Think, for example, about carbon. At present, our
economic engine is emitting far too much carbon dioxide
into the atmosphere; this is destabilizing the climate.
We desperately need a valve that can crank the carbon
flow down. Let’s assume we can design and install
such a valve. (I explained how this can be done in my
previous book, Who Owns the Sky? It involves selling a
limited quantity of “upstream” permits to
companies that bring fossil fuels into the economy.) The
question then is, who should control the valve?
Unfettered markets can’t be given that
responsibility; as we’ve seen, they have no ability
to limit polluting. So we’re left with two options:
government or trusts. Government is a political creature;
its time horizon is short, and future generations have no
clout in it. Common property trusts, by contrast, are
fiduciary institutions. They have long time horizons and
a legal responsibility to future generations. Given the
choice, I’d designate a common property trust to be
keeper of the carbon valve, based on peer-reviewed advice
from scientists. Its trustees could make hard decisions
without committing political suicide. They might be
appointed by the president, like governors of the Fed,
but they wouldn’t be obedient to him the way
cabinet members are. Once appointed, they’d be
legally accountable to future generations.
Now imagine a goodly number of valves at the local,
regional, and national levels, not just for carbon (which
requires only one national valve) but for a variety of
pollutants. Imagine also that the valve keepers are
trusts accountable to future generations. They’d
have the power to reduce some of the negative
externalities — the illth — that corporations
shift to the commons. They’d also have the power to
auction limited pollution rights to the highest bidders,
and to divide the resulting income among commons owners.
That’s something neither the Fed nor the EPA can
do.
These trusts would fundamentally change our economic
operating system. What are now unpriced externalities
would become property rights under accountable
management. If a corporation wanted to pollute, it
couldn’t just do so; it would have to buy the
rights from a commons trust. The price of pollution would
go up; corporate illth creation would go down. Ecosystems
would be protected for future generations. More income
would flow to ordinary citizens. Nonhuman species would
flourish; human inequality would diminish. And government
wouldn’t be enlarged — our economic engine
would do these things on its own.
One final point about valves. It’s not too
critical where we set them initially. It’s far more
important to install them in the right places, and to put
the right people in charge. Then they can adjust the
settings. ...
“Let us suppose,” economist Ronald Coase
wrote in 1960, “that a farmer and a cattle-raiser
are operating on neighboring properties.” He went
on to suppose further that the cattle-raiser’s
animals wander onto the farmer’s land and damage
his crops. From this hypothetical starting point Coase
examined the problem of externalities and proposed a
solution — the creation of rights to pollute or not
be polluted upon. Today, pollution rights are used
throughout the world. In effect, Coase conjured into
existence a class of property rights that didn’t
exist before, and his leap of imagination eventually
reduced real pollution.
“Let us suppose” is a wonderful way for
anyone, economists included, to begin thinking. It lets
us adjust old assumptions and see what might happen. And
it lets us imagine things that don’t exist but
could, and sometimes, because we imagined them, later
do.
Coase supposed that a single polluter or his
neighboring pollutee possessed a right to pollute or not
be polluted upon. He further supposed that the
transaction costs involved in negotiations between the
two neighbors were negligible. He made these suppositions
half a century ago, at a time when aggregate pollution
wasn’t planet-threatening, as it now is. Given
today’s altered reality, it might be worth updating
Coase’s suppositions to make them relevant to this
aggregate problem. Here, in my mind, are the appropriate
new suppositions:
- Instead of one polluter, there are many, and
instead of one pollutee, there are millions —
including many not yet born.
- The pollutees (including future generations) are
collectively represented by trusts.
- The initial pollution rights are assigned by
government to these trusts.
- In deciding how many pollution permits to sell, the
trustees’ duty isn’t to maximize revenue
but to preserve an ecosystem for future generations.
The trusts therefore establish safe levels of pollution
and gradually reduce the number of permits they sell
until those levels are reached.
- Revenue from the sale of pollution permits is
divided 50 percent for per capita dividends (like the
Alaska Permanent Fund) and 50 percent for public goods
such as education and ecological restoration.
If we make these suppositions, what then happens? We
have, first of all, an economic model with a second set
of books. Not all, but many externalities show up on
these new ledgers. More importantly, we begin to imagine
a world in which nature and future generations are
represented in real-time transactions, corporations
internalize previously externalized costs, prices of
illth-causing goods rise, and everyone receives some
property income.
Here’s what such a world could look like:
- Degradation of key ecosystems is gradually reduced
to sustainable levels because the trustees who set
commons usage levels are accountable to future
generations, not living shareholders or voters. When
they fail to protect their beneficiaries, they are
sued.
