital and those who live primarily off their investments and those who live off their wages. Assume the demos decided to tax the rich, that is the income they get from dividends and interest, at fifty percent. This would reduce manufacturing output. And thus this tax would get less revenue than expected as people would consume more nonmanufactured goods.

Also, we sometimes hear that a trade or tax policy has a cost to the economy of so many billions of dollars. The general equilibrium model says how much of each good each group would receive after the change. These are converted to a single money amount in two ways. We use the new equilibrium incomes and prices and ask how money would we have to give or take away from each household to return them to their previous utility level. This is called compensating variation (CV). Or we could take the old equilibrium prices before the tax or trade change, and say how much do we have to add or take away from each household to make them "whole." The demos can look at this summary statistic for the whole economy or look at how each group in the economy does. Probably, some want to "soak" the rich and do not care about their happiness. Others may have similar feelings about those who receive welfare or who work for the government.

In the simple model with which the article started, the tax caused a welfare loss of 0.66% of the whole economy, but the tax revenue was only a few percent, so the deadweight loss from the tax by giving people less manufactured goods than they wanted was one quarter of the revenues earned. However, rich households that were living off their savings suffered all of the decline while the average Joe was better off. So whoever is making a policy decision can think in a more reasoned way.

Some tax codes say that the income from certain investments is taxed at a lower rate. A sophisticated model found that these that they reduced the interest rate for those vehicles. Thus, the tax code was more progressive than it might appear. And at the margin, one estimate says that the deadweight loss from a marginal change in the tax code is 100%. Or the cost for an extra dollar of government revenue to the economy is two dollars.

Of course, economists simulate with lots of parameters. One used thirty-three products. They used 100 different categories of households. Joseph Pechman and Benjamin Okner looked at 87000 different categories to see "Who bears the tax burden?" And as the article, but more importantly, a Cato Institute review, it matters whether we look over a lifetime or single year. A student in a high-end business school or medical school obviously has a low income but just as obviously expects a high income soon. But can we simulate or get information from the demos on this number of categories? If the tax code were a decision tree, people would try to move themselves to a more favorable branch of the tax tree.

This reminds me of the Simulation and its Discontents" of which I read a review in the Chronicle of Higher Education. One can put in one's simulation an equation making rioting likelihood an increasing function of taxes, income, or inequality. People playing with the simulation will learn "taxes causes rioting" regardless of whether there was there was empirical basis for the equation.

These modules depend upon "elasticity estimates" and input-output tables. If the prices of manufactured goods go up by ten percent, will people consume ten percent less, twelve percent less, eight percent less. And we simply don't know these numbers. An economist illustrates these issues, bacic micro economics. Similarly, there is a basic engineering question: how much steel does it take to build one windmill, how many doctors or nurses does it take to provide a certain quantity and type of health care. The latter is an input-output matrix. We only know what the prices are today and the amount consumed today. Yes economists can make estimates by looking over time, but although prices were different ten years ago and demand was different ten years ago, lots of other things were different then such as tastes and family structure, and even technology such as how long a car lasted.

Thus as each voter enters in their preference for what the taxes should be, they must also be asked to put in their estimates for all these parameters, how do each worker and invester respond to taxes. Of course, the web site would have estimates from the best economists a click away. But if the economists disagreed, the voter must choose.

And these estimates vary. Drs. Bruegger and Loertscher showed that even in a simple model, voters could be stuck in a local optimum. This was particularly if there are large external shocks to the economy so that they can't tell what changes are do to the policies for which they vote and which changes come from the external shock. For example, basic intermediate macroeconomics says that if interest rates increase, people will save more. But some economists said that the elasticity would be close to zero. My mother said that those who had a temperment for spending would rationalize not putting away for a rainy day and those who were by nature thrifty, would find a rationalization for saving. If interest rates are higher, they may save less, as a lower retirement nest egg would grow sufficiently to meet their retirement needs. These are the kind of debates of which voters must confront or resolve in their own minds, as they input their votes about the economy and taxes.

The second part of the article concerns trade effects and trade policies. This is not as relevant to the theme of this blog, but one thing that struck me is for large countries at least, the effect of free trade is very small. One estimate was that forming the European Economic Community only improved cost-benefit by the equivalent of 0.05 percent.

