Virtuous rent: a rudder that can transform our economy.

Peter Barnes: The London Underground abounds with warnings to “mind the gap,” referring to the space between station platforms and train doors. In our larger society similar warnings could be issued for the gaps between rich and poor and between humans and nature. These gaps must not only be minded, they must also be narrowed. The persistent question is how to do this, and I con­tend that a form of rent may be the best possible tool. But before we get to that, we must first become familiar with rent.

The term was first used by classical economists, including Adam Smith, to describe money paid to landowners. It was one of three income streams in the early years of capitalism, the others being wages paid to labor and interest paid to capital.

In Smith’s view, landlords benefited from land’s unique ability to enrich its owners “independent of any plan or project of their own.” This ability arises from the fact that the supply of good land is limited, while the demand for it steadily rises. The effect of landowners’ collection of rent, he concluded, isn’t to increase society’s wealth but to take money away from labor and capital. In other words, land rent is an extractor of wealth rather than a contributor to it.

A century later, a widely-read American economist named Henry George (his magnum opus, Progress and Poverty, sold over two million copies) enlarged Smith’s insight substantially. At a time when Karl Marx was blaming capital­ists for expropriating surplus value from workers, George blamed landlords for expropriating rent from everyone. Such ­rent­ extraction operated like “an immense wedge being forced, not underneath society, but through society. Those who are above the point of separation are elevated, but those who are below are crushed down.” George’s proposed remedy was a steep tax on land that would recapture for society most of landowners’ parasitic gains.

More recently, the concept of rent was expanded to include mono­poly pro­fits, the extra income a company reaps by quashing com­pe­tition and raising prices. Smith had written about this form of wealth extraction too, though he didn’t call it rent. “The interest of any particular branch of trade or manufac­tures is always to widen the market and to narrow the competition…To widen the market may frequently be agreeable enough to the interest of the public; but to narrow the competition must always be against it, and can only serve to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens.”

It’s important to recognize that the tax Smith spoke of isn’t the kind we pay to government; rather, it’s the kind we pay, much less visibly, to businesses with power. That’s because prices in capitalism are driven by four factors: supply, demand, market power and politi­cal power. The first two, which are omnipresent in economics texts, deter­mine what might be called fair market value; the last two, which are prevalent in the real world, determine rent. Actual prices charged are the sum of fair market value and rent. Another way to say this is that rent is the extra money people pay above what they’d pay in truly com­pe­titive markets.

More recently, the term has been further extended to include income from privileges granted by government—import quotas, mining rights, subsidies, tax loop­holes and so on. Many econo­mists use the term “rent-seeking” to describe the multiple ways special interests use govern­ment to enrich them­selves at the expense of others. If you’re wondering why Washington, D.C. and its envi­rons have grown so prosperous in recent decades, it’s not because govern­ment itself has become gargantuan, it’s because rent-seeking has.

In short, traditional rent is income received not because of anything a person or business produces, but because of rights or power a person or business possesses. It con­sists of takings from the larger whole rather than additions to it. It redis­tributes wealth within an econ­omy but doesn’t add any. As British economist John Kay put it in the Financial Times, “When the appropriation of the wealth of others is illegal, it’s called theft or fraud. When it’s legal, it’s called rent.”

Because rent isn’t listed separately on any price tag or corpor­ate in­come statement, we don’t know exactly how much of it there is, but it’s likely there’s quite a lot. Consider, for example, health care in America, about one-sixth of our economy. There are many reasons the U.S. spends 80 percent more per capita on health care than does Canada, while achieving no better results, but one of the biggest is that Canada has wrung huge amounts of rent out of its health care system and we haven’t. Every Canadian is covered by non-profit rather than profit-maximizing health insurance, and pharmaceuti­cal prices are tightly controlled. By contrast, in the U.S., drug companies overcharge because of patents, Medicare is barred from bargaining for lower drug prices, and private insurers add many costs and inefficiencies.

Or consider our financial sector. Commercial banks, the kind that take depo­sits and make loans, receive an immensely valuable gift from the federal gov­ernment: the right to create money. They’re allowed to do this through what’s called fractional reserve bank­ing, which lets them lend, with interest, about ten times more than they have on deposit. This gift alone is worth billions.

Then there are commercial banks’ cousins, investment banks, which are in the business of trading securities. They can’t mint money the way commercial banks do, but they have tricks of their own. For one, they charge hefty fees for taking private companies public, thus seizing part of the liquidity pre­mium public trading creates. For another, they make lofty sums by creat­ing, and then manipulating, hyper-complex financial “products” that are, in effect, bets on bets. This pumps up the casino economy and extracts capital that could otherwise benefit the real economy.