- Thanks to per capita dividends, income is recycled
from overusers of key ecosystems to underusers,
creating both incentives to conserve and greater
equity.
- Clean energy and organic farming are competitive
because prices of fossil fuels and agricultural
chemicals are appropriately high.
- Investment in new technologies soars and new
domestic jobs are created because higher fuel and waste
disposal prices boost demand for clean energy and waste
recycling systems.
- Public goods are enhanced by permit revenue.
What has happened here? We’ve gone from a
realistic set of assumptions about how the world is
— multiple polluters and pollutees, zero cost of
pollution, dangerous cumulative levels of pollution
— to a reasonable set of expectations about how the
world could be if certain kinds of property rights are
introduced. These property rights go beyond
Coase’s, but are entirely compatible with market
principles. The results of this thought experiment show
that the introduction of common property trusts can
produce a significant and long-lasting shift in economic
outcomes without further government intervention. ...
Commons Rent
It shouldn’t be thought that the commons is, or
ought to be, a money-free zone. In fact, an important
subject for economists (and the rest of us) to understand
is commons rent.
By this I don’t mean the monthly check you send
to a landlord. In economics, rent has a more precise
meaning: it’s money paid because of scarcity. If
you’re not an economist, that may sound puzzling,
but consider this. A city has available a million
apartments. In absolute terms, that means apartments
aren’t scarce. But the city is confined
geographically and demand for apartments is intense. In
this economic sense, apartments are scarce. Now think
back to that check you pay your landlord, or the mortgage
you pay the bank. Part of it represents the
landlord’s operating costs or the bank’s cost
of money, but part of it is pure rent — that is,
money paid for scarcity. That’s why New Yorkers and
San Franciscans write such large checks to landlords and
banks, while people in Nebraska don’t.
Rent rises when an increase in demand bumps into a
limit in supply. Rent due to such bumping isn’t
good or bad; it just is.We can (and should) debate the
distribution of that rent, but the rent itself arises
automatically. And it’s important that it does so,
because this helps the larger economy allocate scarce
resources efficiently. Other methods of allocation are
possible. We can distribute scarce things on a first
come, first served basis, or by lottery, political power,
seniority, or race. Experience has shown, though, that
selling scarce resources in open markets is usually the
best approach, and such selling inevitably creates
rent.
Rent was of great interest to the early economists
— Adam Smith, David Ricardo, and John Stuart Mill,
among others — because it constituted most of the
money earned by landowners, and land was then a major
cost of production. The supply of land, these economists
noted, is limited, but demand for it steadily increases.
So, therefore, does its rent. Thus, landowners benefit
from what Mill called the unearned increment — the
rise in land value attributable not to any effort of the
owner, but purely to a socially created increase in
demand bumping into a limited supply of good land.
The underappreciated American economist Henry George
went further. Seeing both the riches and the miseries of
the Gilded Age, he asked a logical question: Why does
poverty persist despite economic growth? The answer, he
believed, was the appropriation of rent by landowners.
Even as the economy grew, the property rights system and
the scarcity of land diverted almost all the gains to a
landowning minority. Whereas competition limited the
gains of working people, nothing kept down the
landowners’ gains. As Mill had noted, the value of
their land just kept rising. To fix the problem, George
advocated a steep tax on land and the abolition of other
taxes. His bestselling book Progress and Poverty
catapulted him to fame in the 1880s, but mainstream
economists never took him seriously.
By the twentieth century, economists had largely lost
interest in rent; it seemed a trivial factor in wealth
production compared to capital and labor. But the
twenty-first century ecological crisis brings rent back
to center-stage. Now it’s not just land
that’s scarce, but clean water, undisturbed
habitat, biological diversity, waste absorption capacity,
and entire ecosystems.
This brings us back to common property rights. The
definition and allocation of property rights are the
primary factors in determining who pays whom for what.
If, in the case of pollution rights, pollution rights are
given free to past polluters, the rent from the polluted
ecosystem will also go to them. That’s because
prices for pollution-laden products will rise as
pollution is limited (remember, if demand is constant, a
reduction in supply causes prices to go up), and those
higher prices will flow to producers (which is to say,
polluters).
By contrast, if pollution rights are assigned to
trusts representing pollutees and future generations, and
if these trusts then sell these rights to polluters, the
trusts rather than the polluters will capture the commons
rent. If the trusts split this money between per capita
dividends and expenditures on public goods, everyone
benefits.
