State and Wealth
The state is an idea like any other creative human innovation. States can be improved. Tesla is in the business of adding value to customers and states. We suggest a deeper discussion on the latter.
“It is not the young people that degenerate; they are not spoiled till those of mature age are already sunk into corruption.” — Montesquieu
Where does the state come from?
What are the origins of states? Why did people organize themselves around governments? What is the role of modern governments. What is the role of Tesla as it relates to governments? Tesla is an interesting case study since they have factories and businesses in many different jurisdictions. Are those factories going to evolve differently, or are the states going to converge around the needs of Tesla?
Tesla has large factories in different jurisdictions. They started with California, then Nevada, then Shanghai, Berlin, Texas, and now Mexico. Will those parts of Tesla evolve differently, or will the jurisdictions converge to meet the needs of Tesla? Our conjecture is that as long as Tesla provides enough value to the jurisdictions, they will adapt to the needs of Tesla. Tesla is as much in the business of providing customer value as it is of providing value to states
To answer these questions, we go way back to the origins of states and ask ourselves, "Why did states emerge in the first place?" An interesting paper by Omer Moav et al. discusses this topic in a recently published article in the Journal of Political Economy. Moav argues that states emerged because they could tax people. In other words, states happen because they can. This is a pretty narrow way to look at the world, a way that is still pretty popular in economics. It’s about what can happen, not what should happen. I disagree. States didn’t emerge because they could, but because they were an idea that evolved and eventually conquered the world. Everything in nature starts with ideas. The state is an idea. As far as causality or sequence is concerned, I’d bet that the idea of a state came before the state, not the other way around. Here is an illustration.
The state is a creative idea
Moav argues that states emerged because people used certain cereals as crops that needed to be stored. In the paper, he goes all the way back to the history of humanity, where humans were hunter-gatherers and then developed farming methods. Farming requires or enables stationary lifestyles as opposed to the nomadic existence of hunter-gatherers. Farming enables a more flexible food supply. Crucially, it also enables stationary lifestyles where technology and infrastructure can be built. For example, you could build roads or water mills for irrigation and thus increase your yields. Nomads can do similar things, but it requires a lot more energy and coordination. Farming allowed large cultures like the Chinese or Egyptian empires to emerge. The key question is: what came first, the state or the farming?
In this essay, we argue that the state came first. Or, to be precise, the idea of the state came first. People came up with the idea of organizing themselves for protection and labor sharing. The sons of farmers were recruited to be soldiers, and the prettiest daughters were given to them as wives. Those soldiers made sure that the land was safe from invasions. Later, other tribes joined or were conquered. The crucial question here is, "What came first?" State or farming? I conjecture that the state came first. Like every other innovation in human history, it started with an idea and then grew. State is an idea, an innovation, like the wheel, the transistor, literature, or religion. The state isn’t hard-coded in our DNA or an emergent property of quantum mechanics. It emerged because somebody, somewhere, had an idea. It took human creativity to come up with the idea of the state.
The state fosters innovation and enables more flexible production
What is a state? The state is an elite that has a monopoly on violence and taxation. Look at the Mafia. The Mafia is a state. The Communist Party of China is a state, as are Cuba, Switzerland, and the US. They’re all states, just different types of states. But let’s go back to Egypt 5000 years ago. What happened there? Nomads lived in the desert. Some of them got together and decided to form an enclave where protection was given. Because they felt protected, they could choose to produce more flexible crops, such as grains, etc. This also enabled technologies such as roads, horses for transport, water mills for irrigation, etc. With all these innovations, food production increased. If you have time and safety to think and tinker around with engineering solutions to increase your crop yields, you will eventually succeed. But you need time. The new form of organization, the state, gave people the necessary time and safety.
