The data required for rational economic planning are distributed among individual actors and thus unavoidably exist outside the knowledge of a central authority
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Local Knowledge Problem retweeted
"why should capital get the residual claim" is a question that only sounds deep if you ignore what residual means
the residual is what's left after everyone else has been paid. the worker gets his wage whether the business profits or fails. the supplier gets paid. the landlord gets rent. the bank gets interest. all of these are fixed claims
contracted in advance, paid first, guaranteed
the shareholder gets what remains. if the business loses money, the fixed claimants still get paid. the shareholder gets the loss. if the business makes nothing, the shareholder gets nothing. if the business goes bankrupt, the shareholder is last in line
the residual claim isn't a privilege. it's the position of maximum risk. the person who accepts it accepts the most uncertainty. that's why he gets the upside; because he bears the downside
"workers take risks too"
yes. the worker risks losing his job. but the worker keeps the wages he already earned. the shareholder risks losing the entire investment; every dollar he put in. the worker's downside is bounded. the shareholder's is total
"most shareholders bought existing shares, the company got nothing"
the company got the capital when it issued the share. the secondary buyer pays the original investor for the right to the residual claim. without the secondary market, the original investor wouldn't invest
because he couldn't exit. the liquidity of the secondary market is what makes the primary investment possible
"capital doesn't work, think, or create"
capital is stored work. it's the wages someone earned and didn't spend. it's the consumption someone deferred so the resources could go to production instead. to say capital doesn't work is to say the person who saved his labor didn't labor
"we could pay capital a fixed return and give the residual to workers"
this exists. it's called a cooperative. workers can organize firms this way any time. the fact that most workers choose to take a fixed wage instead of the residual claim tells you which they prefer. the worker who wants the residual can have it; by starting a business, buying shares, or joining a co-op. most don't, because the fixed wage is safer
the real question isn't why capital gets the residual. it's why anyone would provide capital without it. the residual claim is the incentive to invest, to monitor, to allocate. remove it and you remove the mechanism that directs resources to their most productive use
the socialist wants to keep the investment but remove the incentive. keep the capital but remove the reward. the result every time is the same; the capital stops flowing, the investment stops happening, and the economy that needed both stagnates
you can redesign the accounting. you can't redesign reality
There is a question at the heart of capitalism that we almost never ask.
Why should the owners of capital have the residual claim on the rewards generated by a business?
Capitalism assumes that a business employs people, buys goods and services, pays interest and meets its other costs. Wages are treated as one of those costs. What remains is profit, and that belongs to the owners of capital.
But there is nothing natural about this arrangement. It is not an economic law. It is a choice about power.
That matters when discussing the nature of capitalism and why it differs from neoliberalism.
Before about 1980, capitalism in countries such as the UK operated within much stronger democratic constraints. Trade unions had power. Finance was regulated. Taxes on high incomes and wealth were higher. Public ownership was commonplace. Full employment was an explicit policy objective.
Neoliberalism dismantled much of that settlement. It weakened labour, liberated capital, encouraged privatisation and promoted rent extraction. We should reverse much of that.
But I think we also need to ask a more fundamental question.
Why should capital get the residual return at all?
The usual answer is that shareholders provide risk capital. But workers take risks too. They can lose jobs, careers, pension expectations and future earnings when businesses fail. And most shareholders in large quoted companies did not provide capital to the company anyway. They bought existing shares from another investor. The company received nothing from that transaction.
So why does owning that share automatically confer a claim on the residual rewards created by the enterprise?
Accounting makes the answer look obvious because wages are deducted as a cost before profit is calculated. But accounting reflects the institutions we have chosen to create. Company law, limited liability, shareholder rights and accounting conventions were all designed. They are not laws of nature.
We could design things differently.
We could ask what return capital reasonably needs to attract the investment an enterprise requires, pay that return, and then give the residual claim primarily to those whose work created the remaining value.
That would turn one of capitalism’s most basic assumptions on its head.
Capital does not work, think, create, care or have needs. People do. Capital is a mechanism created by people to facilitate economic activity.
Labour should not simply be treated as a cost incurred to generate a return for capital.
Maybe it is time we asked whether capital should instead be treated as a cost incurred to enable people to work.