At this moment, based on pollution rights allocated so
far, polluting corporations are getting most of the
commons rent. But the case for trusts getting the rent in
the future is compelling. If this is done, consumers will
pay commons rent not to corporations or government, but
to themselves as beneficiaries of commons trusts. Each
citizen’s dividend will be the same, but his
payments will depend on his purchases of pollution-laden
products. The more he pollutes, the more rent he’ll
pay. High polluters will get back less than they put in,
while low polluters will get back more. The microeconomic
incentives, in other words, will be perfect. (See figure
6.1.)
What’s equally significant, though less obvious,
is that the macroeconomic incentives will be perfect too.
That is, it will be in everyone’s interest to
reduce the total level of pollution. Remember how rent
for scarce things works: the lower the supply, the higher
the rent. Now, imagine you’re a trustee of an
ecosystem, and leaving aside (for the sake of argument)
your responsibility to preserve the asset for future
generations, you want to increase dividends. Do you raise
the number of pollution permits you sell, or lower it?
The correct, if counterintuitive answer is: you lower the
number of permits. ...
read the whole chapter
Dividends from Common Assets
A cushion of reliable income is a wonderful thing. It
can be saved for rainy days or used to pursue happiness
on sunny days. It can encourage people to take risks,
care for friends and relatives, or volunteer for
community service. For low-income families, it can pay
for basic necessities.
Conversely, the absence of reliable income is a
terrible thing. It heightens anxiety and fear. It
diminishes our ability to cope with crises and
transitions. It traps many families on the knife’s
edge of poverty, and makes it harder for the poor to
rise.
So why don’t we, as Monopoly does, pay everyone
some regular income — not through redistribution of
income, but through predistribution of common property?
One state — Alaska — already does this. As
noted earlier, the Alaska Permanent Fund uses revenue
from state oil leases to invest in stocks, bonds, and
similar assets, and from those investments pays yearly
dividends to every resident. Alaska’s model can be
extended to any state or nation, whether or not they have
oil. We could, for instance, have an American Permanent
Fund that pays equal dividends to long-term residents of
all 50 states. The reason is, we jointly own many
valuable assets.
Recall our discussion about common property trusts.
These trusts could crank down pollution and earn money
from selling ever-scarcer pollution permits. The scarcer
the permits get, the higher their prices would go. Less
pollution would equal more revenue. Over time, trillions
of dollars could flow into an American Permanent
Fund.
What could we do with that common income? In Alaska
the deal with oil revenue is 75 percent to government and
25 percent to citizens. For an American Permanent Fund,
I’d favor a 50/50 split, because paying dividends
to citizens is so important. Also, when scarce ecosystems
are priced above zero, the cost of living will go up and
people will need compensation; this wasn’t, and
isn’t, the case in Alaska. I’d also favor
earmarking the government’s dollars for specific
public goods, rather than tossing them into the general
treasury. This not only ensures identifiable public
benefits; it also creates constituencies who’ll
defend the revenue sharing system.
Waste absorption isn’t the only common resource
an American Permanent Fund could tap. Consider also, the
substantial contribution society makes to stock market
values. As noted earlier, private corporations can
inflate their value dramatically by selling shares on a
regulated stock exchange. The extra value derives from
the enlarged market of investors who can now buy the
corporation’s shares. Given a total stock market
valuation of about $15 trillion, this socially created
liquidity premium is worth roughly $5 trillion.
At the moment, this $5 trillion gift flows mostly to
the 5 percent of the population that own more than half
the private wealth. But if we wanted to, we could spread
it around. We could do that by charging corporations for
using the public trading system, just as investment
bankers do. (For those of you who haven’t been
involved in a public stock offering, investment bankers
are like fancy doormen to a free palace. While the public
charges almost nothing to use the capital markets,
investment bankers exact hefty fees.)
The public’s fee could be in cash or stock.
Let’s say we required publicly traded companies to
deposit 1 percent of their shares each year in the
American Permanent Fund for ten years — reaching a
total of 10 percent of their shares. This would be our
price not just for using a regulated stock exchange, but
also for all the other privileges (limited liability,
perpetual life, copyrights and patents, and so on) that
we currently bestow on private corporations for free.
In due time, the American Permanent Fund would have a
diversified portfolio worth several trillion dollars.
Like its Alaskan counterpart, it would pay equal yearly
dividends to everyone. As the stock market rose and fell,
so would everyone’s dividend checks. A rising tide
would lift all boats. America would truly be an
“ownership society.” ...
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