We could wander through other major industries—energy, tele­com­muni­ca­tions, broadcasting, agriculture—and find similar ex­tractions of rent. What percentage of our economy, then, consists of rent? This is a question you’d think economists would explore, but few do. To my knowledge, the only prominent economist who has even raised it is Joseph Stiglitz, a Nobel laureate at Columbia University, and he hasn’t answered it quantitatively.

The amount of rent in the U.S. economy, Stiglitz says, is “hard to quantify (but) clearly enormous.” Moreover, “to a significant degree,” it “redistributes money from those at the bottom to those at the top.” Further, it not only adds no value to the economy, it “distorts resource allocation and makes the econ­omy weaker.” 

So far I’ve described rent as a negative force in our economy. Now I want to introduce the concept of virtuous rent, a form of rent that would have distinctly positive effects.

A perfect example of virtuous rent is the money paid to Alaskans by the Alaska Permanent Fund. Since 1980, the Permanent Fund has distributed equal yearly divi­­dends to every person who resides in Alaska for one year or more. The divi­dends—which have ranged from $1,000 to $3,269 per person —come from a giant mutual fund whose beneficiaries are all the people of Alas­­ka, present and future. The fund is capitalized by earnings from Alaska’s oil, a commonly owned resource. Given the steady flow of cash to its entire pop­u­la­tion, it’s not surprising that Alaska has the highest median income and one of the lowest pover­ty rates of any state in the nation.

Broadly speaking, virtuous rent would be any flow of money that starts by raising the cost of harmful or extractive activity and ends by increasing the incomes of all members of society. Another way to think of it is as rent that we, as collective co-owners, charge for private use of our common assets. Think, for example, of charging polluters for using our common atmosphere and then sharing the proceeds equally.

There are two key differences between traditional and virtuous rent. The first has to do with how the rent is collected, the second with how it’s distributed.

Traditional rent is collected by businesses whose market and/or political power enables them to charge higher-than-competitive prices. It leads to higher prices that serve no economic, social or ecological function. Virtuous rent, by con­trast, would be collected by not-for-profit trusts that represent all mem­bers of a polity equally. It would be generated by charging private busi­nesses for using common assets that most of the time they use for free. Such rent would also lead to higher prices, but for good reasons: to make business­es pay costs they currently shift to society, nature and future genera­tions, and to offset traditional rent.

The second difference is distributional. Traditional rent flows upward to the small minority that owns most of the stock of rent-extracting businesses. Virtuous rent would flow to everyone equally.

When collection and distribution are merged, the effects of traditional rent are doubly negative: it diminishes the efficiency of our economy and the in­comes of all those who pay it but don’t get any. The effects of virtuous rent, by con­trast, are doubly positive: it increases the health and fairness of our economy and the security of our middle class.

At this moment, of course, traditional rent totals trillions of dollars a year, while virtuous rent (out­side of Alaska) is more of a concept than a reality. But virtuous rent can and should grow. To understand how this could hap­pen, it’s necessary to ex­plore two other concepts: common wealth and exter­nalities.

Common wealth has several components. One consists of gifts of nature we inherit together: our atmosphere and oceans, water­sheds and wetlands, forests and fertile plains, and so on. In almost all cases, we overuse these gifts because there’s no cost attached to using them.

Another component is wealth created by our ancestors: sciences and techno­lo­gies, legal and political systems, our financial infra­structure, and much more. These confer enormous benefits on all of us, but a small minority reaps far more financial gain from them than do most of us.

Yet another chunk of common wealth is what might be called “wealth of the whole”—the value added by the scale and syner­gies of our economy itself. The notion of “wealth of the whole” dates back to Adam Smith’s insight two-and-a-half centuries ago that labor specialization and the exchange of goods —pervasive features of a whole system—are what make nations rich. Beyond that, it’s obvious that no business can prosper by itself: all busi­nesses need cus­­tomers, suppliers, distributors, highways, money and a web of comple­men­tary products (cars need fuel, software needs hardware, and so forth). So the economy as a whole is not only greater than the sum of its parts, it’s an asset without which the parts would have almost no value at all.

The sum of wealth created by nature, our ancestors and our econ­omy as a whole is what I here call common wealth. Several things can be said about our common wealth. First, it’s the goose that lays almost all the eggs of private wealth. Second, it’s extremely large but also (like the dark matter of the universe) mostly invisible. Third, because it’s not cre­ated by any indivi­dual or business, it belongs to all of us jointly. And fourth, because no one has a greater claim to it than anyone else, it belongs to all of us equally, or as close to equally as we can arrange.

