Investing in the Poor

The Unincorporated Man is a science fiction novel in which shares of each person's income stream can be bought and sold.  (Initial ownership rights are person 75%, parents 20%, government 5%–there are
no other taxes–and people typically sell shares to finance education and other training.)

The hero, Justin Cord a recently unfrozen business person from our time, opposes incorporation but has no good arguments against the system; instead he rants on about "liberty" and how bad the idea of owning and being owned makes him feel.  The villain, in contrast, offers reasoned arguments in favor of the system.  In this scene he asks Cord to remember the starving poor of Cord's time and how incorporation would have been a vast improvement:

"What if," answered Hektor, without missing a beat, "instead of giving two, three, four dollars a month for a charity's sake, you gave ten dollars a month for a 5 percent share of that kid's future earnings?  And you, of course, get nothing if the kid dies.  Now you have a real interest in making sure that kid got that pair of shoes you sent.  Now it's in your interest to find out if he's going to school and learning to read and write.  Now maybe you'll send him that box of old clothes you were thinking of throwing away.  Under your system you write a check and forget about the kid, who'll probably starve anyway.  Under our system, you're locked into him.

…the real benefit comes about when those 'evil, selfish, horrible corporations' get involved.  How long will it take for a business to realize that there's a huge profit to be made in those hundreds of millions of starving children?…Imagine a world where a bank gives a loan to a corporation to build a school, hospital or dormitory.  Not because its the right thing to do; who cares!  They'd do it because it's the profitable thing to do.  And because of that, my system, not in spite of greed and corruption and incorporation, but because of it, will work better than yours in any time period with any technology you choose."

So who do you stand with, JC or Hektor?

Hat tip to Robin Hanson for lending me the book and from whom I cribbed the description of ownership rights.  Hanson offers other thoughts on the novel.  And here are earlier comments from Reihan Salam.


We already have entities that can build schools and provide social services to the poor in return for a >10-20% cut of future earnings. They're called governments, and they even have lower costs of capital than private corporations.

Now, they're not necessarily NPV maximizers of tax/services value, or of GDP, or any other measure I can think of, so I'm not going to say that their tendency to not provide such services is proof of their unprofitable nature. Instead, I'll just say that anyone who thinks this is an ideal way to provide effective charity could probably find even greater bang for the modern-day buck through actions of an accountable government.

Considering how Bill Gates and Warren Buffet have thrown some of their money behind lowering third-world fertility, it takes some imagination to think that corporations would find the poor of the earth a resource worth investing in more than they do now if only they had a claim to some portion of the dollar or ten a day that each might produce. Sure, such a system could direct money at children who won't be productive for a decade or more, but the third-world has plenty of spare twenty-year-olds who could be hired right now if their labor were worth something to a corporation.

The governments' cost of capital is perverted by the ability to inflate and tax. That is, it is not a real cost of capital, and it is not superior to those it crowds out by its nefarious means.

This is probably covered in the book: How do you deal with insider trading?

I'm willing to dispute the any time period with any technology you choose part. In most pre-modern circumstances (and maybe even modern ones, see Greece), the owned person can commit fraud more easily than the owner can detect it, making degrees of ownership less than outright chattel slavery difficult to enforce.

(And if fraud is detected, the minority shareholder may even be better off keeping keeping their findings private, because if publicized, they would destroy the value of their holding. The market in all but the highest-value individuals' stocks has to have all of the problems of low-volume, illiquid markets.)

Some sort of modern day capitalist twin of Edward Bellamy's 'Looking Backward', by the sound of it, complete with the charmlessly didactic narrative.
If I lived under this system, I believe I'd try to boost my value via education, hard work or what have you, then sell all my shares in my income for cold hard cash and retire (one version of the insider trading problem). Remember, this isn't slavery - they only own shares of my income, they can't compel me to produce per se. Once my determination to abuse the system was sufficiently established I might be tempted to buy back my now presumably much cheaper shares...

you gave ten dollars a month for a 5 percent share of that kid's future earnings?

Since the kid is a kid, who approves this deal or doesn't? If it's the parents (and they're not restricted to selling their own initial shares), I foresee big principal/agent problems. In some ancient societies parents could sell their children into slavery, and sometimes did. In this society parents who are already down to a small share of their own earnings would be forced to sell shares of their children just to afford prenatal care and maternity services, let alone support the children after birth. Most of the population would probably be born mortgaged.

Also, most people probably aren't worth investing in on those terms. $10 a month (never mind that that's nowhere near enough for child health care, education, or even food or clothing) from, say, age 5 to 18 is at least $1500 and the 5 percent earnings share has to be discounted once for mortality and again for the fact that it occurs many years in the future. (Is it a share of gross receipts or is the individual allowed to deduct operating expenses like food and shelter before splitting his profit with his shareholders? If the latter, many individuals will never turn a profit at all.)

