The Law Market

Law Markets: A model for Predicting Laws, Governments, and Institutions

[thelawwmarket]

The future of immigration is with Costco

Costco sells paid memberships to its customers.  In the future, so will the United States.  That will turn the “immigration problem” into an enormous “immigration benefit”.

The US has the world’s largest economy and the average American is wealthier than the average citizen of any other large (or even medium-sized) country.  The US is safe, clean, and its citizens have unparalleled opportunity to advance and prosper.

Millions of people around the world would love to become US citizens, residents or tourists.  But most of these prospective “customers” never get their opportunity.  As of right now, the vast majority of these people are turned away at the door.  But that will change as more countries, the US included, adopt a paid membership model like Costco’s.

Costco - charging customers to be customers

Costco is the largest membership-only warehouse club in the world.  Unlike other stores, it requires customers to become paying “members” in order to shop there.  Several other big and successful retailers do the same - such as Amazon Prime and Walmart’s Sam’s Club.

Costco makes about 75% of its profits from the membership fee - similar to its competitors - and customer loyalty is sky-high.  Costco has over 40 million members and over 90% renew annually.  The Costco membership base grows by over 2 million every year.

Why are so many people willing to pay $55/year in order to shop at Costco, when they could shop anywhere else for free?  Because Costco offers lower prices and better service.  Costco is able to sell at these low prices because it makes so much money from membership fees.  This paid membership model has already been adopted by a number of countries through “citizenship for investment” programs, with results similar to Costco.

Citizenship in St. Kitts for $250k

Bloomberg recently profiled Henley & Partners, the leader in the citizenship for investment industry.  They describe several countries who currently sell citizenship and the impact this has had on their economies…

“St. Kitts has become the world’s most popular place to buy a passport, offering citizenship for $250,000 with no requirement that applicants ever set foot on the island’s sun-kissed shores. Buyers get visa-free travel to 132 countries, limited disclosure of financial information, and no taxes on income or capital gains. The program became so successful that St. Kitts emerged from the global financial crisis far ahead of its neighbors in the Caribbean. “It’s been a complete transformation,” says Judith Gold, head of an International Monetary Fund mission to the country.”

With this sort of Costco-like performance it’s no surprise that more countries are getting into the paid membership game.  Before the financial crisis, only St. Kitts and Dominica were selling citizenship. Since then, another five countries have started and many more are coming.  Citizenship in Cyprus, an EU member, goes for €2.5 million (about $2.8 million).  How much would US citizenship go for?

A tax-free U.S., financed by immigration?

The US has 309 million residents, as of the last census.  On current immigration programs, about 1 million people attain green cards and about 800,000 become naturalized citizens every year.  If the US were to sell citizenship to 1 million people for $1 million each year, it would generate $1 trillion dollars annually, while adding only 1/3 of 1% to the population.

By comparison, total revenue by the federal government (i.e. taxes paid by all individuals and businesses together) amounts to about $3 trillion/year.  So by selling citizenship to 1 million people, every American man, woman and business could pay 1/3 less taxes every year.  Or we could completely eliminate all payroll taxes for every American (about $1.07 trillion).  Such a policy would be sure to be as popular with US taxpayers as the St. Kitts program is for their citizens.

Competition makes it inevitable

This outcome is not only possible, but inevitable.  The reason is competition.  St. Kitts’ success drove other Caribbean nations to develop similar programs.  Businesses, investors, and employers have a choice of where to setup shop.  In general, they chose to expand into thriving economies.  Following the success of their citizenship for investment program, St Kitts became a thriving economy much faster than it’s neighbors.  In order to compete to attract international businesses and employers, St. Kitts’ neighbors were forced to create similar programs.

As the new programs succeed, ever more countries will be forced, through competition, to follow suit.  WalMart, BJ’s, and Amazon saw the benefits (and the competitive pressures) of Costco’s paid membership program.  The same will happen with an ever-growing list of countries in the Caribbean, Mediterranean, Europe, the Americas and everywhere.

Price competition for immigrants!

Finally, consider the impact of of prices in a world of paid memberships.  Why does Cyprus’ citizenship cost $2.8 million but St. Kitts’ only costs $250 thousand?  In a nutshell, because Cyprus offers a superior product (EU membership, a more developed and diverse economy, proximity to Europe, etc).  Once a country’s economic success is tied to it’s citizenship for investment program, there is a great incentive to keep the price of citizenship up.  But in a free market, consumers will only pay top dollar for citizenship if they get value from it.  Price competition among countries will force governments to provide competitive services - public safety, economic freedom, a clean environment, etc.  Costco cannot continue to add millions of paid members per year unless it maintains a superior product.  Price competition among countries for citizenship will force national governments to offer ever more competitive products of their own.