The big, rarely asked question about our current economy is who gets the benefits of common wealth? No one disputes that private wealth creators are entitled to the wealth they create, but who is entitled to the wealth we share is an entirely different question. My contention is that the rich are rich not so much because they create wealth, but because they capture a much larger share of common wealth than they’re entitled to. Another way to say this is that the rich are as rich as they are—and the rest of us are poorer than we should be—because extracted rent far exceeds virtuous rent. If that’s the truth of the matter, the solution is to diminish the first kind of rent and increase the second kind. 

Externalities are a better-known concept than common wealth. They’re the costs businesses impose on others—workers, communities, nature and fu­ture generations—but don’t pay themselves. The classic example is pollution.

Almost all economists accept the need to “internalize externalities,” by which they mean making businesses pay the full costs of their activities. What they don’t often discuss are the cash flows that would arise if we actually did this. If businesses pay more money, how much more, and to whom should the checks be made out?

These aren’t trivial questions. In fact, they’re among the most momentous questions we must address in the twenty-first century. The sums involved can, and indeed should, be very large—after all, to diminish harms to nature and society, we must internalize as many unpaid costs as possible. But how should we collect the money, and whose money is it?

One way to collect the money was proposed nearly a century ago by British economist Arthur Pigou, a colleague of Keynes’ at Cam­bridge. When the price of a piece of nature is too low, Pigou said, government should impose a tax on using it. Such a tax would reduce our usage while raising revenue for government.

In theory Pigou’s idea makes sense; the trouble with it lies in imple­mentation. No western government wants to get into the business of price-setting; that’s a job best left to markets. And even if politicians tried to adjust prices with taxes, there’s little chance they’d get them “right” from nature’s perspective. Far more likely would be tax rates driven by the very corporations that domi­nate government and overuse nature now.

An alternative is to bring some non-governmental entities into play; after all, the reason we have externalities in the first place is that no one represents stakeholders harmed by shifted costs. But if those stakeholders were repre­sent­ed by legally accountable agents, that problem could be fixed. The void into which externalities now flow would be filled by trustees of common wealth. And those trustees would charge rent.

As for whose money it is, it follows from the above that payments for most externalities—and in particular, for costs imposed on living creatures present and future—should flow to all of us together as beneficiaries of common wealth. They certainly shouldn’t flow to the companies that impose the exter­nalities; that would defeat the purpose of internalizing them. But neither should they flow to government, as Pigou suggested.

In my mind, there’s nothing wrong with government taxing our individual shares of common wealth rent, just as it taxes other personal income, but government shouldn’t get first dibs on it. The proper first claimants are we, the people. One could even argue, as economist Dallas Burtraw has, that government capture of this income may be an unconstitutional taking of pri­vate property.

This brings us back to virtuous rent. There are several points that can be made about this sort of rent.

First, paying virtuous rent to ourselves has a very different effect than paying extractive rent to Wall Street, Microsoft or Saudi princes. In addition to dis­couraging overuse of nature, it returns the money we pay in higher prices to where it does our families and economy the most good: our own pockets. From there we can spend it on food, housing or anything else we choose. Such spending not only helps us; it also helps businesses and their employees. It’s like a bottom-up stimulus machine in which the people rather than the government do the spending. This is no trivial virtue at a time when fiscal and monetary policy have both lost their potency.

VIRTUOUS RENT

Second, virtuous rent isn’t a set of government policies that can be changed when political winds shift. Rather, it’s a set of pipes within the market that, once in place, will circulate money indefinitely, thereby sustaining a large middle class and a healthier planet even as politicians and their policies come and go.

And third, though virtuous rent requires government action to get started, it has the political virtue of avoiding the bigger/smaller government tug-of-war that paralyzes Washington today. It thus can appeal to voters and politicians in the center, left and right.

A trim tab is a tiny flap on a ship or airplane’s rudder. The designer Buck­minster Fuller often noted that moving a trim tab slightly turns a ship or a plane dramatically. If we think of our economy as a moving vessel, the same metaphor can be applied to rent. Depending on how much of it is collected and whether it flows to a few or to many, rent can steer an economy toward extreme inequality or a large middle class. It can also guide an economy toward excessive use of nature or a safe level of use. In other words, in addi­tion to being a wedge (as Henry George put it), rent can also be a rudder. An economy’s outcomes depend on how we turn the rudder.

