A Vision Of Competing, Polycentric Sovereign Wealth Funds

Bryan Caplan, an economics professor at George Mason University in Virginia, once remarked in a class I took with him that he knew of only one scholar who had invented an entire system of government. That scholar is his George Mason colleague, Robin Hanson. Hanson’s governance system, called “Futarchy,” proposes basing policies on the outcomes of prediction markets.

Here I will attempt to sketch a rough, initial outline of an alternative vision that I have for government, which I tentatively call “Fundarchy.” This system would be based on governments managing competing, polycentric sovereign wealth funds that aim to provide public services at a profit. The goal of Fundarchy is to transform government from being a burden on society into a productive engine of economic growth and prosperity.

Under Fundarchy, every level of government would operate its own sovereign wealth fund. As such, some geographic areas might fall under overlapping jurisdictions and therefore come under the authority of more than one government with such funds (this is why the model is “polycentric”). In this manner, cities, states, the federal government, and even other countries, would take on the important role of asset manager.

To some extent, governments are already “asset managers,” because they already own considerable assets, and these assets are managed somehow, even if passively and inefficiently. However, Fundarchy would make this role of the public sector far more explicit, and furthermore these institutions would aim to maximize the value of their assets, subject to the constraint of pursuing other worthwhile public goals and pursuits.

One exciting aspect of Fundarchy is the potential for governments to merge. When governments fail to provide basic services to the public at a reasonable cost, they could “go out of business” by being absorbed into other units of governance. Much like First Republic Bank
FRC
was recently acquired by J.P. Morgan Chase, failing governments could be “purchased” by other jurisdictions that believe they can better manage the failing government’s portfolio.

Another benefit of Fundarchy is that it could eventually eliminate taxes. Our current system of funding government through taxation is inefficient in that it creates considerable deadweight losses, which slow growth and reduce welfare. But what if governments paid us, rather than the other way around? By shifting to a profit-driven model, governments would generate all the revenue they need to offer public services. This would reduce the need for taxes and incentivize governments to provide services people actually want. When enough revenue is generated, governments could make dividend payments to the public, much like Alaska has a sovereign wealth fund that makes annual payments to state residents.

Fundarchy would also help overcome two major problems that have plagued governments throughout all time. These are the “knowledge problem” and “public choice problems.” The knowledge problem refers to the difficulty governments face in obtaining the information they need to make effective decisions. The public choice problem refers to the concern that government officials may act in their own self-interest instead of the public’s.

By relying on the price mechanism, governments could overcome the knowledge problem in the same manner as private businesses. Costs, revenues, and profit margins transparently provide public servants with the information they need to know whether they are succeeding. Under Fundarchy, government officials would also have an incentive to act in the public’s interest, as they would only succeed by providing services the public is voluntarily willing to pay for. In this way, boondoggles would quickly be exposed when it becomes apparent that no one wants to pay for “bridges to nowhere.” Public sector salaries and jobs could also be tied to measurable and reliable performance metrics connected to market prices and profit and loss.

We know that sovereign wealth funds can work because we now have decades of experience watching them in action. Norway, Singapore, Japan and China operate some of the largest, and most profitable sovereign wealth funds in the world. Norway’s Government Pension Fund Global and Japan’s Government Pension Investment Fund both effectively manage more than $1 trillion in assets. These entities are now a recognized and established part of the mainstream financial system.

While there might have been concerns in the past about whether governments could even run such funds profitably, the last few decades have proven governments are indeed able to do so. Not just that, governments can run them honestly and ethically as well. For example, Norway’s sovereign wealth fund imposes strict ethical principles on its investments, such as refraining from investing in tobacco companies. Every jurisdiction could set its own principles for ethical investing, based on the local values and culture.

This is not to say there aren’t legitimate concerns about the dangers of sovereign wealth funds making politicized investments or creating national security concerns when they invest in other countries. In a forthcoming paper, I address some of the myriad concerns raised about sovereign wealth funds. Here, I will only point out that while some of these concerns are indeed legitimate, they are not insurmountable. Everyday experience with the success of these funds around the world suggests the Fundarchy idea can work.

To conclude, Fundarchy offers a promising vision of a productive public sector that is a driver of economic growth, rather than an impediment to it. Mergers mean ineffective governments go away. Dividend payments turn inefficient redistribution into poverty reduction financed by efficient capitalistic production. While there may be challenges with implementing Fundarchy, the potential benefits make it a model of government that merits consideration. When it comes to ideas for radical transformation of government’s role in society, Fundarchy deserves a place at the table.