Immigrants are often seen as a drain on a countries economic resources.  This view is as backward as Costco seeing it’s customers as an economic drain.  People want to buy Costco’s products at low prices.  Costco charges them for this privilege, to mutual benefit.  People want to migrate to other countries.  Some countries are already charging them for this privilege, to mutual benefit.  Through competitive forces, more countries will follow and immigration will be seen for its true potential as an enormous economic benefit.

[thelawwmarket]

The Iran Deal

As of this writing (Sept 27, 2015), it looks like the recently negotiated security deal between the U.S., Iran, the EU, and 6 other countries will come into force.  This deal will significantly impact the likelihood and timing of nuclear proliferation, trade, economic growth, and the political environment in the signatory states and their neighbors.  Rather than speculate on these impacts, I would like to present a few predictions about how this sort of deal - security-related negotiations between sovereign states - will play out in the future.

Law markets theory predicts that security-related deals between sovereign states will become relatively less important in the future.  Instead, individual citizens will have increasing choice over their response to security threats.  In effect, people will be able to “opt in” or “opt out” responses to security threats on an individual, person-by-person basis.  Here’s why…

Security threats will continue to emerge, evolve, strengthen, and weaken indefinitely

Responses to security threats will continue to emerge and evolve indefinitely

Threats from sovereign states are just one type of threat.  Security responses provided by sovereign states are just one type of response.  There are many other types of security threats and response.

The sovereign-state will decline as a primary source of security threats and threat responses

The security threats of the future will increasingly come from groups that are not aligned with any particular sovereign-state.  Threat responses will also come from groups other than sovereign-states or their military and intelligence forces

Prediction: In the future, people will be able to choose which security services they want to employ on an individual, person-by-person basis

1) Security threats - constantly emerging and evolving

Consider all the security threats that we face on a daily basis.  Armed attack from a sovereign state (e.g. Iran) is just one type of threat.  We also face threats from foreign terrorist groups (Al Qaeda, ISIS, etc) domestic terror groups (the KKK, Aryan Nations, etc), street gangs, the mafia, pirates, hijackers, hackers, hacker groups, and innumerable types of individual criminals and groups of criminals.  Security threats are at least as old as civilization and are constantly emerging, disappearing, strengthening, weakening, and morphing.

The average American is more likely to be adversely impacted by a hacker or local criminal than by a foreign state.  However harm from a foreign state (invasion, war, economic sanctions, travel restrictions, etc) usually has a much greater adverse impact when it happens.  Both state-based and non state-based security threats are important.

2) Threat responses - constantly emerging and evolving

For every security threat, there is a range of responses.  Responses to airplane hijacking include metal detectors, passenger screenings, armed guards on airplanes, locks on cockpit doors, investigations into terror and criminal groups, etc.  Potential hijackers may attempt to circumvent these responses with their own technology or techniques (plastic explosives, shoe bombs, box cutters, etc).  Security measures evolve to respond to these new techniques and technologies.  The cat and mouse game continues indefinitely.

Some threat responses are collective in nature.  Banding together with other threatened people can result in an effective security response.  Such collective security responses include neighborhood watches, police, tribes, religions, gangs, and countries (sovereign-states). What makes these collective is that the group (the country, the neighborhood, the tribe, etc) works together to diffuse the threat.  Maybe every member of a community is required to stay up once per week on a night watch.  Or perhaps everyone contributes some money to hire a night watchman.

Other threat responses are individual in nature.  People can take some security measures into their own hands, without depending on neighbors.  Such individual security responses include buying a gun, buying door locks, or hiring a home security service.  A homeowners gun or locks or private home security service protect his family and property.  The decision and implementation for these security responses does not require his neighbors consent or sacrifice.  With individual responses like door locks, there isn’t any need for collective decision making or enforcing collective decisions (taxes, treaties, drafts, etc)

3) Sovereign states are just one type of threat and response

Some threats come from sovereign states.  These include armed invasion, arial attack, missiles, hacking, sabotage, etc.  Many of these threats can also come from non-state groups or individuals.  There are many historical and contemporary examples of armed invasion of one state’s armies into another’s territory.  And there are many examples of armed invasion from non-state groups also (e.g. mongol hordes, vikings, visigoths, ISIS).  In general, any type of attack that can be mounted by a sovereign state can also be mounted with a non-state group with sufficient resources.