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My life with Gemini CLI:
✦ Now, I'll update the return statements in the reducer to include the new_current_index. I will do this in a single, careful replace call.
✦ I have made another mistake. I will read the file again to ensure I have the exact content before attempting to modify the return statements.
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Local Knowledge Problem retweeted
The best case for an “international agreement to slow down AI” is that China will laugh at it. The worst case is that it will pretend to agree.
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"That's the power of human ingenuity; our ability to do more with less."
I am honored to have been featured in Human Progress for this one!
Here, I chart progress in data density, measured as bits of information stored per gram of matter.
To bring the point home, I calculated data density across some historically significant documents, beginning with the Rosetta Stone, the Magna Carta, the King James Bible, charting progress all the way to the modern era.
In sum, a modern SSD can store about 5.3 trillion times more data per gram than a stone tablet.
That's the power of human ingenuity; our ability to do more with less.
open.substack.com/pub/humanp…
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Local Knowledge Problem retweeted
2FA for my damn frequent flyer account. I'm pretty sure no one is coming for my $12 of Delta miles
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Local Knowledge Problem retweeted
The precautionary principle: Never do anything for the first time.
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Local Knowledge Problem retweeted
New from @DiSalvoPhD and me: Capital Is Not Taking Half of America’s Income, and Other Myths About the “Labor Share”
taxfoundation.org/blog/capit…
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Local Knowledge Problem retweeted
No, it can't. The problem of socialist calculation is the absence of property rights, as Mises explained, not knowledge, as Hayek put it. Without property rights, there is no possibility of calculating profit/loss with real opportunity costs for an actual owner who reaps the benefits of correct plans and suffers the consequences of wrong plans. Hayek's fluffy talk about knowledge is nice and catchy, but ultimately unrigorous, imprecise, and confusing. No matter how much knowledge you give to a computer, it cannot perform economic calculation on capital that is not owned, whose loss doesn't cost anyone anything and whose success doesn't provide profits to anyone. Socialists have been getting overexcited about every single advance in computer technology for a century, thinking it will finally provide them the tools to defeat Hayek, but the only thing that ever worked for them is private property, in other words, moving away from socialism. The only way to make socialism work is to kneel before Mises and allow property rights and let property owners perform economic socialism. In other words, the only way to make socialism work is to stop it from being socialist. The issue is not about the size of knowledge. This is why Amazon can successfully plan for hundreds of millions of workers, suppliers, and customers, but socialism fails in a tiny country like Estonia. Amazon, and everyone involved with it, have property rights and can perform economic calculation. A minister in socialist tiny Estonia has no property rights and so cannot perform economic calculation.
Hayek may be nice to read in the early phase of your learning economics and recovering from Marxist, Keynesian, and Friedmanite nonsense, but he is no substitute for the real deal: Mises, Rothbard, and Hoppe.
I discuss this in detail in my Principles of Economics, and you can see the full lecture based on the chapter on piped.video/watch?v=X_ednX6x…
FT: “Imagine a super-AI armed with access to all the data we let our devices record for every transaction we enter into….Such an AI would surely bury Hayek… it shows that AI removes one of the 20th century’s strongest arguments against central planning.” ft.com/content/cd3fcbff-8512…
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Local Knowledge Problem retweeted
Probably. Have you read @mungowitz's essay "They Clapped"? It's an excellent read. econlib.org/library/Columns/…
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Local Knowledge Problem retweeted
In this episode, I give a rapid-fire string of responses to the common allegation that capitalism requires "exponential growth on a finite planet." I'm being serious, if socialists want to continue the argument on specific points, let's do it. (Link next.)
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Local Knowledge Problem retweeted
Everyone keeps debating “affordability” like it’s some giant mystery...
It’s not. We printed nearly 40% more dollars in two years during COVID. Asset prices and everyday costs exploded as a direct result. Homes, food, insurance, and borrowing costs all reset higher. Mortgage rates that were once near historic lows are now stuck around 7%.
The affordability crisis is the direct aftershock of the largest peacetime money expansion in modern US history — future generations are absolutely cooked.
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RT @JessicaBRiedl: CBO now estimating a final FY 2026 deficit of $2.1 trillion - up from $1.8 trillion last year.
Nearly all of this year'…
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