Howard Reed | An alternative to universal basic income

With the federal government – and indeed several Western countries – quickly acquainting themselves with the concept of wage subsidies, proponents of universal basic income quietly (or not so) have been wondering if our current crisis would be a convenient segue to their ultimate aim. Their recognition of problems with our economic structure is welcome but the idea of the state being responsible for the redistribution of cash to every citizen is problematic.

Automation is a certainly a threat to the existing economic order as it is slowly eroding the pyramid of labour at its base. As machines and the algorithms that run them become capable of increasingly complex tasks – replacing workers – the social contract and the resultant tense thread tying labour and capital together is being frayed.

This tension has provided the stability that allows modern societies to thrive. Whilst workers can no doubt reskill, my personal experience suggests that at some point in the majority of domains, humans will no longer be able to compete with machines if the benchmark is efficient production. It follows that income will increasingly flow to the shareholder at the machines themselves have no particular demand for it beyond their maintenance and repair.

There is also no doubt that the distribution of wealth is becoming unequal. Since the 1980s the demands of the investor has bred an insipid culture in financial management that regards the market not as the most efficient means for allocating resources but merely a capital pump for transfer of wealth. It should be no surprise that this machinery is working as intended exploiting the increasing power mismatch between labour and capital.

I will not argue that the twin forces of automation and greed should be abolished. In attempting to we would squander the realisation of a dream to rid human affairs of menial labour – a project I remain all for. Greed – or more preferably a competitive spirit – is a necessary driver of any market.

I will however argue against the intervention of government directly into dealing with these two issues as a universal basic income would require. This is because it potentially de-couples the citizen from the economic life of the country and in doing so places the task of hedging that income over their lifetime on the state.

Instead of universal basic income, I would propose that each citizen receives a share in each company over a particular size. The sum total of these citizen shares could be up to but would be no more than 50% of said company. This would be a voting share which could be allocated to a proxy which could be an interest group or even a political party. The share would also be non-transferable and expire with the citizen. This share will be equivalent in standing to those held by private investors in terms of distribution of dividends and voting.

Having a stake in the majority of the economy in this way provides an income and a signal to the citizen. In tough times, this signal will prompt some if not the majority of people to develop more sources of income such as employment or starting their own businesses. In good times, all share in the boom. Those with any financial nous will squirrel some of their income away whilst most may end up relying on fund managers in much the same way we do with superannuation today.

Retaining private investment is an important counterweight; otherwise this scheme is simply communism. As I have stated earlier, tensions are important for stability. They provide a dynamic equilibrium that can respond to changes in fortune. This scheme recasts the social contract from one between worker and owner to one between citizen and investor.

Giving citizens a vote in the decision making of companies allows them to dictate directly to companies their desires (if they wish) rather than through the indirect route of government legislation. Whilst this would thrust politics into the general meetings of every major company, increased scrutiny of boards would be a good thing.

The alternative in UBI would force the government to intervene increasingly in the economy, asserting control in order to manage the risks inherent in a gargantuan welfare system whilst its citizens can afford – in the medium term at least – to ignore problems developing in the economy. Typically this disinterest would only be resolved once the economy crashes leading to an under-damped response leading to more instability.

What would companies gain from this massive transfer of capital and corporate power? I would propose the abolition of taxes on business possibly even extending to other sources of government revenue such as royalty payments. Taxation of companies suggests they should have representation in government as the citizen enjoys. Whilst legal personhood for corporations has its usefulness, I am uncomfortable with any justification that extends their influence into government for similar reasons we have historically separated church and state.

This represents a colossal reform but one I believe is achievable from a technical level. Given the information technologies that exist today, very little if any of the transactions that would underpin this system would be mediated directly by government. In implementing it we have an opportunity for the benefits of automation to productivity to be shared by all and an incentive for the citizen to remain connected to the economic life of the country.

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First, some choice lines from selected replies…

Mr Reed paints with a broad brush, and it would be churlish not to respond in kind. In fact, I’m going to dispense with the brush altogether and just throw paint at the wall in rage – confident that whatever abstract splatter I produce will be more coherent than Reed’s ejaculatory mess.