Threatened states can respond with a variety of measures.  National security responses include war, threat of war, treaties, alliances, subversion, economic war, trade war, defensive walls, fortresses, the UN, assassination, sabotage, and many more.  Terror groups can be attacked militarily, subverted, co-opted, have leaders captured, killed, arrested, etc.  Hacker groups can be infiltrated and subverted.  Firewalls, authentication, encryption, and access control systems can be built and improved.

People can also develop their own individual, non-collective responses to threats from foreign states (war, invasion, bombing, etc).  Individuals can move to another city or country, move to a gated/fortified community, build a bomb shelter, buy better firewall and encryption software, etc.  In general, national-level security responses (armies, central intelligence, treaties, etc) are most effective in response to national-level security threats (armed invasion, missile attack, etc).  Hacking, terrorism, sabotage, and more local threats can be treated more locally or individually with individual measures.

4) Diminishing primacy of the sovereign-state as a war protagonist

But the era of one sovereign state invading another is passing.  Gradually, all the countries in the world are becoming more politically free and more prosperous, and free states rarely attack each other.

War is destructive.  The alternative - peace and trade - are productive.  In an environment of freedom, self-interested people tend to engage with each other productively, in trade, rather than destructively, in war.  Where citizens can impact the choices of their leaders (e.g. democracies) they tend to chose peace over war (see Democratic Peace Theory)

Over time, the world is becoming more free.  Prior to the founding of the United States, there were effectively no democracies in the world.  Now most of Europe, the Americas, and much of Asia and Africa have democratic governments at some level.  In general, this freedom is increasing over time.

Empirical evidence backs up the theory that the threat of invasion from a foreign state is diminishing.  The first half of the 20th century featured several of the worlds most destructive wars (WWI, WWII, and the Russian and Chinese Civil wars) with some very un-free protagonists (The Austro-Hungarian Empire, Imperial Russia, Imperial Japan, Nazi Germany, the Soviet Union, and Communist China).  Tens of millions of people died in these battles - particularly citizens of the least-free states.  The second half of the 20th century featured some large wars (Korea, Vietnam, Iran-Iraq, Soviet war in Afghanistan) also with some very un-free protagonists, but these were much less destructive than in the first half of the century.  The 21st century seems to continue on this trend, as there have been no major wars between large countries.

If these trends continue, individual nations will continue to become more free, more prosperous, and less likely to fight each other in wars.  As countries become wealthier, they become more politically free.  And as countries become more politically free, they tend to become wealthier.  Wealth and freedom form an “endogenous system”, mutually promoting each other.

5) Increasing primacy of non-state organizations as a security threat

While wars between sovereign-states are declining as a security threat, non-state organizations are increasing.  Recent non-state threats include Al Qaeda, ISIS, the Taliban, the IRA, the FARC, Aum Shinrikyo‎, the Lord’s Resistance Army, and many more.  At the same time, non-state hacker groups such as Anonymous, LulzSec, and the Legion of Doom are becoming important threats online.  As states become more prosperous and free, they are less likely to invade each other.  Meanwhile, declining communication and transportation costs are making it easier for non-state threats to form and act.

The future: Individual choice over security threat responses

Security threats are constantly emerging and evolving.  Threat responses are emerging and evolving to counter the threats.  But sovereign countries are less likely to invade each other because they are getting more prosperous and free, and free states rarely threaten each other.  Therefore, state-level collective security measures (i.e. armies, navies, intelligence forces, treaties, etc) designed to respond to state-level threats are relatively declining in importance.

Treaties, such as the one with Iran, are inherently a state-level security response.  The treaty (“deal”) binds each signatory nation and all it’s residents.  Treaties are by their nature collective, national responses.  But such national responses are declining in importance.  In place of state-level threats, non-state groups and individuals continue to emerge and increase in relative importance.  But for these threats, there are individual responses.  As threats shift from nations to non-nation groups, responses will shift from collective nation-level responses (e.g. treaties) to individual level responses (private security, online security, etc).  People make these security choices individually, rather than collectively.  In the future, the (collective, national) battle over the ratification of a security treaty with Iran will be replace by the (individual) decision of which IT security firm to hire, which town or community to live in, or what systems to install in your home.