Think about the board game Monopoly. The object is to squeeze so much rent out of other players that you wind up with all their money. You do this by acquiring monopolies and building hotels on them. However, there’s another feature of the game that offsets this extracting of rent: all players get a cash payment when they pass Go. This can be thought of as virtuous rent.

As Monopoly is designed, the rent extracted through monopoly power greatly exceeds the virtuous rent players receive when pass­ing Go. The result is that the game always ends the same way: one player gets all the money. But sup­pose we tip the scale the other way. Suppose we decrease the extracted rent and increase the virtuous kind. For example, we could pay players five times as much for passing Go and reduce hotel rents by half. What then happens?

Instead of flowing upward and concentrating in the hands of a single winner, rent flows more evenly. Instead of the game ending when one winner takes all, the game continues with many players remaining.

The point I wish to make is that different rent flows can steer a game—and more importantly, an economy—toward different outcomes. Among the out­comes that can be affected by differing rent flows are the levels of wealth co­n­centration, pollution and real investment as opposed to specu­lation.

Rent, in other words, is a powerful tool. And it’s also something we can fiddle with. Do we want less extracted rent? More virtuous rent? If so, it’s up to us to build the pipes and turn the valves.

Photo by Paul Housberg

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In Alaska the Fund, operating as an independent, state-chartered trust, holds an equity stake in oil on state lands and therefore reaps a royalty on a portion of the oil extracted.  This is deposited in a massive trust fund, worth more than $52 billion, which kicks off revenues in the form of “dividends” for every resident of the state, including children.  The sums usually amount to $1,000 to $2,000 per year.

Peter Barnes in his 2006 book Capitalism 3.0 suggested a number of ways in which the permanent fund idea could be applied to other common assets that are now plundered for private gain, such as forests, the atmosphere, the copyright and patent systems, and the financial regulatory apparatus.  The State of Vermont has entertained the idea of establishing permanent funds for some of its common assets, but the idea has not moved there. (See the 2008 report, “Valuing Common Assets for Public Finance in Vermont.”)

I was therefore thrilled to learn recently about a fascinating version of the permanent fund that the Supreme Court of India has mandated for the state of Goa.  In the course of public-interest litigation, it was discovered that, over the course of an eight-year period, the Goan government had allowed private mining companies to cart away 95% of the value of minerals on public lands, or about US$8.5 billion. This sum is twice the total state revenues for those eight years, or about$5,800 (Rs.3.7 lakhs) for each man, woman and child in Goa. In addition, private mining companies had caused all sorts of environmental destruction.

Rahul Basu, an Indian activist who brought the Goa Iron Ore Permanent Fund to my attention, noted that “since minerals are a part of the commons, i.e., owned by all of us, this loss is effectively a per-head tax. Everyone loses equally, and a few get richer.  This is not trickle-down, it is gush-up. This is a highly regressive redistribution of wealth.”  Basu also noted that government privatization of common assets violates principles of equality, and thus runs contrary to Article 17 of the Universal Declaration of Human Rights.  “We have found similar issues in iron ore, coal, oil & natural gas elsewhere in India,” writes Basu.  “As royalty rates are usually set by trying to attract investment into the sector, countries race to the bottom.”

In response, the Indian Supreme Court in 2012 ordered a new levy of 10% of the value of iron ore in Goa be collected and deposited into a new Goa Iron Ore Permanent Fund.  This would help ensure that the benefits derived from mineral extraction in Goa would go to the people, and not be diverted to private parties colluding with state officials. The court’s ruling the first time that a court anywhere had ordered such a remedy, and it resulted in the first permanent fund in India.

Significantly, the Court’s ruling relied on the public trust doctrine and principle of “intergenerational equity.” The public trust doctrine declares that governments are trustees of certain resources for the public and future generations, and therefore cannot legally give away or privatize common assets.  In essence, they belong to the commons.  Under the India Constitution, the state government owns minerals, not the central government, as in the US.  It therefore falls on the state of Goa to ensure that the public reaps the full value of its minerals – a failure that the Indian Supreme Court ruling sought to remedy.

Of course, implementing the Supreme Court’s ruling has been the hard part.  The Goa state and private mining companies are fiercely resisting.  As Basu reports, although the Goa Iron Ore Permanent Fund now exists with about US$10 million in it, the State is fighting idea of Citizen Dividends and trying to weaken the operational structure. The Supreme Court has rejected the first two draft plans, in part because of provisions that would make the Fund less than permanent.