Also also, the government in this scenario doesn't bring in nearly enough money to function at 21st century tech levels (i.e. defending against criminals and attackers armed with 21st century tech, providing an infrastructure that includes an electrical grid and communications networks, etc.) unless it also has the equivalent of a sovereign wealth fund providing education and other services in exchange for shares in addition to the starting 5%. Even then it's dubious that the government could make enough to fund essential government services.

Finally: terminal illnesses and congenital disabilities prove that individual is not economically worth investing in. So this system can't really replace social insurance even under ideal conditions (unless "ideal conditions" include "medical technology that can cure anything, even Terri Schiavo" -- and who approves the price of *that* deal?).

Retirement, too. If you don't own enough shares in people younger than yourself, or if they die or have economically unproductive lives, there's no way you can sell shares in your own future income after retirement. The government is too stripped down to run a Social Security-like system and it's obvious that in this universe private charity is a fool's game when you could be doing private investment instead.

You would only get an idea like that in a socialist society where people are treated like economic units. Parents make tremendous investments in their kids and expect nothing in return. They provide the physical, emotional, and psychological support so important in families but totally lacking in welfare (socialist funded) families. Of course, the parents still need the political and economic freedom to create a better life for their children.


You asked, "How do you deal with insider trading?"

A better question: Why should you deal with insider trading?

There are other side effects here worth mentioning.

Gender splits in value. In marriages it is not uncommon for one partner to tale time off around early child rearing, and to work less hours due to family obligations. This is usually the female partner. Statistically, for the same level of investment women tend to produce less income as a result. We currently choose as a culture to gloss over this. Under this system the result would be investors requiring more equity for the same capital resources invested in women, which would feedback to make it even more attractive on margin for women to carry out activities in the unpaid economy (household and child rearing), which would feedback into the income stats, thus further increasing the percentage of future income the market would demand for the same unit of capital.

Net-net, you would expect a rapid decline in the investment of capital in women, which doesn't feel like a desirable outcome.

@Kyle, regarding insider trading --

All sales/purchases by the individual are, by definition, insider trading. Off course people will try to promote themselves when selling shares. Saavy investors will see through that, just as they do today during an IPO.

It's called "due diligence."

@quadrupole: I don't think this is ignored - I think the lower expected value of female labor due to pregnancy and childrearing probably explains a lot of the remaining wage differential between men and women, although I've never read/heard a serious discussion about it.

Doc Merlin makes an interesting comment to Annonymous 7:42's comment, and my endorsement with this comment:

Unlike from the shareholders in the novel, you cannot buy yourself back from the government."

But, rather defeating the role of government, I think his comment actually supports annonymous's comment and shows why government, rather than a private market, everything else being equal, might be a better option.

Consider this problem: my next door neighbor is a healthcare executive at an HMO. He tells me: if I could be assured that the insured would stay with us for five years, we might do more preventive work with an insured; but, if we make this investment in the insured's health, or do something that is preventive, the result might not show up for five years: and, in the meantime, the insured will have gone to another carrier because now my rates have gone up (in the short run) because of this program.

The fact that you can't opt out of your government, as Doc says, actually supports the argument that things can more effectively be done by the government than by the market which will not provide that option: the government captures the gain from the investment in the later period.

You do too.

I only read the first few comments, but isn't the point not that resources are distributed to the poor, but that the distributor of those resources has an incentive to see that they're used "profitably"?

For example, instead of simply building a school and purchasing books, might an investor spend time tutoring the students in mathematics to enhance their future value?

I like it with a couple of caveats:

1) No default ownership for parents. The incentives to raise a child properly should not include the present value of future cash flows. As Chris said above, major principal-agent problems. Kids should be able to sell shares to their parents once they reach a certain age.

2) Shares do not include board voting rights. This is not slavery; a shareholder cannot be allowed to exert any sort of control as a result of their investment. The cuma sum laude Wharton grad changes his mind and wants to make music? Tough, you should have done better psychological due diligence before you invested.

Otherwise, you have two adults voluntarily entering into an agreement, so I don't see how you could legitimately oppose this.

To answer the question about loans, consider our current tax code.

If a person gets a valuable degree and earns high income, their student loan interest deduction is phased out.

If you earn a low value degree or don't get a job, you can get deferments, forebearance, and the full value of the interest deduction.

Now Obama wants to forgive student loan principal for "public service" which will include a broad range of his public sector union buddies.

In other words, we are subsidizing failure and punishing success.


Otherwise, you have two adults voluntarily entering into an agreement, so I don't see how you could legitimately oppose this.

Almost all investment that is important in a human capital sense occurs before the investee reaches legal majority. Even college admissions are pretty much decided by then. Contracts between adults would be the smallest part of this arrangement.

If you can't contract with children to buy shares of their future income in return for education, and contracting with their parents is limited to the parents' own money/shares and not shares of the child's future income, then you can't educate the children of poor parents at all; they have nothing to pay for it with. Which is exactly the problem public education was created to solve in the first place.