…the scheme means that citizens are simply huddled together in the same overcrowded boat – rising and falling together, yes – but ever more disengaged from the titanic forces causing the tides.

Companies benefit greatly from government expenditure, for example having an educated populace to draw labour from, a functioning legal system in which to conduct predictable business and settle disputes, utilisation of state funded infrastructure etc. This alone creates an obligation to contribute to the systems from which benefit is derived… Removal of corporate taxes places the burdens for this more on individual taxation and consumption for [education, health, disability care etc] to continue

[A]llowing citizens to proxy their votes to political parties is an outrageous idea. Giving the LNP 10 million votes in BHP automatically introduces a huge conflict of interest and undermines all political policies.

…Mr Reed’s proposal would make today’s “capital pump” look like a lazy ceiling fan.

Why should we human beings, born free, be reduced to oiling the machines?

Finally, Arkady Galt responds…

I am happy that the author is promoting thoughtful conversation about inequality by throwing his hat into the ring to critique one of the leading proposed remedies and add his own novel idea to the mix. Whilst I wholeheartedly agree that rising inequality and the birth of ‘the useless class’ due to automation and capitalism is dangerous and needs action, I think there are serious issues with the argument against Universal Basic Income and the alternative citizen shareholder proposal. Over the course of this critique of the critique, I will highlight how the proposal is like using a sledge hammer to fix the issues with UBI, but then wildly missing the target and smashing the economic floor whilst the real problem still remains. Finally, I will suggest some alterations to UBI that might assuage the author’s concerns and propose additional measures to cure the disease of inequality and usher in the age of ‘noble leisure’ that has been a dream since the time of Aristotle and could soon be within our grasp.

Before getting to the meat of the argument though, I cannot resist taking the bait and calling out this poetic but confusing piece of hyperbole that muddies the otherwise sound introduction to the nature of the inequality problem:

Since the 1980s the demands of the investor has bred an insipid culture in financial management that regards the market not as the most efficient means for allocating resources but merely a capital pump for transfer of wealth. It should be no surprise that this machinery is working as intended exploiting the increasing power mismatch between labour and capital.

I don’t think any investor or financial manager has ever participated in the market with the altruistic goal of efficiently allocating society’s resources and even (or especially) Adam Smith would acknowledge that capital is invested with the utterly selfish goal of maximising returns on the investor’s money within the level of risk they are comfortable with. With the confusing talk of malfunctioning ‘capital pumps’, perhaps the relevant change the author was hinting at in the 80s is demand for higher returns in shorter timeframes. This change in investor expectations does promote higher risk ventures, more speculation and less investment in long-term innovations with their subsequent productivity enhancements. This is a problem for economic health and stability that will still exist when shareholders are given their shares ‘for free’ and calls for other reforms specifically targeted to combat short-termism. Also, I don’t think you can blame companies for acting within labour laws to maximise profit for their investors because it is the ideal role of governments (and perhaps unions) to set rules to avoid exploitation of low-skilled workers and the resulting inequality at this micro-economic level.

The main argument against UBI is that it disconnects people from the economy and I agree with this. However, the proposed citizen shareholder mechanism will not be very different top UBI in practice. Most shareholders today, who actually toiled to pay for their shares and did some analysis to select them, are very passive and content to let executives maximise profit so they can just receive their regular dividend cheques and enjoy capital growth. They are connected to the economic cycle in that they notice changes in returns but there is very little they can do about this fluctuation in reality, especially in downturns when options for new income are sparse. I would expect that when people are given 100 shares selected for them and have no ability to trade or sell them (the most important feedback given from society to companies), they will care even less than today’s shareholders. Whilst they will notice the economic cycle, they are still disconnected from the economy itself in that they are not personally contributing any value to it and hence are still ‘useless’ with all the negative impacts associated with this.