This has prompted citizen proponents of the Fund to launch the Goenchi Mati campaign to fight the state’s weak governance plan for the Fund and to stop abusive mining and royalty-collection practices. The group has three major demands:

1)  Uphold “zero-loss mining” by ensuring that the State of Goa captures the full value of minerals for the public interest;

2) Treat revenues from minerals as capital receipts (sale of assets), and not as mere windfall revenues to the state.  This would help reduce the volatility of government revenues derived from commodities.  And

3) Establish a permanent fund that functions as a trust for the people and future generations, not just for iron ore but for other minerals such as bauxite and coal.

The campaign calls for the establishment of a “Future Generations Fund” that would serve as an endowment fund for the people, with income reinvested to ensure that the principal is protected and keeps pace with inflation. One useful model is the Government Pension Fund run by Norway, which deposits 100% of oil revenues into a permanent fund of about US$90 billion, which yields a real return of more than 4% per annum, or about $7,000 per person.  By contrast, Alaska puts only 25% of oil revenue into its permanent fund, with the rest into the state treasury, which makes that money subject to all sorts of political and cyclical economic pressures.

Think about how permanent funds for common assets in poorer countries could vastly reduce inequality and poverty!  Basu estimates that if the world’s $50 trillion of capital receipts from minerals were to be put into permanent funds, they would generate 3% real returns for everyone and result in $1.5 trillion in dividends, or about $2,100 per capita — about $6 daily.  This is far more than people in many countries, including India, now earn.  Ah, but the political struggle of the people to reap the benefits of what they already own, morally if not legally, remains.

If you’d like to learn more about the Goenchi Mati Campaign (“Stop the Theft of Our Common Resources, Our Children’s Future”) there is a website, Facebook page and Twitter feed.

Cross-posted from Bollier.org

Photo by Abhisek Sarda

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The latest discussion among members of the Great Transition Initiative focuses on a pragmatic institutional innovation for protecting and sharing co-owned resources, as outlined in an incisive article by Peter Barnes on Common Wealth Trusts. In response to Barnes’s contribution to this vital debate, STWR’s Rajesh Makwana argues that we must not shy away from the need to challenge neoliberalism, the influence and power of multinational corporations or the increasingly undemocratic nature of our political institutions. 

To read Peter Barnes’s essay along with other selected comments from the discussion, as well as Barnes’s response to the debate, please visit: http://www.greattransition.org/publication/common-wealth-trusts

By reconceptualizing a commons-based approach to protecting and sharing co-owned assets as a traditional market-based mechanism, Peter Barnes essentially presents a convincing “hack” of capitalism. Few progressives are capable of expressing far-reaching ideas in such accessible language or formulating truly pragmatic proposals that are based squarely on the ethic and practice of sharing. Although Barnes’s model for common wealth trusts has significant implications for re-organizing economic systems, his proposal will appeal to those on both the left and right of the political spectrum as well as those who might favor a less radical path to addressing some of the most damaging aspects of modern capitalism.

Somewhat indirectly, Barnes also makes an important contribution to the evolving debate on how to fund a universal basic income at a time when many governments are facing severe budgetary restrictions and the cost of such schemes are widely considered unaffordable. Rather than diverting funding from (and curtailing) existing welfare programs, it is conceivable that a basic income funded through the value of shared resources could help preserve solidarity-based systems of social protection, supplement dwindling incomes, and thereby help reduce inequalities.

As a model for raising resource rents from natural resources, Barnes’s proposal also has significant implications for funding social dividends in developing countries—particularly those that are afflicted by the “resource curse.” Unconditional social dividends from resource rents paid directly to citizens in low-income countries could be administered by an independent trust rather than the public sector, and could dramatically reduce human deprivation.

In line with the view that ending hunger and poverty should be a central pillar of any great transition, perhaps the most radical aspect of Barnes’s concept is the potential to apply it at the international level as a mechanism for managing and sharing global resources. As Thomas Pogge argues in his proposal for a “global resource dividend,” all human beings should be recognized as having an inalienable stake in the world’s natural resources (such as fossil fuels) and should therefore be entitled to a share of their value.[1]

Similarly, Alanna Hartzok has proposed that a global resource agency could collect resource rents from the exploitation of a range of shared resources, including ocean fisheries, the sea bed, and the electromagnetic spectrum.[2] It is feasible that the funds generated by a global resource trust could be used to fund urgent global public goods such as universal social protection or to generate a global citizen’s income. In this way, Barnes’s model could be scaled up to facilitate an international redistribution of wealth, while limiting global resource use and waste production through globally agreed “caps.”