Thursday, August 5, 2010

Thoughtful Thursday, Corporations and Corporate Democracy

  1. Dodge Versus Ford Motor Company 1780 N.W. 668
  2. Joel Bakan, The Corporation:The pathological Pursuit of Profit and Power


    In the early 1700's in Britain, many confidence men created fraudulent corporations, the most notorious of them being the South Sea Company Bubble. Thus, in 1720, Parliament outlawed the corporation.
  1. In 1776, Adam Smith warned in Wealth of Nations, corporations inevitably would be victims of insider fraud. Managers could not be trusted to "steward 'other people's' Money."
  2. England repealed what was known as the Bubble Act in 1825, bringing back the corporate form.
  3. In 1853, Edinburgh Journal called for workmen to have a share of the ownership of the firm so they understand the concerns that now only a manager/owner understands.
  4. Gilbert and Sullivan satirized the corporation in Utopia Limited Though a Rothchild you may be, in your own capacity, As a Company you've come to utter sorrow, But the liquidators say "Never mind--you needn't pay" So you start another company tommorrow

  5. England limited Corporate liability in 1856
  6. In the 1890's states competed to have corporations incorporate in their state and made their corporate laws most friendly. As we know, Delaware was very successful in this regard, which effort to this day brings in money to the state.

Corporation Purpose

I am sure everyone here has heard that corporations goal is to make profit, improve the bottom line and increase shareholder wealth, generally by increasing the stock price. John and Horace Dodge invested $10,500 in Ford at 1906. Ford, famously, paid his workers more than the going rate. He also halved the price for his Model T. Bakan quoted him as saying 'I do not believe that we should make such awful profits on our cars. A reasonable profit is right but not too much.' And in this case, the Dodges sued Ford and this established the legal principle that managers and directors have a legal duty to increase profit. Robert F. Kennedy Junior recently gave a talk at our University to a packed Western Hall, our largest venue. He said that a corporation must maximize its value. He used the example of Walmart donating supplies after Katrina. It could do to that to make people feel good about the company. But it could not donate because there were people who really needed help. That would be spoliation of assets and it should be illegal. Thus, we must regulate corporations. Bakan cited Hutton versus West Cork Railway Company allowed this saying 'a company which always treated its employees with Draconian severity' would have bad employee relations but that 'charity has no business to sit at boards of directors qua charity.'

But according to Wikipedia that is not the case. The real problems was that the Dodges wanted a big dividend to start a competing car manufacturing company! Ford did not want this. And the court awarded a special dividend to the Dodges with which they started the famous Dodge company. And the case was much concerned with minority rights in a corporation as henry Ford owned fifty-eight percent of the shares. And it was about the argument of gaining market share versus profit. 'My amibition' declared Mr. Ford, 'is to employ still more men; to spread the benefits of this industrial system to the greatest possible number, to help them build up their lives and their homes. To do this, we are putting the greatest share of our profits back into the business." And in fact the complaint said asked that Ford restrained from taking money that would be given out as dividend and from building "fixed capital assets" including possibly an iron smelting plant versus distributing a cash surplus of sixty million dollars. At the time the shareholders were receiving a return from their original investment of sixty per cent per year!

In the share economy, we have similar problems with an individual, A loaning to another individual, B. B as a sovereign indivdual would have the right to vary his income, e. g., stopping work, going to medical school, etc. or vice versa. B might work for share of future income, from building a house where they would both receive money as it was rented out. Or B might work for a startup biotech firm--in exchange for the revenue if their drug succeeds. A is at the mercy of B's decisions, except where they represented waste. Thus A might take action if B decided to sit on the meadow and watch the grass grow, particularly, if A was living in B's house and agreed to pay a 20% of their income in exchange. In a share economy, people would not rent an apartment for a fixed amount of money; they exchange a share of their income for the right to live there. If there was no corporate form, we boil down to that in Ford vs. Dodge, because Ford still retained majority ownership even though Dodges contributed to Ford's business.

In reading the decision, I find, "The difference between incidental humanitarian expenditure of corporate funds for the benefit of the empoyees, like the building of a hospital for their use and the employment of agencies for the betterment of their condition, and a general purpose and plan to benefit mankind at the expense of others, is obvious...A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself..."

Fiduciary Duty

Many of the problems with corporate decisions are a director or manager self-dealing. Voting to approve the big purchase to the company they or their relative own. The manager reveals his conflict of interest. A group of disinterested directors or a majority of the shareholders approves the decision. I see no reason that a sortition jury could not do this. Thus a firm can hire the managers' wife when she really is qualified.


By contrast to my proposal, the shareholders have no power. In 1913, A Congressional Committee found that that not only had the shareholders never overthrown the existing management in any large corporation, they had not even started an investigation. The management is "virtually self-perpetuating."

