Tibor F. Liska

Experimental Economy

In his research and theoretical work, Hungarian economist Tibor Liska (1925–1994) designed a socio-economic model where even property would be subject to competition. His model considers the power of disposal of property as a basic human right, which should be asserted through open competition. In this concept the state plays only background roles providing some services to ensure the frame of the competition but has no say in the operation of the economy. Nowadays one of the topical subjects of much current discussion is the outworn methods of the society's control system and the necessity of finding new ways to organize public affairs. The Liska Model is a remarkable concept to indicate a possible direction towards establishing a new manner of social control and to build up a self-controlled society.

The Liska Tibor College of the Budapest University of Technology and Economics runs a student camp every summer (beginning with 2009) where the simulation of a self-controlled society is operating according to the rules of the Liska Model. The camp is called LisKaLand. The term LisKaLand is a pun as kaland means “adventure” in Hungarian.

The number of participants has been increasing year by year. In 2011 about 130 students and some older friends spent the planned 8-day stretch in the camp. There were organized events of high standard (lectures and training in the day; rock bands, quiz games and parties at night) but the most significant experience was the functioning of the Liska Model in practice. The students took over as entrepreneurs the kitchens, the buffets, the bars, the sport grounds, the housing and all other available things and they set them into operation. Nothing was free of charge. All goods and services were on sale, and bought and sold using exclusively the local currency named ÖKI.

Initially, all citizens of the LisKaLand society were granted their social inheritance, namely two bank accounts to cover the cost of living and/or to be able to enter the entrepreneurial competition. Only one of the deposits (the “riskable” part) could be used freely while the other (the “non riskable” part) was blocked. The interests of the blocked part guaranteed a continuously increasing income. (The base interest rate was 10% per day and only half of the interests of the blocked part could be withdrawn while the rest was automatically added to the blocked account.) The income from the social inheritance ensured a very comfortable living standard even for those who did not want to work, and wished only to enjoy an 8-day holiday.

After arrival in the camp the enterprise units (firms) were auctioned. This was to select the first owners. The financial supplies of the citizens were sufficient to buy small firms only, to get the bigger ones (like kitchens, pubs) they needed an extra amount. During the auction everybody was granted unlimited credit but for buying only a single unit. Thus at the beginning each player could own one firm at most, though later they could acquire more if they wanted. Besides the auctioned units anyone could register a new firm by paying a minimal registration fee.

The owner could revalue his property any time and he had to pay 6% tax per day after the actual value but he had to sell it at that price if anyone wanted to buy it. This form of ownership (personal-social ownership) is a mixture of private ownership and tenancy, though closer to private ownership. (This is, incidentally, one of the most important, and certainly the most innovative element of the Liska Model.) Personal-social ownership ensures that the property will be managed by the person who can do it in the most profitable way as long as he retains maximum efficiency on the long run. Here only those can remain owners who are ready to pay more tax then the others. Only those extra profits can be taken away tax-free what others are not able to produce. Initially some did not increase the value of the firm according to profitability to save tax, but they soon regretted it since they were relentlessly over-bidden.

This kind of ownership is the very important element of the self-controlling system. The taxation goes without taxmen and any revenue services. As there is no income tax in this system, only owners have to pay tax and they decide how much they would like to pay since they are able to revaluate easily their property in both directions at any time. In the Liska Model this changing of the value is free of charge but, unlike in the original model, in LisKaLand an additional tax of 30%, called “the bidding fee” was due after the added value if the value was increased. If the owner wanted to pay less tax, he just decreased the value of the firm, which was free of charge, but this gave better chance to others to take over.

Two “state companies” were also operating in LisKaLand: the Bank and the External Trade Company. The other 80 firms (17 housing units, 3 wholesalers, 6 kitchens, 5 bars, 4 buffets, 2 sweets shops, 2 bazaars, 6 public area units, 3 arbitrators, and 32 other services) were in the free-market competition sphere and uniform rules applied to all.

Both state companies were running without real decision making powers; they only provided services according to their profiles. The state companies were managed by “civil servants”, who were the organizers of the camp and they were not allowed to enter the entrepreneurial competition, but they helped others to understand the rules and gave advice when needed.

