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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There’s been plenty of talk about Thomas Piketty’s recent volume. While the attention and awareness it has generated is not a bad thing, it’s also worth exploring some constructive critiques of the book that go beyond mere defensive slander. Of these we feel that David Harvey’s review of Piketty’s study, originally published on his webpage, is specially relevant.

Thomas Piketty has written a book called Capital that has caused quite a stir. He advocates progressive taxation and a global wealth tax as the only way to counter the trend towards the creation of a “patrimonial” form of capitalism marked by what he dubs “terrifying” inequalities of wealth and income. He also documents in excruciating and hard to rebut detail how social inequality of both wealth and income has evolved over the last two centuries, with particular emphasis on the role of wealth. He demolishes the widely-held view that free market capitalism spreads the wealth around and that it is the great bulwark for the defense of individual liberties and freedoms. Free-market capitalism, in the absence of any major redistributive interventions on the part of the state, Piketty shows, produces anti-democratic oligarchies. This demonstration has given sustenance to liberal outrage as it drives the Wall Street Journal apoplectic.

The book has often been presented as a twenty-first century substitute for Karl Marx’s nineteenth century work of the same title. Piketty actually denies this was his intention, which is just as well since his is not a book about capital at all. It does not tell us why the crash of 2008 occurred and why it is taking so long for so many people to get out from under the dual burdens of prolonged unemployment and millions of houses lost to foreclosure. It does not help us understand why growth is currently so sluggish in the US as opposed to China and why Europe is locked down in a politics of austerity and an economy of stagnation. What Piketty does show statistically (and we should be indebted to him and his colleagues for this) is that capital has tended throughout its history to produce ever-greater levels of inequality. This is, for many of us, hardly news. It was, moreover, exactly Marx’s theoretical conclusion in Volume One of his version of Capital. Piketty fails to note this, which is not surprising since he has since claimed, in the face of accusations in the right wing press that he is a Marxist in disguise, not to have read Marx’s Capital.

Piketty assembles a lot of data to support his arguments. His account of the differences between income and wealth is persuasive and helpful. And he gives a thoughtful defense of inheritance taxes, progressive taxation and a global wealth tax as possible (though almost certainly not politically viable) antidotes to the further concentration of wealth and power.

But why does this trend towards greater inequality over time occur? From his data (spiced up with some neat literary allusions to Jane Austen and Balzac) he derives a mathematical law to explain what happens: the ever-increasing accumulation of wealth on the part of the famous one percent (a term popularized thanks of course to the “Occupy” movement) is due to the simple fact that the rate of return on capital (r) always exceeds the rate of growth of income (g). This, says Piketty, is and always has been “the central contradiction” of capital.

But a statistical regularity of this sort hardly constitutes an adequate explanation let alone a law. So what forces produce and sustain such a contradiction? Piketty does not say. The law is the law and that is that. Marx would obviously have attributed the existence of such a law to the imbalance of power between capital and labor. And that explanation still holds water. The steady decline in labor’s share of national income since the 1970s derived from the declining political and economic power of labor as capital mobilized technologies, unemployment, off-shoring and anti-labor politics (such as those of Margaret Thatcher and Ronald Reagan) to crush all opposition. As Alan Budd, an economic advisor to Margaret Thatcher confessed in an unguarded moment, anti-inflation policies of the 1980s turned out to be “a very good way to raise unemployment, and raising unemployment was an extremely desirable way of reducing the strength of the working classes…what was engineered there in Marxist terms was a crisis of capitalism which recreated a reserve army of labour and has allowed capitalists to make high profits ever since.” The disparity in remuneration between average workers and CEO’s stood at around thirty to one in 1970. It now is well above three hundred to one and in the case of MacDonalds about 1200 to one.

But in Volume 2 of Marx’s Capital (which Piketty also has not read even as he cheerfully dismisses it) Marx pointed out that capital’s penchant for driving wages down would at some point restrict the capacity of the market to absorb capital’s product. Henry Ford recognized this dilemma long ago when he mandated the $5 eight-hour day for his workers in order, he said, to boost consumer demand. Many thought that lack of effective demand underpinned the Great Depression of the 1930s. This inspired Keynesian expansionary policies after World War Two and resulted in some reductions in inequalities of incomes (though not so much of wealth) in the midst of strong demand led growth. But this solution rested on the relative empowerment of labor and the construction of the “social state” (Piketty’s term) funded by progressive taxation. “All told,” he writes, “over the period 1932-1980, nearly half a century, the top federal income tax in the United States averaged 81 percent.” And this did not in any way dampen growth (another piece of Piketty’s evidence that rebuts right wing beliefs).