I contrast a sistuation where randomly selected groups of shareholders, and shareholders would include the employees who receive a share in lieu of salary, make the decisions. As I outlined in that proposal, a certain percentage of each group could escalate a decision to a larger group or even force a vote of all members.

In the 1930's, AT&T advertised a picture of an older women looping at her AT&T Share Certificates with her children in the background and pronounced in another advertisement 'a new democracy of public service ownership' that is 'owned directly by the people--conrolled nto by one, but controled by all.' Now, we would have that same mother, sitting at her computer participating in the decisions, big and little, teaching her children, looking over her shoulder, about the company that they would one day inherit--I don't believe in stocks being sold.

Limited Liability

Now the corporate form by limited liability did allow middle class to contribute capital to large enterprises. And the idea was this middle class investor who may have invested a few thousand dollars should not lose their house and all their other savings should the aiport or railway go bankrupt with more liabilities than assets. Let's look at Ms. Jones from my earlier post. Should she lose all her assets if the doctor she financed commits malpractice during a delivery and a child is born with severe cerebral palsy. What if the plumber that the apartment complex hired causes a gas explosion killing dozens?

I distinguish contract and tort liability. In our current system, an enterprise can promise more than 100% of its incomes. This usually does not happen deliberately--I hope. It promises fixed payments totalling a million dollars a month at a time that its revenue may be several million a month. However, if the economy sours.... This is what happened to General Motors whose revenue halved and Pittsburgh whose population halved (reference,, 7811 which disappeared from the net in a few days), but which still has large pension and debt service obligations. But in a share economy, no enterprise can promise more than 100 percent of its revenues. Thus, unless it commits a tort offense, there is no problem with the business going bankrupt. As I mentioned in that post, the owners might liquidate if the revenue cannot cover the current variable costs.

But what about a BP spilling oil, Massey Coal having a mine accident, or an Arthur Anderson not auditing Enron properly resulting in many investors losing money. Or a small businesses delivery driver crashing into someone.

I propose the sortition juries in dealing with a tort case would have to decide how to allocate the costs. one seventh of Britain's total dividend income came from BP. These individuals certainly had no control over the decisions that led to the blowout and spill! Is it fair they lose their retirement?

In a sortition system, ordinary stockholders would have the authority to contribute to the day to day decisions of the enterprise. In the rig control room, the partners and employers could call in a sortition jury to make an important decision. What if there is another big spill like Macondo? The share holders would be individually judged as to what share if any they should bear. Computers keep good records. The sortition jury in the tort case could look at each juror: What did you know and when did you know it? What did you say? Did you try to bring the problem to other shareowner's attention. What did you vote? The Corporate Bylaws would have a mechanism where any shareholder or employee or even an outsider could bring the matter to the attention to a randomly chosen set of the shareowners. They could vote, don't worry about it--it's just a gadfly. Or they could say this is a real concern and escalate it further.

And, sortition jury would look at the general climate in a corporation. Bakan described (page 81) how BP was negligent in handling its Prudhoe Bay facilties. Massey's Upper Big Branch coal mine had five times violations than the national origin. In 2005, BP's big rig Thunder Horse had many problems, bad underwater welding and a valve installed backwards. JoulesBurn documented many other near misses in the Gulf of Mexico. The Texas City refinery disaster in 2005 was similar with 300 safety violations 21 million in fines. Workers were working twelve hours per day--reminds me of the concern about medical residents working twenty-four hour shifts. Occupational Safety and Health Administration revisited them in 2009 and found 700 safety violations and $87.4 million in fines--most because BP did not live up to its agreement after the 2005 disaster.

In the United States and Australia uses a mind and will test in corporate criminal liability. If it is run by a series of decisons sortition jury, it could look at the decisions as a whole. Do they give a wink and nod at safety violations? Or do we see 987 of the 1032 situations where sortition juries had the opportunity to act on safety situations being decided on the safety/conservative side.

Revocation of Corporate Charters

State governments can revoke corporate charters. And Elliot Spitzer and Robert Benson proposed that corporations that repeatedly release toxic waste or otherwise endanger the public can have their charter revoked. But, there are many small investors in any of these large corporation, and should they suffer for offenses they did not do, had no knowledge of, and had no way of stopping. I propose that a corporation would lose its governance to a sortition jury, forever if it is convicted of murder, a capital offense. It would be under the control of a sortition jury. The sortition jury would run the corporation as the board of directors, considering whatever stakeholders it wished to including investors. The sortition juror would command every move of the corporation just as a jailor controls the minute-by-minute activities of a prisoner.