The bank was a computer program running on a local network with several terminals. It kept the records of the accounts, handled transfers and registered the actual values of the running firms. It was a self-service bank. All transactions were controlled by the players; they logged in with their password and managed their things (transferring money, buying firms, changing the value of their own firm, paying off the installments on their credit). Only the monetary traffic needed the contribution of an official; the user typed in the amount, then went to the cashier to cash in or out, finally the cashier confirmed the transaction. The only real decision making task of the bankers was to set the credit limit of the players. Credit was not available for consumption, only for buying firms or stocks. When someone’s credit level was set, he could call down amounts any time and he had to pay interest on it as long as he refunded it. The bankers personally considered the credit abilities.

In LisKaLand, like in fairytales, one day corresponded to one year; this was the base period of all accounting. When someone withdrew some money from his deposit, he got the interests after that amount only up to the moment he received the cash. The banking system did not calculate interest rate during the day only made additional operations, but once a day (at 3 a.m.) all accounts were updated precisely due to the second the action was taken. If someone should have to pay (tax or credit interests) more than the rest of his deposit, his credit was increased automatically as far as his credit limit allowed it. If the credit limit was over, bankruptcy was started. It happened very rarely since the bankers warned everyone in time to take care of their finances.

LisKaLand was a full information society, all transactions were public; from the bank terminals anyone could retrieve any details of the bank database, even the personal transactions. Retrieving could be made by many criteria (by name, firm and time).

The External Trade Company brought in supplies from the nearby shopping center. Only wholesalers had the right to post orders to the External Trade Company on the basis of a previously fixed price list. The prices on this list were in ÖKI scaled to the prices of the shopping center, only alcoholic drinks and cigarettes were more expensive (the latter for the sake of environmental considerations, just as plastic plates and cups). Prices were changed when needed to the effect that the value of the expected orders could not overrun the daily limit of the camp budget. The actual list was ready every day in the morning, the orders were received up to noon and delivery took place at early afternoon.

The wholesalers were not allowed to sell product directly to costumers but only to the public catering firms (kitchens, buffets, pubs and shops). Due to market control these firms could order only those products which belonged to their profile:

KitchensWarm food raw material
BuffetsCold food raw material
Sweets shops   Fruit, sweets and ice cream
BazaarsAll other not mentioned above
All price information was public even the orders from the External Trade Company so the whole economy was rather transparent. This transparency created a trustful milieu and helped to reach all agreements without conflicts.

In 2011 two new kinds of enterprise entered the competition; the arbitrators and the public area units. Both kinds were working under the uniform rules like all other firms. The arbitrator was a chosen magistrate who was called on in case of conflicts and for a small charge he meted out justice. Nobody could defy the judgment except another arbitrator. So, if only one arbitrator was called he decided the case and if the other side also called an arbitrator (this was typical) than they had to reach an agreement. If they were not able to agree the Supreme Court would have decided and one of the arbitrators (or both) had to pay a serious penalty. This was the rule but never been implemented since the players rather reached agreement on the first level than pay for justice. In very few cases the arbitrators were called on and they produced immediate agreement.

Public space in the camp was managed in the form of public area units. The total area of the camp was divided into area lots and each lot had an owner in the same way all other firms had. The owner had to keep the lot in order, and had the right to charge a fee for any activity there. The lot owner could charge mobile firms (like hawkers) as much as he liked but he had to bargain with the owners of immovable ones (like kitchens). If they were not able to agree an arbitrator had to be called on. Contrary to all expectations there were very few problems. In most of the cases they easily made agreement rather than pay for the arbitrators. The Supreme Court remained only a threat. But this threat was important to easily find mutual agreement and to help co-operation.

The miniature society was working wonderfully. The citizens enjoyed the situation. All of them took part in the activity of the firms; most of them were also owners, at least for a while. The bigger firms usually employed helpers. The owners had instructive experiences; they had to make a resolution hourly about supply, stocks, marketing strategy, costs, prices and wages – which was useful for them quite independently from the Liska Model. The average age of the players was just over twenty but their inventiveness made up for their inexperience. At the very beginning they interconnected the services. The owners of the living quarters came to an understanding with the owners of lavatories and the use of the showers were included in the price of the accommodation. Similarly they solved the “breakfast service in bed” and the half board in cooperation with kitchens and buffets. Portions of foods were sold in advance on meal vouchers. Bars and buffets employed agents and it was not easy for participants to resist the barrage of offers. They organized parties and quiz games where the entrance fee covered a considerable amount of food and drink, too.

