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An Alternative to Capitalism and Planned Economy? A Third Way economic system? A way to reduce the Boom and Bust tendency of free markets? A way to narrow global wealth disparity by returning the financial benefits of using the Earth's natural resources to all inhabitants.

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  1. 1. UDI-ism or Unity in Diversity Stephen Lee October 2004 An Alternative to Capitalism and Planned Economy?
  2. 2. Market’s Invisible Hand? <ul><li>“ When individuals further their own interests, Adam Smith believed, they generally serve the interests of society as a whole. It is a remarkably seductive hypothesis, and sometimes it holds up; yet all too often, it doesn’t.” p.168 </li></ul><ul><li>“ Gerard Debreu of UC Berkeley and Kenneth Arrow of Stanford, both of them received the 1983 Nobel prizes for this achievement, … establish the conditions under which Adam Smith’s “invisible hand” worked. These included a large number of unrealistic conditions, such as </li></ul><ul><ul><li>Information was either perfect or at least not affected by anything going on in the economy </li></ul></ul><ul><ul><li>Whatever information anybody had, others had the same information </li></ul></ul><ul><ul><li>Competition was perfect </li></ul></ul><ul><ul><li>One could buy insurance against any possible risk” </li></ul></ul><ul><li>“ My research … on the consequences of imperfect and asymmetric information (where different individuals know different things) … has shown that one of the reasons that the invisible hand may be invisible is that it is simply not there .” p.13 </li></ul><ul><li>“ Imperfect information presents some individuals with the opportunity to act in ways that allow them to benefit at the expense of others, whom they are supposed to serve .” p. 168 </li></ul><ul><li>“ The invisible hand theory was a great relief to CEOs, for it told them that by doing well (for themselves) they were doing good (for society). Not only should they feel no guilt in greed; they should feel pride .” p.14 </li></ul>Quotes from “The Roaring Nineties” by Joseph Stiglitz, 2001 Nobel economist, with Akerlof and Spence
  3. 3. Market Failures <ul><li>Among the “market failures” … were those associated with agency problems , where one person has to act on behalf of another . Because of imperfect information … and because of the failure to align incentives , it is often the case that he does not . p.14 </li></ul><ul><li>A central problem of modern economics is how to align interests – how to provide incentive structures that make the agent more likely to represent his or her rightful clients. p. 168 </li></ul><ul><li>One of the most important market failures – one to which Adam Smith himself called attention – resulted from the striving of businesses to suppress competition . p.105 [why anti-trust policy is needed] </li></ul><ul><li>The California’s energy deregulation did not work out the way that its advocates claimed… The experiment with deregulation was a debacle. California had led the experiment in electricity deregulation. America, and California, had to pay the price. p.250 </li></ul><ul><li>The smoking gun(s) might never have been discovered had it not been that Enron’s greed eventually led to its own bankruptcy and the resulting court processes eventually uncovered the documents showing how the market manipulation processes worked – p.256 </li></ul><ul><li>Maximizing personal gain <> maximizing shareholder profit <> maximizing economic efficiency <> maximizing public good </li></ul>Quotes from Joseph Stiglitz’s “The Roaring Nineties”
  4. 4. The Danger of Booms and Busts in Markets <ul><li>“ Bubbles are dangerous, because when they burst – and they always do – they can leave havoc in their wake…” p.58 [“Take the real estate bubble of the 1980s… it partly led to the collapse of the savings and loan associations, costing the government – the American taxpayer – more than $100 billion. p.63] </li></ul><ul><li>“ During the bubble, of course, all kinds of resources get wasted – in amounts that are often hard to fathom, and make government waste look small by comparison.” p.63 </li></ul><ul><li>Booms become bubbles when there is </li></ul><ul><ul><li>irrational exuberance, i.e., high prices not based on true information, “fundamentals” or basic facts, but “based on the irrational whims of market speculators… then investment will go helter-skelter” (p.61), i.e., the market will not allocate resources efficiently </li></ul></ul><ul><ul><li>Imperfect information about other bulls in the herd making the same decision at the same time, e.g., to build a power plant, without full consideration of long term risks (not a quote) </li></ul></ul>Quotes from Joseph Stiglitz’s “The Roaring Nineties”