[thelawwmarket]

Uber and the Homestead Strike

How does a deadly steel strike in 1892 presage the outcome of Uber’s recent public labor disputes?

The Homestead Steel Strike of 1892 was a landmark labor dispute, resulting in the deaths of 9 strikers and 3 private security officers. A new steelmaking technology called “open-hearth” rapidly spread through the steel industry in the U.S. and worldwide.   Following this transition, total employment in the steel industry went up, though individual compensation per worker went down.  The same will happen with Uber and the ride-for-hire industry.

The technology shift: apps and open-hearth furnaces

The Homestead Steel Works was one of the first major steel plants in the world to fully transition from the Bessemer steelmaking process to the open-hearth process in 1886.  The old Bessemer process took 10–20 minutes to make a batch of steel, vs 8-10 hours for the new open-hearth process.  The slow process is actually an advantage in steelmaking because the chemical reaction is easier to monitor and control.  The new, slower open-hearth process resulted in higher steel production, more precise chemical composition, and superior properties of the finished product.

Uber is a mobile phone based ride-for-hire app.  As of 2015, Uber is rapidly replacing older ride-for-hire services, which rely on street-hailing or phone-dispatch, phone based driver feedback, cash or card-swipe payment, and memory or map-based street navigation.  With Uber, all this is done in the app.

For customers: a better product

Through both of these technology transitions, the quality of the product went up while the cost of production went down.  The open-hearth steelmaking process could produce more steel more cheaply than the Bessemer process.  It could also produce higher quality steel (less nitrogen impurity) and was more environmentally friendlier than the legacy process because it could recycle scrap steel.

Uber’s app-based car hailing system matches drivers and passengers more efficiently than street or phone-dispatch hailing, so each car can provide more rides during the same period of time.  App-based driver rating results in more riders rating their drivers, a more efficient feedback loop, and a better quality service (better car condition, cleanliness, noise/music volume, politeness, etc).  Riders find payments through the Uber app to be more convenient than swiping a credit card or giving cash.  The app-based payment process is also faster, so cars can get back on the road quicker and start providing their next ride.

Labor demand shift: more labor, less skills

In both cases, the new technology resulted in differences in demand for labor.  Because of the slower chemical reaction time, the new open-hearth process required fewer plant chemists than the Bessemer process, so skilled chemists were in less demand.  Meanwhile, since open-hearth were easier to scale up than Bessemer plant, some types of workers were in greater demand.  The new plants required more operators of overhead cranes, hoists, charging machines, and buggies.  The skills required to operate the new material handling systems were relatively easy to acquire.  Now people with substantially less training could work in a steel plant.  These new less-skilled operators were willing to work for less compensation than the old highly-skilled chemists used in the Bessemer process.  The new plants required more workers but less skilled workers than the previous generation.

Uber also requires more labor with less skills than legacy ride-for-hire systems.  Previously, taxi and car service drivers needed be very familiar with a city and local navigation.  The extreme case of this requirement is “The Knowledge” held by London taxi drivers, which requires years of training.

The app based navigation in Uber largely makes these skills unnecessary. Anyone who can drive a car can drive for Uber with no further training required.  The app also obviates knowledge of traffic patterns, car demand patterns, and route selection.  But since the new service is more convenient for riders, more rides are offered and more are taken.  With Uber, more drivers are needed but each driver needs fewer skills.

With Uber, as with the open-hearth steel process, demand for a large pool of relatively less-skilled labor is replacing demand for a small pool of relatively higher-skilled labor.

Resolution: A labor force for the new technology

The Homestead Strike culminated in large-scale violence, 12 deaths, numerous injuries, criminal charges and imprisonment (see overview).  The striking workers wanted to retain the old wages and work rules used in the days of the Bessemer process.  But there were plenty of workers capable of running the new plant who were less skilled and willing to work for lower wages.

The old skilled workers attempted to prevent new less-skilled workers from entering the Homestead plant to take the new jobs.  After several days of violence governor of Pennsylvania called in the state militia to bring peace and allow the new workers access to the plant.  Some of the old workers returned to jobs in the new environment of technology, skills, and wages.  Other skilled workers moved on to other occupations.  The steelmaking industry continued its transition from Bessemer to open-hearth in the following decades.  Commercial steelmaking in the US completed its transition in 1968 when the last Bessemer plant shut in 1968.