Similarly, a corporation convicted of a lesser charge, that would be punishable by a few years in jail if done by a natural person, would find their affairs controlled by a sortition jury for the same length of time. They would have to avoid not wasting assets in the same manner that a conventional jail could not work a person to death, even thought the thirteenth ammendment specifically allows involuntary servitude as due punishment for a crime.

The Corporate Purpose

A corporation, by law's, sole duty is to increase shareholder wealth. in the opinion of Milton Friedman of Peter Drucker, that is as it should be. This creates a psychopath. It has no empathy for anyone else and have superficial relationships crafted by Public Relations types.

A true shareholder democracy, would allow the Walmart share holders to genuinely feel for the Katrina victims and put the full power of Walmart's distribution to get them things they need. One may argue that the role of a corporation is simply to make money for the share holders. The share holders could then give to whatever charitable enterprise they wish. If they all donated to the Red Cross, the Red Cross should simply contract with Walmart to buy at the market value whatever Katrina victims needed. To some extent, that is the Coase's work on the nature of the firm--is it more efficient to have several entities interacting or do everything within one organization. It depends upon the relative transaction costs. There are empirical sociological issues of group identity as well, would people get a better feeling, be more likely to contribute, as part of the identity: Walmart shareholder.

And it is a broader issue of Rule-Based utilitarianism vs. Original utilitarianism, which is of course beyond the scope of this blog. But we hear stories of top executives, top lawyers or partners in big accounting firms, deciding to leave those organizations and help a non-profit or become teachers in inner school districts. Utilitarianism would tell a public spirited individual with the talent and luck to be a partner in an accounting firm: stay in that job that brings to you hundreds of thousands of dollars. Spend only what you need to be socially acceptable there--I know that a partner at Big Four accounting firm must dress a certain way, and probably could not get away with living in a slum. Give the remainder to that cause. Would an individual who was fortunate to be a big tobacco lawyer do more for the anti-smoking cause by staying in that job--after all someone would take it anyway who probably would be at least almost as an effective litigator for the tobacco company for you. Secretly contribute money to the anti-smoking cause!

For Future Thoughtful Thursdays

Corporate Criminal Liability -- a good bibliography is in the Wikipedia article on this subject.

Rights of Minority ShareHolders and the fiduciary duty of one share holder to another.

Tuesday, August 3, 2010

Share Economy--how it might work.

The third posting here, I proposed share economy. A firm or enterprise or government does not have debts. When it does not have enough cash or fungible product to purchase something it needs, it grants a share of its income. (In this article, I limit myself to discussing shares that last forever.)

It is now 2060. Nurse Joan Smith owns a one percent share in an apartment building. She is free, so she marked on her mobile device that she is available for her investments. She's a night owl--she is up. There is a leak in one of the line B apartments in that building. It is starting to create a flood. The tenant calls the super who is in the apartment now and he video's the situation and clicks the button to contact all share owners for approval. He wants to call the plumber, $200.00 for an emergency house call. Joan along with five other investors gets the call. Their mobile's calculate the cost of this expense based on their share. In Joan's case, it is two dollars. She certainly feels comfortable. Since, it was marked an emergency and not everyone would have an opportunity to weigh in, 80% consent is required under the bylaws. However, Janet, a plumber living 500 miles aways, asks about shutting off the water to the entire line. They discuss that this means that the six tenants in the line won't have water in the morning. However, they decide to do that since Janet won't consent to her share of the expense on an emergency basis. The alternative would be for fourty percent of the group to vote to bother everyone and wake them up, as well as have approval of one employee, in this case the super. (This is all programmed into the bylaws of the corporation and those procedures are automatically enabled.) They all the hold the line while the super makes sure that he really can shut the water off. He does so, and the group do vote to give the plumber fourty dollars for going quickly, shutting the water and helping the tenant mop it up. They also set up the procedure for everyone to be contacted for an eight AM meeting to decide the permanent fix for the leak.

A few days later, unrelatedly, Apartment 2C became vacant. A young medical student presents wanting to rent the apartment. He had no current income but he did offer a one percernt life time share of his medical income in exchange for his rent. He presented his grades from Undergraduate School and recommendations, as well as video record of his study time during his undergraduate days for their perusal. He estimated his medical income from the Bureau of Labor Statistics data, and it certainly would have been attractive. But they won't get any money until he starts practicing, seven or eight years away--depending upon what residency he picks. This was not an emergency, so a random sample of share owners was convened. They each got votes proportional to their share; some on the call to discuss this thus have a higher percentage and some had a lower percentage. Based on the estimate, the bylaw computer estimated for Ms. Jones would get thirteen dollars every year he practiced. However, the others wanted more current income and she was outvoted.