  5. 5. The Danger of Booms and Busts in Markets <ul><li>“ The very word “telecommnications” speaks of boom and bust: in just nine years, from 1992 to 2001, this industry’s share in the economy doubled… But by 2002, half a million people out of work, $2 trillion in lost market capitalization. Dow Jones communication tech index down 86%... Twenty-three telecom companies bankrupt.. Investments of some $65 billion poured into the telephone industry between 1997 and 2001 were worth under $4 billion.” p.92. </li></ul><ul><li>Busts become prolonged if decisions are based on today’s profits and ignore externalities, i.e., social costs </li></ul><ul><ul><li>“ Fire workers as soon as it is clear that you don’t need them… Firm loyalty – either of workers to their firm or the firm to its workers – were values of a bygone era.” </li></ul></ul><ul><ul><li>“ This meant that employment fell far more quickly as the economy went into the downtown.” p.183 </li></ul></ul><ul><ul><li>Company savings at the expense of unemployment benefits and other social costs which are shifted to the government </li></ul></ul>Quotes from Joseph Stiglitz’s “The Roaring Nineties”
  6. 6. Overcoming NIMBY Against Projects for Public Good <ul><li>Not In My Back Yard (NIMBY) syndrome is a major hurdle </li></ul><ul><li>Examples are: </li></ul><ul><ul><li>regional transportation </li></ul></ul><ul><ul><li>States-crossing transmission lines </li></ul></ul><ul><ul><li>Location of low-income housing </li></ul></ul><ul><ul><li>Many other “what’s in it for me?” </li></ul></ul><ul><li>A new economic framework is needed to solve this problem </li></ul>
  7. 7. Market Reform <ul><li>Under Capitalism and imperfect Market, Maximizing personal gain <> maximizing shareholder profit <> maximizing economic efficiency <> maximizing public good </li></ul><ul><li>Third Way – an alternative to Capitalism and Socialism/Central Planning </li></ul><ul><ul><li>Unity in Diversity (UDi-ism – pronounced you-dye-ism) </li></ul></ul><ul><ul><li>Preserve the creativity and energy of selfish interests </li></ul></ul><ul><ul><li>Channel that diversity into a common interest </li></ul></ul><ul><li>How? </li></ul><ul><ul><li>Externalities taken as free resources will be internalized into economic decisions by corporations and individuals </li></ul></ul><ul><ul><li>Monetize quantifiable social costs, e.g., environmental costs and include them in Tier 2 pricing (may be implemented in the beginning as a displayed price adder for public awareness of the true cost of a product) </li></ul></ul>
  8. 8. UDi-ism (Unity in Diversity) <ul><li>UDI Cost = Tier 1 Cost + Tier 2 Cost </li></ul><ul><li>Tier 2 Costs capture externalities </li></ul>What if the price of a hamburger includes a medical cost due to health effect? What benefits will it bring to the consumer and to the country? What new and healthier food will become good businesses?
  9. 9. Example of Tier 2 Concept <ul><li>Sin tax is a form of Tier 2 cost </li></ul><ul><li>Gasoline tax is another form of Tier 2 cost </li></ul><ul><li>Tax is not based on market principles </li></ul><ul><li>Tax is a stick not a carrot </li></ul>Today’s Price = Tier 1 Cost + Cigarette Tax UDI Price = Tier 1 Cost + Tier 2 Cost (for health effects) <ul><li>How is Tier 2 pricing superior to a consumption tax? </li></ul><ul><li>Induces better products and rational consumer behavior </li></ul><ul><li>Responds to changing conditions and values of the consumers </li></ul><ul><li>Tier 2 revenue goes into social accounts </li></ul>
  10. 10. How to Set the Tier 2 Prices <ul><li>Some Ideas: </li></ul><ul><ul><li>Poll the residents of different communities to place a dollar value on each of the social costs and benefits associated with a proposed project </li></ul></ul><ul><ul><li>The methods for calculating these costs and benefits may be set by objective and scientific boards with regular polling of people’s changing values and preferences </li></ul></ul><ul><li>What social costs & benefits? And who and where? </li></ul><ul><ul><li>Land use </li></ul></ul><ul><ul><li>Vegetation effect </li></ul></ul><ul><ul><li>Wild life effect </li></ul></ul><ul><ul><li>Human health effect </li></ul></ul><ul><ul><li>Interference with communication </li></ul></ul><ul><ul><li>Aesthetics </li></ul></ul><ul><ul><li>Water use </li></ul></ul><ul><ul><li>Air quality </li></ul></ul><ul><ul><li>Cultural or historical </li></ul></ul><ul><ul><li>Economic benefit from construction </li></ul></ul>