By the end of the 1960s it became clear to many capitalists that they needed to do something about the excessive power of labor. Hence the demotion of Keynes from the pantheon of respectable economists, the switch to the supply side thinking of Milton Friedman, the crusade to stabilize if not reduce taxation, to deconstruct the social state and to discipline the forces of labor. After 1980 top tax rates came down and capital gains – a major source of income for the ultra-wealthy – were taxed at a much lower rate in the US, hugely boosting the flow of wealth to the top one percent. But the impact on growth, Piketty shows, was negligible. So “trickle down” of benefits from the rich to the rest (another right wing favorite belief) does not work. None of this was dictated by any mathematical law. It was all about politics.

But then the wheel turned full circle and the more pressing question became: where is the demand? Piketty systematically ignores this question. The 1990s fudged the answer by a vast expansion of credit, including the extension of mortgage finance into sub-prime markets. But the resultant asset bubble was bound to go pop as it did in 2007-8 bringing down Lehman Brothers and the credit system with it. However, profit rates and the further concentration of private wealth recovered very quickly after 2009 while everything and everyone else did badly. Profit rates of businesses are now as high as they have ever been in the US. Businesses are sitting on oodles of cash and refuse to spend it because market conditions are not robust.

Piketty’s formulation of the mathematical law disguises more than it reveals about the class politics involved. As Warren Buffett has noted, “sure there is class war, and it is my class, the rich, who are making it and we are winning.” One key measure of their victory is the growing disparities in wealth and income of the top one percent relative to everyone else.

There is, however, a central difficulty with Piketty’s argument. It rests on a mistaken definition of capital. Capital is a process not a thing. It is a process of circulation in which money is used to make more money often, but not exclusively through the exploitation of labor power. Piketty defines capital as the stock of all assets held by private individuals, corporations and governments that can be traded in the market no matter whether these assets are being used or not. This includes land, real estate and intellectual property rights as well as my art and jewelry collection. How to determine the value of all of these things is a difficult technical problem that has no agreed upon solution. In order to calculate a meaningful rate of return, r, we have to have some way of valuing the initial capital. Unfortunately there is no way to value it independently of the value of the goods and services it is used to produce or how much it can be sold for in the market. The whole of neo-classical economic thought (which is the basis of Piketty’s thinking) is founded on a tautology. The rate of return on capital depends crucially on the rate of growth because capital is valued by way of that which it produces and not by what went into its production. Its value is heavily influenced by speculative conditions and can be seriously warped by the famous “irrational exuberance” that Greenspan spotted as characteristic of stock and housing markets. If we subtract housing and real estate – to say nothing of the value of the art collections of the hedge funders – from the definition of capital (and the rationale for their inclusion is rather weak) then Piketty’s explanation for increasing disparities in wealth and income would fall flat on its face, though his descriptions of the state of past and present inequalities would still stand.

Money, land, real estate and plant and equipment that are not being used productively are not capital. If the rate of return on the capital that is being used is high then this is because a part of capital is withdrawn from circulation and in effect goes on strike. Restricting the supply of capital to new investment (a phenomena we are now witnessing) ensures a high rate of return on that capital which is in circulation. The creation of such artificial scarcity is not only what the oil companies do to ensure their high rate of return: it is what all capital does when given the chance. This is what underpins the tendency for the rate of return on capital (no matter how it is defined and measured) to always exceed the rate of growth of income. This is how capital ensures its own reproduction, no matter how uncomfortable the consequences are for the rest of us. And this is how the capitalist class lives.

There is much that is valuable in Piketty’s data sets. But his explanation as to why the inequalities and oligarchic tendencies arise is seriously flawed. His proposals as to the remedies for the inequalities are naïve if not utopian. And he has certainly not produced a working model for capital of the twenty-first century. For that we still need Marx or his modern-day equivalent.

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