For all the above reasons, Barnes clearly makes a vital contribution to the growing debate on how to share our common wealth. However, his proposition fails to adequately challenge the ideology of neoliberalism, the influence and power of multinational corporations over public policy decisions, or the increasingly undemocratic nature of our political institutions. Barnes places little faith in governments and argues that they cannot be trusted to protect the interest of future generations. While that might be true within the current context, surely any great transition must involve tackling this issue head-on: we cannot shy away from the need to democratize governments to ensure they represent public rather than private interests and actively protect the biosphere for future generations.

Given the ongoing tendency of policymakers to privatize public assets rather than share them for the common good, it is unlikely that governments will consider establishing common wealth trusts unless political power is radically decentralized. It is clear, therefore, that a program of social dividends derived from shared wealth is not a panacea and should only be implemented as part of a comprehensive program of progressive reforms that seek to redistribute wealth, power, and resources across all levels of society.

Notes

1. Thomas Pogge, “Eradicating Systemic Poverty: Brief for a Global Resources Dividend,” Journal of Human Development 2, no. 1 (2001): 59-77, http://unpan1.un.org/intradoc/groups/public/documents/APCITY/UNPAN002063.pdf

2. Alanna Hartzog, The Earth Belongs to Everyone (Radford, VA: The Institute for Economic Democracy, 2008), http://www.earthrights.net/pubs/the-earth-belongs-to-everyone.pdf. Specifically, see chapters 9 (p. 127), 14 (p. 172), and 30 (p. 334).

Image credit: Charamelody – flickr creative commons

– See more at: http://www.sharing.org/information-centre/blogs/debating-how-protect-and-share-commons#sthash.Ge754hH9.dpuf

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Peter Barnes, an old colleague of mine who writes about the commons from an economic perspective, recently published an essay about “common wealth trusts” as a structure to be used in transitioning to a new economy.  The essay, on the Great Transition Initiative website, recapitulates and extends an idea that Barnes has written about in the past – how to use stakeholder trusts to manage common assets (minerals, forests, electromagnetic spectrum, groundwater, etc.) while providing dividends to all citizens who are also co-owners of those assets.

Barnes argues that common wealth trusts “address the two greatest flaws in contemporary capitalism—its relentless destruction of nature and widening of inequality—while still keeping the benefits that markets provide.”  Trusts can work because they can provide clear (collective) property rights and formal management systems around resources that are invisible to markets and in many instances threatened with privatization.  He writes:

…..Markets currently do not acknowledge such wealth or recognize its value, much less its common ownership. Because of this enormous market failure, private businesses take, use, or pollute common wealth without limit, generally without paying its right­ful owners for the pri­vi­lege. By so doing, private businesses and their narrow group of owners capture much of the value added by common wealth, exacerbating inequality. If businesses had to pay for the use of common wealth, these things would not happen, or at least would happen much less. What are now unpriced exter­nal­i­ties or straight-out thefts would become costs for businesses that could generate income for everyone.

“Organizing common wealth so that markets respect its co-inheritors and co-beneficiaries requires the creation of common wealth trusts, legally accountable to future generations,” Barnes argues. “These trusts would have authority to limit usage of threatened ecosystems, charge for the use of public resources, and pay per capita dividends. Designing and creating a suite of such trusts would counterbalance profit-seeking activity, slow the destruction of nature, and reduce inequality.”

One of the satisfying features of the Great Transition Initiative’s essay series is the curated commentary on featured essays. In this case, nine commenters offer short but focused responses to Barnes’ proposals.

Development specialist James Quilligan worries about the need to scale common wealth trusts by federating them through innovations such as “bioregional councils, guilds, entrepreneurial hubs, and strategic planning agencies.”

Geographer Neera Singh is concerned about the inequalities that result by declaring that an ecosystem resource belongs to everyone because such “equality” may ignore past inequities in investment in a resource:  “Investment of caring labor by people living in these landscapes cannot be ignored. To treat these natural resources as “common wealth” belonging to “everyone” equally will be to introduce another layer of injustice over past injustices.  It is critical to address issues of redistribution. In the absence of radical redistribution of the “common wealth” generated by the past appropriation of the gifts of nature and of indigenous people, peasants, and pastoralists, starting with treating ‘natural resources’ as common wealth, today, will not be enough.”

Economist Elizabeth Stanton worries that politics will interfere with the establishment of a system of common wealth trusts:  “As tempting as it is to try to write our political system out of the equation, we will likely need to continue to wade through the morass of political mechanisms that shape our decision-making processes.