Eventually, there was a surplus. But surplus is a function of supply and demand. With the surplus, demand rose, too. More people were able to be fed, older people lived longer, couples had more kids, etc. More food produces more people and, hence, more demand. But eventually there was so much surplus that the rulers decided to build pyramids, etc. The key point here is that the state emerged as an idea and then evolved because it was an idea that worked. Not just that. The state was so successful that it altered the behavior of humans. At some point, they became wasteful, and society declined. But the idea of a state survived. It’s so powerful that it’s independent of who adopts it. Other people in other parts of the world took it up and used the same concept for their own organization. The only difference is their interpretation of the state. Some used more liberal, democratic forms of state, and others were more totalitarian. But the concept of a state as an organizational form of society where we give certain powers and monopolies to an elite so they provide us with security survived the millennia. Anarchy is an inferior form of societal organization.
Tesla must add value to customers and state
What does that mean for us today? It’s the same thing. The state is an idea and can be morphed as creativity evolves. States can be better or worse. There is no such thing as the state. States, like everything else, constantly evolve. It is our power as humans to use creativity and ideas to shape our surroundings. The idea of the state is just that. An idea of how to shape our society. Take the idea of writing a constitution. Or the idea to use a monetary system based around a central bank to manage our economy. Or the idea to allow for referendums. Those are all creative ideas that emerged throughout the centuries and manifested themselves with real political consequences for society. The crucial point here is that we can still have new ideas. Just because we have a system doesn’t mean we should accept it. Like ideas in science or art, we should constantly criticize the current political system and the state and try to improve it. To paraphrase Karl Popper, "Democracy is a system where leaders and ideas get replaced with better leaders and better ideas without violence." Let’s not forget that.
Tesla is an interesting case study because they have factories in different types of jurisdictions. How will the Tesla business evolve? Will Mexico be very different than Shanghai? Or will all the jurisdictions converge to meet the needs of Tesla? In this essay, we argue that as long as Tesla provides enough value to the states, the latter will converge to meet the needs of Tesla. As a consequence of that, we define the objective function of Tesla as "a business that provides customer value and value to the state." Disruptions such as Tesla can only happen if both variables are satisfied.
What does it mean to provide value to the state? Who is the state? The state is a constituency that has a monopoly on violence and taxation. What do they want? It’s in Tesla’s best interest to cater to the respective constituencies. However, it’s important to distinguish between catering and subserving. For example, catering to workers means educating them, increasing their standards of living by increasing their productivity, giving their kids more opportunities, etc. On the other hand, subservience would be to yield to short-term demands by unions for immediate pay increases, pension spiking etc. These measures would improve the immediate status of workers but hurt them in the long run. Tesla has to stay laser-focused on catering to the long-term wellbeing of their workers, not the short-term rent seeking. The same applies to other parts of the state, such as government officials, state legislatures, and all other constituencies.
It’s important to recognize that Tesla has to take the state seriously. In fact, we all must take the state seriously. The state is a superior organizational form. The question is not whether we should have one, but what kind. We argue in this essay that companies like Tesla are best served by helping to shape the state around them. It’s not enough to produce customer value; you have to increase value for the state too. And like with customer value, there is an opportunity to improve value for the state. It follows similar dynamics. You create resources to cater to the needs of your constituency. You do that in a profitable way, which in the context of the state means that by providing value to the state, you make sure you get more value out of that. While there is a vast literature on how to increase customer value and position a company to take advantage of market dynamics, there is not much written about how to deal with the state. We propose a deeper discussion about how to treat the state as if it were a customer and provide value to it in a profitable and sustainable way. We distinguish between catering to the state and subservience. While the former is necessary for long-term wealth creation, the latter is a trap to be avoided.
Conclusion
State and wealth are intertwined like customer value and wealth. You can’t have the latter without the former. People have chosen to organize themselves in hierarchies and give a certain elite the power of violence and taxation because this form of organizing society is superior to alternatives. Hence, the question is not whether we want a state but what kind. We argue that states are like ideas; their origins are in the creativity of humans. The system constantly evolves. Companies like Tesla are in the business of creating value for customers and states. It is important to distinguish between providing long-term value to states and subservience. The latter is a trap to be avoided. As a next step, we suggest a deeper discussion of how companies like Tesla can best serve their constituencies, similar to how they can position themselves to best serve their customers.