  11. 11. Concept of Tier 2 Assets <ul><li>Tier 2 assets (e.g., air, water, land, health) belong to the states and the citizens </li></ul><ul><li>Create a Tier 2 class of investment capital (may change corporate governance and voting rights) as private companies use Tier 2 assets in their factories or plants </li></ul><ul><li>Distribute Tier 2 revenues and benefits to all contributing parties in social accounts or as financial incentives. (This turns doing public good into personal incentives. Social accounts become a realizable personal asset, e.g., distributed by the State as tax rebates or added to retirement benefits.) </li></ul><ul><li>People (investors, management, workers, customers, residents, and regulators) will then behave in accordance with the objectives of minimizing the total Tier 1 + Tier 2 costs (UDI cost), which approximates all direct and social costs </li></ul>
  12. 12. UDi-ism (Unity in Diversity) Tier 1 Costs (Direct Costs) UDI Cost = Tier 1 Cost + Tier 2 Cost * Best UDI Decision Tier 2 Costs (Public Good) Decision is not optimal if Tier 2 costs are ignored
  13. 13. How Profit Maximization May Become More Aligned with Public Good <ul><li>If Tier 2 costs are actually charged with real currency </li></ul><ul><ul><li>Firms that consume or degrade public good in its production process pay the State a Tier 2 cost (based on community’s value) </li></ul></ul><ul><ul><li>Company’s UDI profit motive = Maximize (Revenue - Tier 1 costs - Tier 2 costs) </li></ul></ul><ul><ul><li>A clean power plant will have a competitive edge due to lower UDI cost of electricity </li></ul></ul><ul><li>If Tier 2 costs are implemented as price labels only </li></ul><ul><ul><li>The State may let the firm with clean power production receive a tax credit equal to part ( α ) of the Tier 2 cost reductions </li></ul></ul><ul><ul><li>Company’s UDI profit motive = Tier 1 profit + α x Tier 2 savings </li></ul></ul><ul><ul><li>This will tilt the firm’s decision to give Tier 2 savings some weight </li></ul></ul><ul><ul><li>Design question: what is the threshold value of α to be effective? </li></ul></ul><ul><ul><li>May use law to require company to use full Tier 2 savings even if the company may only receive α of the total in tax rebate </li></ul></ul><ul><li>Corporate tax rate has a component decided by the public based on annual evaluation of the company’s record on improving public good </li></ul>
  14. 14. How Boom and Bust Cycles Can be Moderated by UDI-ism 3 Incentive Structures Scales = Economic Health Years Tier 1 Short-term Profit Only
  15. 15. How Boom and Bust Cycles Can be Moderated by UDI-ism 3 Incentive Structures Scales = Economic Health Years Central Planning
  16. 16. How Boom and Bust Cycles Can be Moderated by UDI-ism 3 Incentive Structures Scales = Economic Health Years The UDI profit motive would also dampen the boom and bust cycle of markets because the Tier 2 costs are typically long term and corporate governance would be influenced by Tier 2 stakeholders, i.e., States and residents who contribute Tier 2 capital in return for UDI capital ownership UDI Profits
  17. 17. All Parties Are Winners Under UDI-ism <ul><li>Investors and Businesses get </li></ul><ul><ul><li>Consensus from the states and the communities to build truly economical projects </li></ul></ul><ul><ul><li>True market values for investments </li></ul></ul><ul><ul><li>Long-term competitiveness, sustainability and profitability </li></ul></ul><ul><li>States and residents get </li></ul><ul><ul><li>Fair compensation for social costs </li></ul></ul><ul><ul><li>Benefit of a region-wide beneficial investment </li></ul></ul><ul><li>Customers pay fair and true costs </li></ul><ul><li>Economy is improved due to true economic efficiency </li></ul><ul><ul><li>Projects would be optimized to minimize total UDI cost </li></ul></ul><ul><li>UDI-ism may be a third way economic system which may fix the problems of today’s capitalistic markets </li></ul>
  18. 18. More Information <ul><li>About the author </li></ul><ul><li> </li></ul><ul><li>More papers and presentations about Unity in Diversity (UDI-ism) </li></ul><ul><li> </li></ul><ul><li>Application to CO2 Reduction in Electricity Production </li></ul><ul><li> </li></ul>