Barnes offers direct responses to his friendly critics, which helps illuminate the possibilities and limits of common wealth trusts. One virtue of his idea is that it is immediately actionable within contemporary political settings.  The legal models are straight-forward; just add political advocacy. Yet some critics regard the ready-to-go character of common wealth trusts as precisely its shortcoming:  it does not change the fundamental dynamics of markets or politics (although Barnes would note that commons trusts can help establish strict new limits on market exploitation of resources and prevent privatization of resources).

An ongoing, timely debate that is worth continuing….

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What a pleasure, then, to read Peter Barnes’ new book and discover some sensible, practical ideas.  Barnes is a writer, entrepreneur and long-time friend; we worked together a decade ago with the late Jonathan Rowe in exploring the great potential commons in re-imagining politics, policy, economics and culture. The author of pioneering policy ideas in Who Owns the Sky? and Capitalism 3.0, Barnes has just published With Liberty and Dividends for All:  How to Save Our Middle Class When Jobs Don’t Pay Enough (Berrett-Koehler Publishers). 

The book aims to reduce inequality not through the tax system or education and training, but by inventing new commons-based institutions that can generate nonlabor income for everyone.  The secret of the wealthy, of course, is that they don’t depend on salaries or wages, but on investment income from their equity assets.

So how might commoners pull off this trick?  By generating income from common assets.  The money won’t come from government spending or redistribution, or from new taxes on business.  It will come from commoners seizing control of the shared equity assets they already own – the atmosphere, airwaves, the sovereign right to create money (now enjoyed by banks), and the public institutions that make stock markets and copyrights possible.

These equity assets belong to all of us. Unfortunately, most of the benefits from these assets have been privatized by banks, oil companies, telecom companies, the culture industries, depriving us of income to which we, as common property holders, are entitled.

Barnes proposes renting out various common assets to businesses that wish to use them.  This is a well-accepted principle – to pay for something owned by someone else.  Why should companies get a free ride on public assets?  Barnes proposes charging corporations for the use of the airwaves, the pollution sink of the atmosphere, and the right to monopoly protections such as copyrights, trademarks and patents.  Revenues from our common assets could be channeled into independent, non-governmental trust funds that would then regularly generate dividends for everyone.

Barnes introduces us to these ingenious ideas with an astonishing clarity and concision, and with a passion for fairness that would make most economists squirm.  Despite delving into some arcane fields of economics, social policy and law, his sentences are brisk and lucid, and his scholarship lightly worn (but with sufficient endnotes).  He takes us to a zone of policy originality that even Joseph Stiglitz, Paul Krugman, Robert Reich and Amartya Sen haven’t dared to visit.

The beauty of Barnes’ proposals is that revenues for commoners would be generated without political stigma.  The money cannot be criticized as reckless government spending or money taken from others through government distribution.  Nor could it be criticized as an unfair giveaway to the “undeserving poor.”  Revenues earned from common assets would be considered a birthright entitlement – a revenue stream to which commoners are entitled by dint of their citizenship.  One person, one share.  This is part of the great political achievement of Barnes’ proposals – they have wide appeal across the ideological spectrum.

“Co-owned wealth is the underappreciated complement to privately owned wealth,” writes Barnes.  “It consists of assets created not by individuals or corporations but by nature or society as a whole.  This little-noticed cornucopia includes our atmosphere and ecosystems, our sciences and technologies, our legal and financial systems, and the value that arises from our economic system itself.  Such co-owned wealth is hugely valuable but at the moment is barely recognized.”

Barnes is not intent on toppling capitalism, but rather on effecting serious structural changes to make it work more fairly and effectively for commoners.  This takes him on a quest for the “Money River,” a term that he borrows from a Kurt Vonnegut novel:  “Forget about hard work and the merit system and honesty and all that crap, and get to where the Money River is,” declares a character in Vonnegut’s God Bless You, Mr. Rosewater. 

For most businesses and wealthy people, the Money River flows from ownership of equity assets, preferably assets that others have been freely subsidized by the government or taxpayers.  These are the equity assets that produce “extractive rents” – undeserved profits that stem from monopoly ownership or unfair, noncompetitive control of an asset.

Barnes points out, for example, that Bill Gates’ $72 billion fortune, is not just a case of a smart guy who worked really hard (although he sure did).  His fortune stems mostly from the network effects of Microsoft software that stymies competition, its market power in getting Microsoft software preinstalled on all computers, and the copyright protection that the government gives Microsoft for free.

The dirty little secret of capitalism is that huge amounts of investors’ income derive from unearned “rents,” not from free and open competition.  Seen in this respect, Barnes writes, “Gates’ fortune wasn’t earned by him but rather was taken by him from wealth that rightfully belongs to everyone.”