The other arguments against UBI are largely statements with justification assumed, but such assumptions must be challenged. There is a thread of disillusionment with a government run by political parties that implies they cannot manage a UBI redistribution mechanism, but this is ironic considering the alternative proposal endorses company boards becoming 50% controlled by those very same political parties! I would agree that government bureaucracies are often inefficient and political parties are often corrupt and self-serving, but UBI is frequently advocated by the ‘small government’ lobby precisely because it replaces complicated welfare arrangements with a simple universal automated money transfer system from tax payer to citizen. Just like there is an assertion that IT systems of today could easily manage the citizen shareholder system, it is safe to assume these systems could also manage the UBI’s transactions.

Regarding the asserted problem of governments having to hedge future UBI responsibilities and increasingly intervene in the economy to manage this, the future risk could, if desired, be outsourced to individuals in the same way as was proposed in the citizen shareholder scheme. Governments could scale their UBI payments based on current tax revenue and enforce compulsory superannuation as the mechanism for people to guarantee their own future security. However, I think Keynesian thought and recent GFC and COVID-19 experience shows that when the economic cycle turns down it is counterproductive for governments to stem the flow of money so I think this concern is not worth worrying about.

Although the citizen shareholder mechanism makes it seem like specific payments supporting the unemployed are no longer necessary, the end effect for companies could be largely the same as with UBI – it the simply difference between a 50% dilution of shares and resultant 50% reduction in dividends for paid investors versus a 50% tax on dividends to pay for UBI.

The main differentiator with UBI, in my opinion, is the direct political intervention in company boardrooms. Businesses need long range certainty and clarity about rules and a level playing fields across companies to plan investment and compete effectively. Moving the emphasis of citizen input from parliament and its transparent legislation into individual boardrooms will destroy these pre-requisites and have a terrible effect on company and economic dynamism. Like in normal representative democracy, most people will just want their cheque and the proxy capability will be exploited by power hungry politicians and is the road to corruption. In another ironic twist, the author is quite paranoid about business intervening in the state due to the obscure legal modelling of companies as people, but I feel the intermingling of politics and companies in hundreds of dimly lit board rooms and the adjoining corridors is much more corrupting of both institutions.

Now that the issues with the citizen shareholder proposal and its relationship to UBI have been discussed, it is worth circling around the core unsolved problems that were identified and that the proposal sought to address. Here are a four ideas that might progress the discussion and could be the seed for future essays and critiques:

1. To control parasitic, exploitative, monopolistic or otherwise destructive companies, fix the democratic process and legislate effectively! This could involve political and campaign funding reforms to reduce corporate influence on politics and deliberative democracy to bypass parasitic politicians and strengthen the voice of the rational informed citizen (and even create some of those which don’t currently exist).
2. Start reducing the work week and improve the quality of education. There will continue to be highly paid work for those at the top of the value pyramid, so create more people capable of doing these jobs and force companies to share those tasks (and wealth) across more people. That education should also include serious content devoted to cultivating the knowledge and skills of noble leisure, which should be the main use for non-work time and is a critical part of achieving personal happiness according to Aristotle.
3. Implement UBI as an immediate safety net for displaced workers and redistributive mechanism to move wealth from the machine owners to the rest of society. To target the redistribution better, it could be funded by a tax based on the company’s profit to employment ratio. 
4. To truly involve UBI recipients in the economic life of the country, a final innovation is needed to give meaningful and achievable work to those in the newly created ‘useless class’. I would suggest some type of ‘kickstarter’ approach for socially beneficial non-profit enterprises to access some UBI funding streams and employ people to strengthen the human and community experience of the nation. By definition, this will be a labour-intensive and relatively lower-skilled sector that would not attract capital in normal markets chasing high returns from AI and automation driven companies. There is some overlap with government services like aged health care and education so some of these sectors might simply be better funded as part of the system. Whether people would be penalized for remaining unemployed on UBI and not participating is a detail that would be discussed.

Although these measures are only described at the highest level, it seems clear to me that there are options where the fruits of automation and human ambition (or greed) can be enjoyed by those who possess them but are also shared with the broader society in which they were first nurtured so that a new society of shared flourishing and personal happiness can be created.