One source of the general good feeling was that everyone had the possibility to choose: either he could work or have a rest and enjoy himself. There was not a must; anyone did what he would have liked to do; whatever he had done he took the consequences. The “state” did not change the rules, did not encroach on the economy. The organizers easily found helpers when needed for communal tasks (like setting up the stage for the evening concert) for a small charge and if there were too many applicants for the job, they were bidding.

Everyone worked for a while, even those who initially determined not to do so. Some equipment (grills, waffle iron) were typically relocated to renters. The renter could buy it any time but the one who wanted to provide a grill party at a specific evening made an agreement with the owner rather than buying the whole thing. Since the raw material could be bought only by the owner this was also included in the agreement beside the rent fee. The renter did the work not for the money; nevertheless it was one of his motivations. They had a life of ease without extra income too, but to try something that was a pleasure to try and beside make some money, that was really great. Would not it be nice if this kind of practice was not only typical in LisKaLand?

For understanding the substance of the Liska Model the eight days of the camp was definitely more efficient then the one-semester course at the Corvinus University of Budapest in the last twelve years, especially if we consider the fact that previously many of the students had only a very vague idea of Tibor Liska’s conception.

The selection system of the model was working perfectly; it verified the expectations about the new form of ownership. This form of ownership was tried already in other experiments, too, and always proved it really selected the best owner.

To overtake a firm was a rather simple procedure. The one who had enough money or credit limit just logged in the banking system and bought the firm and he immediately became the new owner, the purchase price (i.e. the actual value of the firm) was transferred from the account of the new owner to the account of the old one. The new owner already could increase (and usually did) the value of the firm. Afterwards with an arbitrator (it was not obligatory but recommended) they went to the old owner, informed him about the new situation and he had to decide to hand over the firm or buy it back. If he decided to pass they surveyed the stocks, the new owner paid additionally in supply price and life could go on from there.

At the beginning of the camp there were particularly many speculative takeovers with considerable overbids and often the old owner bought back the firm and made additional bidding at the same time. The players were quick to understand the matter; from the third day the values of the firms were raised in time. The number of the changing of the owners quickly fell, especially of the speculative ones. The handovers by agreement became typical: the old owner first devaluated the firm to the level of the agreed value and the new owner was bidding up after taking over.

This camp was not the first experiment with the Liska Model, but this was the closest to the basic concept. The most relevant departure from the original model was that here the owners had got less shielding to save their property. The tax to be paid after the property was much higher (6% against the original 1%), so the form of the ownership got farther from private ownership and closer to tenancy. The cheaper the property tax is the greater the shielding for the owner is. On the other hand, in the original model this tax is not a real tax as it is paid for the next generation, it has to be paid into the player’s own account, into the non riskable (blocked) part of the social inheritance, which can be used during his lifetime. The basic concept is that the present generation collects inheritance for the next generation. The model allows, even motivates, entrepreneurs to be as efficient as they can be, and at the same time to generate a bigger amount for their own social inheritance account. Though they can use it throughout their lifetime, finally they leave a bigger inheritance to the next generation, since the blocked part will be redistributed among newborn babies. This idea about the redistribution among successive generations did not make sense in the camp, so here the rational replacement became the real taxation (only symbolic parts of it were added to the blocked account).

The parameters of the Liska Model (interest rate, property tax, riskable rate) are all exogenous variables; they cannot be determined arbitrarily as they depend on the environment in which the model is operating. It would be hard to explain why just these values were applied but since these values proved to be really useable, it was a lucky choice.

The main theoretical results of LisKaLand was to verify (not prove, since it would need much more experiments) the expectations about the new form of ownership. The 8-days camp justified that this form of ownership is indeed able to select the right man for the right place without external intervention and in a self-controlled way. One might even say that this attitude seems to be the main obstruction of the expansion of this kind of ownership in practice, since possibly nobody wants to give up the control of the selection system.

Tibor F. Liska        
September 2011.