Barnes has noted that entrepreneurs who take their private companies public immediately reap a huge windfall, often as much as 30% or more.  This is a “liquidity premium” made possible by the huge apparatus of regulatory institutions, laws, courts and other public bodies, which give investors the confidence to invest in a stranger’s enterprise.  It’s a very large expense that the rest of us are paying for, but which entrepreneurs enjoy for free.

So what if commoners could control their own renewable equity assets and charge businesses to use them?  Barnes calculates that we could have “dividends for all” if we could collect fair-market value from businesses that wish to pollute the atmosphere, by establishing “cap-and-dividend” carbon trading schemes.  We could charge those who wish to use the electro-magnetic spectrum for broadcasting.  Why should banks be able to create 90% of the money supply for free, through fractional-reserve bank lending?  Why not let this benefit accrue to the public?  Why should investors be able to make speculative investments in a massive casino maintained through government regulation and oversight?  Why not charge a small percentage of these costs to investors?

Barnes calculates that charging for these private uses of common assets could produce between $1 trillion and $1.48 trillion, which in turn could generate dividends for of family of four of $13,428 and $19,812.  Now there’s a big step toward reducing inequality!

Barnes ideas are based on the highly successful example of the Alaska Permanent Fund, which since 1980 has established a trust fund with over $4 billion, which produces yearly dividends of $1,000 or more for every resident of Alaska ($4,000 for families of four).

Even Sarah Palin and conservatives like Bill O’Reilly are ardent supporters of the Alaska Permanent Fund because the Fund is about controlling what we already own, not taking it from someone else.  It’s about predistribution of our own assets, not redistribution from someone else.  And because such funds are treated as universal entitlements – not something that only the poor receive – there is no social division or resentment from this source of income.

Barnes astutely points out that “co-owned wealth dividends would have one further benefit:  they’d keep our economy humming by maintaining consumer purchasing power.”  It is this last point that may give some commoners pause.  Do we really want to rev up the market machine and its growth dynamics? Part of the answer is that dividends are less about fueling growth than in stabilizing basic livelihoods and subsistence.

Barnes is also aware of the dangers of monetizing nature, which can lead to harmful market governance of genes, water or seedlines, for example.  But certain shared resources can be prudently be monetized, he insists.  “What keeps it a commons is not whether it is monetized or not, but how the rent is shared.  If the rent is privatized, that’s wrong.  If the rent is shared equally, that’s OK.  Indeed, it’s better than OK — it’s virtuous.  And necessary.”

Barnes argues that monetizing some common wealth “is essential to fixing capitalism’s two biggest flaws: destruction of nature and widening inequality.  None of the moral objections stand up to this high utility value.”

Unlike traditional monetizers of nature, who wish to create markets in order to maximize short-term gains, however, Barnes has another motive entirely.  He wishes to “make visible” in market transactions a wide variety of non-human species, ecosystems, future generations, and society itself (as a whole),” so that their interests can be “heard” in the market.  As Barnes recently reflected:

This tragic flaw of markets [the lack of voice for nature, future generations and society as a whole] must somehow be fixed.  In theory it could be fixed by government regulation and taxation, but given that government itself is almost entirely in the sway of living suppliers and demanders, such a “solution” will never work or last.  Far better to make the market fix itself by introducing agents for the currently unrepresented.

This requires populating the market with entities legally accountable to future generations, other species (when appropriate) and all living pe­r­sons equally — what I have elsewhere called “common wealth trusts.”  As legal scholar Carole Rose has put it, these entities might be thought of as “pro­per­ty on the outside and commons on the inside.”  Outward­ly, the market would see them (and have to respect them) like cor­por­ations, but inwardly they’d be coded to protect their assets for future generations and share current income (if there is any) equally.

If this were done, one result would be the monetization of common wealth that is currently unmonetized.  I have no problem with this.  In fact, it is essential to the whole process.

In Capitalism 3.0, I called this process of legally embodying common wealth propertization — which should not be confused with privatization, which is the giving or selling of common wealth to private owners.  Propertization keeps common wealth common, while at the same time protecting it from private takeover.  An example is the community land trust.

In my view, propertization of selected pieces of common wealth, if done to scale, can fix capitalism’s two most tragic flaws: its relentless destruction of nature and equally relentless widening of inequality.  By making the invisible visible, it can make the invisible hand both smarter and fairer.

Chase down a copy of With Liberty and Dividends for All.  It will challenge many of your assumptions about what can feasibly be accomplished within the existing capitalist system and, indeed, within the framework of the commons.  The reverberations from this short, readable and profoundly original book will be heard for years to come.

Originally published in bollier.org

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