However, Ms. Jones found his prospects attractive, and maybe him as well, so he send him a message that she would talk to some of her friends at the hospital. Several of the other nurses reviewed the records, they all had a surplus of income over expenses that needed to be invested. So they sponsored him, authorizing a share of their current income in exchange for his share of his medical income. With that, he went to an apartment complex down the street and the owners there took a share of the nurses income while he was in medical school and he signed over at the e-notary, one percent of his medical income. (A comment on any subsequent romantic involvement between Ms. Jones and the future doctor is beyond the scope of this posting!)

After the second "Great Recession" in 2025, the United States shifted to a share economy. Ms. Jones' grandfather, a construction worker, joined the team to build the apartment complex above and he got a six percent share but no money since the apartment complex was built on spec. He had rented a house to live in on 1/3 share of his income. So two percent of the apartment complex income went to the original owner of that house. When he passed on, each of his four grand children got one quarter of his assets, he had accumulated several other shares over the years. And so that is how Ms. Jones ended up with one share of the apartment complex.

And as our young doctor went off and practiced, he remembered the help that he got that day and many others. And sometimes a young college student would need medical care, and they would exchange a 0.1 share of their income for his professional practice. And each of our six nurses then ended up with a 0.002% percent share in each of their life incomes.

I talk about corporations and how larger corporations would run in the share economy in August Fifth's Thoughtful Thursday.

Sunday, August 1, 2010

Sovereign debt defaults

GMO has a wonderfully written piece on sovereign debt, an issue I touched upon here. Both I and other bloggers say his paper is a must read.

For those who don't have time to find it ont he net, here are the points that caught my eye. Many people point to debt to GNP ratio in their concerns

  1. Russia defaulted in 1998 when goernment debt was 12.5 percent of GDP.
  2. Japan has a debt of twice its GDP and its government bonds yield from 0.13 percent to 1.81 percent depending whether one looks at three months or three decades.
  3. Adam Smith and David Hume were very concerned about the real growth of English debt after the Napoleanic wars. Here debt was 250 percent of GNP and the percentage was similar in the interwar years and after woerld war II. During the first run up, the electorate, which was a small percentage of the demos, voted for deflation so their government debt holdings increased in value. And the debt went down from Napoleonic levels.
  4. In the depression, there were major defaults; 90% of foreign bonds sold in 1929 subsequently defaulted.
  5. There have been cycles of international ledning and default goign back to the 1820's. Often a bank panic in London or New York precipitates the wave of defaults.
  6. In 1820's, Greogor MacGregor posed as the rule of a fictitious Latin American country and got a loan from a London bank.
  7. Latin American countries defaulted several times. This started in 1820--shortly after their independence.j
  8. In 1557, Emperor Philip II of Spain defaulted--and they still had their colonies producing gold. The "first international credit crisis" Short-dated debt was 3.5 times revenues. Just before this default, he was paying fifty percent annual interest.
  9. Dudley Baxter in the 1800's said that governments in sourthern Europe were spendthrift. Spain defaulted thirteen times since 1800. Portugal defaulted five times.
  10. When countries were able to reduce their debt to GDP ratio, they did it by strong real growth as England did with the industrial revolution and its empire and the Scandinavians did.
  11. Public finance is a Ponzi scheme--people keep buying the debt of these countries, which money is used to roll over (i. e. payoff) earlier purchases of debt.
Henry T. C. Hu talked about GMO in his article in Business Lawyer. Richard Cheney, Senator John Kerrey and Harvard University use Gratham, Mayo, Van Otterloo and Company for asset allocaton and it regularly posts history and predictions thereto.

I will talk about this article later on portfolio asset class returns, "The New Portfolio Society, SEC Mutual Fund Disclosure, and the Public Corporation Model, August 2005, 60(4), page 1303.

For Future Thoughtful Thursdays

  1. Walter Bagetot The Danger of Lending to Semi-civilized Countries 1867
  2. Max Winkler foreign bonds: An Autopsy 1933
  3. Ilse Mintz, Deterioration in the Quality of Foreign Bonds Issued in the United States 1820 to 1830, 1951.
  4. Carmen Reinhart and Ken Rogoff, This Time is Different 2009.