App-based ride-for-hire systems will replace legacy taxi and dispatch services just as open-hearth steelmaking replaced Bessemer steelmaking.  After the picket-and-strike phase we see today, a new class of workers will provide more customers a superior service for lower prices and lower wages.  The fact that apps provide a better quality of service at a lower cost makes this inevitable - just as inevitable as the transition to a superior steelmaking process. This will result in lower compensation for the less-skilled drivers required by the new technology than the high-skilled drivers they replace - just as low-skilled, low-compensation steelworkers replaced high-skilled high-compensation steelworkers of the previous generation in that industry.

[thelawwmarket]

For Russia, Oil Collapse Has Soviet Echoes

For most countries, the economic slowdown in China and the accompanying slump in commodity prices represent something between nuisance and pothole. For Russia, they are a catastrophe.

Prediction: The Russian economy and Putin administration will collapse by 2020

This article clearly lays out the precarious position and direction the Russian economy is moving in.  A few world events have moved against Russia lately - namely:

The collapse of the Putin-supported Yanukovich regime in Ukraine

Falling global prices for oil & gas, primarily due to increasing supply

Slowing of the Chinese economy, a major destination of Russian raw materials exports

The Putin administration has responded to these events with increased coercion (reductions in freedom) such as:

Invading Crimea and Eastern Ukraine

Increasing cronyism

Restricting media freedom

Interfering with the judicial system and due process

Increased military spending and threatening neighbors

Restricting freedom always slows economic growth.  In this case, massive coercion is coinciding with a massive slowdown in the Russian economy (between 3.4% and 6% this year, according to this article).  This sort of economic atrophy can be sustained for a while (e.g. North Korea, Cuba, Zimbabwe).  But for an export-driven economy like Russia today (and like the Soviet Union in the 1980′s) it leads to political collapse.

[thelawwmarket]

(via The Untold Story of Silk Road, Part 1 | WIRED)

Thorough and detailed account of the rise and fall of Silk Road and its (likely) founder Ross Ulbrecht.  I haven’t read too much about the story and I’m sure this rendition has it’s share of inaccuracies, embellishments, strategic oversights, and dramatizations.

Short of my researching it in full detail, my takeaway is that Silk Road, Bitcoin, Tor, and the technologies and communities here are indeed an enlightening glimpse of the future.  This particular site and this particular individual were foiled, but the whole story just shows what’s possible to an enormous generation of copycats, tinkerers, iterators and improvers.

For every flaw, there is a patch or a workaround or a new best-practice.  Version 2 (and 3 and 4 and 5...) will be as much better and and as much bigger as Facebook is to MySpace and Friendster.  If anything, detailed accounts like this will show the next Ross Ulbrecht how to be more careful.

One question nagged at me as I read the story - why didn’t he operate from overseas the entire time?

[thelawwmarket]

(via L. Gordon Crovitz: Amazon’s Drones Exiled to Canada - WSJ)

Amazon chooses drone-testing laws outside the U.S. and then uses lobbying, PR, and media to change laws in the U.S.

[thelawwmarket]

China is setting a precedent for creation of new sovereign territory with ocean landfill.  Could independent entities do the same thing to create brand new nations?

(via U.S. Misses Real Threat of China's Fake Islands - Bloomberg View)

[thelawwmarket]

Watch What Happened When a Reporter Tried to Buy Eight Basic Goods in Venezuela - Bloomberg Business

An extreme result from extreme price controls (Venezuela 2015)

[thelawwmarket]

How Powerful Is Your Passport? | GOOD

How many countries can you get visa-free access to for a given countries passport?

[thelawwmarket]

Passport King Christian Kalin Helps Nations Sell Citizenship - Bloomberg Business

More countries than ever selling outright citizenship... Before the financial crisis, there were just two countries that sold outright citizenship: - St Kitts - Dominika Recently, 4 more have jumped in: - Grenada - Cyprus - Antigua & Barbuda - Malta

[thelawwmarket]

Secession, virtual and physical

[thelawwmarket]

More Americans renouncing citizenship to avoid taxes and regulations...

[thelawwmarket]

More ties between Bitcoin and seasteading...

[thelawwmarket]

Seasteading and Bitcoin

[thelawwmarket]

A great synergy of two mechanisms of the law market - micronations and virtual currencies.

[thelawwmarket]

Adam Draper’s Boost VC makes a big bet on the virtual currency

Bitcoin me: Adam Draper’s Boost VC makes a big bet on the virtual currency

[thelawwmarket]

Asset seizures in California prompt move to another state.