P.S. Wait a minute, why am I accepting your unspoken premise in the first place? Deceptive contracts are more common than dirt and much more dangerous. The equivalent of payday lending or cash-out refis in that universe would be unspeakable -- and perfectly legal.

I just finished it. I got through it, but only barely. It is a grace C effort. Very amateur in many respects. They are not very good writers. They shift perspecive too much. They tell instead of showing. There is little drama; strangely little curiosity of the protagonist; the antagonist, "Hektor," is a horribly silly and uninteresting character.I wonder if they switched the writer about half-way though--the writing improves in the middle section, but then again degrades near the end. Like they are in a hurry, and take even less time at showing instead of telling.

Don't get me wrong--there are flashes of ... insight behin the scenes. These are thoughtful, quasi-educated guys (eduated in the intellectual libertarian sense--they know just enough to impress laymen and to sound like they have Deep Thoughts). It's fun to read just b/c of this wacky idea... but they tell instead of showing--a LOT. They just explian people's motivations and have too many shifts in perspective, sometimes within the same paragraph. The whole plot makes no sense--they never explain exactly what incorporation means, or how it differs from taxation; they never explain why the most you can have is 75% of yourself--the state gets 5%, your parents 20%--what if the parents give you back your 20%? then you have 95. They never explain why majority is so important--or exactly what control shareholders have over you other than a share of "profits."

They have a confused notion o money--they talk about private companies competing by issuing money: you have AmEx credits which are useful for purchasing one type of commodity, Mars credits useful for purchasing another type of thing--that's how they see specialization! Instead of a universal money--that's what a money is, a universal medium of exchange--they see an advantage to different ("private") currencies that are used to buy different types of goods. ?!

The writing is clunky, hamfisted. Characterization just horrible. The Hektor antagonist is a joke. Plot development is bad. They don't build up to things; they just announce. I can't tell if this book is intended as a spoof or criticism of libertarianisn (or capitalism) or not, or if they are even sure. On the one hand the future society is advanced and peaceful. But then they intimate it's heading towards totalitariansimm... but they don't do anything to demonstrate that at all or back it up. And they don't show why the taxes that they hold up as a better model to incorporation are really different. They don't explain why Justin is so against incorporation, nor why others care so much that he is. The riots make little sense. The horriblely drawn chacter of Hektor made it hard for me to enjoy it. The technology is crude and unimaginitive.

But ... the authors seem earnest and try hard. I think it's about as good as they can do. I'll read the sequel probably.

I think framing has a lot of impact on this issue. Instead of saying that a corporation can own shares in your income, how about saying it is like a loan that you wont get into trouble ever paying back, but will have to pay more if you become rich. Indeed, I think this frame is better. This can effectivley act as an inequality reduction policy without mandatory taxes. Even after taking into account the less hardworking/talented may receive smaller investments, it will help a very large number of people who are mainly poor because they started life poor.
As someone who supports redistribution by goverment(except that i would like to see direct transfers instead of inefficient large programs), this is something i would like to see happen. Also, I remember reading about something like this about Australia giving out students loans for which the amount you repay depends on your salary.
For people who are worried that this is reminiscent of slavery, one could have a clause that there is a minimum percentage(say 35%) that you cant below. Like bankruptcy laws where the lender can auction off your property but you have a right to keep some minimum income, your car, excluding rent payments etc.

"If someone owns a part of my monetary income stream, I will quickly transform as much of my compensation as feasible into non-monetary components."

Exactly. Wouldn't this just mean that every employer provides food, housing, medical care, internet, cable TV, etc instead of "income"? Just like how many CEOs only get "paid" $1 a year today.

I am very glad to have this topic.I would say the importance of investing cannot be overstated. Money is a fluid thing. Something worth one dollar one day could cost significantly more the next day.

lumpens will have big incentives to kill their parents

In spite of greed and corruption and incorporation,will work better in any time period with any technology you choose. What I believe in, There is always the incentive to earn money. After all, you are keeping a fraction of what you are earning.

I think most of the objections raised to this system are not unreasonable, but when compared to the status quo are not really so bad.

Giving parents 20% may encourage some parents to put undue emphasis on the child's financial prospects while ignoring non-monetary aspects of the child's welfare. On the other hand, some loving parents may have more children because they know it won't be as much of a financial strain.

Some interesting points I've seen raised:

- comparison to the current degree of government ownership of individuals (Doc Merlin - May 19, 9:21)
- Bill (May 19, 11:02) responds to Doc Merlin, but fails to account for the fact that government employees face a principal/agent problem; they aren't residual claimants on individuals and so have no incentive to invest in them.
- residual claimancy problem (Kyle - May 19, 9:45)
- taxes, like this system, encourage individuals to take their income in non-taxable forms (Ken Nelson - May 19, 12:24)
- IRS lobbying in favor of this, more complex reason for the IRS(framing - May 19, 5:54)

As it stands, the closest there is to this system is micro finance, although there the lender has incentive to ensure the borrower earns enough and its up to the borrower to exceed expectations.

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dazzling and outstanding; every girl will be happier

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