Trustee

Peter Barnes: Capitalism 3.0 — Chapter 6: Trusteeship of Creation (pages 79-100)

But who? Marjorie Kelly has written a brilliant book called The Divine Right of Capital. By divine she doesn’t mean God-given. She means that, under our current operating system, the rights of capital trump everything else. The rights of workers, communities, nature, and future generations — all play second fiddle to capital’s prerogative to maximize short-term gain. This hierarchy isn’t the doing of God or some inexorable law of nature. Rather, it’s a result of political choice.

The question of who gets the top right in any society is always an interesting one. Invariably, the top dogs in any era assert that there’s no alternative. Kings said it three hundred years ago; capital owners say it today. They hire priests and economists to add moral or pseudoscientific credence to their claims. The truth, though, is that societies choose their top right holders, and we can change our minds if we wish.

Kelly locates many places where capital’s supremacy is written into our codes. Corporate directors, for example, are bound by law to put shareholders’ financial gain first. If a raider offers a higher price for a publicly traded company than its current market value, directors have little choice but to sell, regardless of the consequences for workers, communities, or nature. Similarly, it’s the fiduciary duty of mutual funds, pension funds, and other institutional investors to seek the highest returns for their shareholders or beneficiaries. This duty is embodied, among other places, in the Employee Retirement Income Security Act of 1974. Although the language of the act sounds innocent enough — a pension fund manager, like any trustee, “shall discharge his duties . . . solely in the interest of the participants and beneficiaries” — it results, ironically, in the financing of many workers’ retirements by investing in companies that shift other workers’ jobs overseas. Throw in the WTO and NAFTA, and the rights of capital stand comfortably astride everyone else’s.

What’s wrong here? It’s not that businesses pursue profit; that’s what they’re designed to do and what we want them to do. The problem is that private capital rides in the front of the bus while everyone else rides in the back. ...

Trusts are centuries-old institutions devised to hold and manage property for beneficiaries. The essence of a trust is a fiduciary relationship. Neither trusts nor their trustees may ever act in their own self-interest; they’re legally obligated to act solely on behalf of beneficiaries.

Trusts are bound by numerous rules, including the following:

* Managers must act with undivided loyalty to beneficiaries.
* Unless authorized to act otherwise, managers must preserve the corpus of the trust. It’s okay to spend income, but not to diminish principal.
* Managers must ensure transparency by making timely financial information available to beneficiaries.

These rules are enforceable. The basic enforcement mechanism is that an aggrieved beneficiary or a state attorney general can bring suit against a trustee. When that happens, the trustee must prove she acted prudently; if there’s any doubt, the trustee is fined or fired. As Supreme Court Justice Benjamin Cardozo once put it: “A trustee is held to something stricter than the morals of the marketplace. Not honesty alone, but the punctilio of an honor the most sensitive, is the standard of behavior.”

A trustee isn’t the same thing as a steward. Stewards care for an asset, but their obligations are voluntary and vague. By contrast, trustees’ obligations are mandatory and quite specific. Trusteeship is thus a more formal and rigorous responsibility than stewardship.

Trusts can be in charge of financial as well as physical assets. In this chapter, my concern is natural assets — gifts we inherit from creation. One of my premises is that each generation has a contract to pass on such gifts, undiminished, to those not yet born. If we are to keep this contract, someone must act as trustee of nature’s gifts, or at least of the most endangered of them. The question is, who?

The candidates are government, corporations, and trusts. I argued earlier that neither corporations nor government can fulfill this function; they’re both too bound to short-term private interests. That leaves trusts.

Common Property Trusts

The Trebah Garden Trust isn’t a rarity. Across Britain, the National Trust — a nongovernmental charity founded in 1895 — owns over six hundred thousand acres of countryside, six hundred miles of coastline, and two hundred historic buildings and gardens. It has over three million members who elect half of its fifty-two-person governing council (the other half are appointed by nonprofit organizations that share the trust’s goals). In the United States, there are now over fifteen hundred Trebah-like trusts, protecting over nine million acres. On top of that, the fifty-five-year-old Nature Conservancy protects more than fifteen million acres.

Let’s posit, then, a generic institution, the common property trust. It’s a special kind of trust that manages assets that come from the commons and are meant to be preserved as commons. Common property trusts manage these assets first and foremost on behalf of future generations. They may have secondary beneficiaries, such as public education or residents of a particular locale, but such living beneficiaries take backseats to the yet-to-be-born. These trusts carry out their missions by owning and managing bundles of property rights. Here are two examples from my own backyard: the Marin Agricultural Land Trust (MALT) and the Pacific Forest Trust (PFT). The demise of family farms and the loss of open space around cities are seemingly unstoppable trends. Yet in Marin County, just north of San Francisco, family-owned dairy, sheep, and cattle ranches have survived. A big reason is that ranchers there have an option: selling conservation easements to MALT.

A conservation easement is a voluntary agreement between a landowner and a trust that permanently limits uses of the land. The owner continues to own and use the land and may sell it or pass it on to her heirs. However, the owner gives up some of the rights associated with the land — for example, the right to build additional houses on it or to clear-cut trees. The trust that acquires the easement makes sure its terms are followed by the current as well as future owners.

In Marin County, MALT has preserved nearly forty thousand acres of farmland by buying conservation easements from ranchers. This represents about a third of the land currently farmed. The ranchers receive the difference between what the land would be worth if developed and what it’s worth as a working farm. In effect, they’re paid to be land stewards and to forgo future capital gains.

Most of MALT’s money comes from public sources. What the public receives isn’t an old-fashioned commons of shared pasturage, but a lasting pastoral landscape and a viable agricultural economy. That’s not a bad alternative to suburban sprawl.

In much the same way, the Pacific Forest Trust acquires what it calls working forest conservation easements from private woodlands owners. Some of the easements are purchased, others are donated by owners in exchange for tax benefits. Here again, owners keep their land but agree to forgo nonforest development and to harvest trees sustainably.

PFT’s goal is to protect not only forests themselves but the many species that live in them, as well as the ecosystem services — such as clean water and carbon absorption — that forests provide. As with MALT, some of PFT’s money comes from public sources. In return, the public gets healthy forests for considerably less than it would cost to buy and manage them outright.

Valves and Their Keepers

One job of common property trusts is to preserve habitat and landscapes, but such trusts can also play another role — controlling the flow of pollution into ecosystems. In this case, what they’d be managing isn’t the ecosystems themselves, but human economic activity around the ecosystems. In that sense, they’d be more like the Federal Reserve than the Nature Conservancy.

Let me back up here a bit. When I was in college, my economics professors talked of fiscal and monetary “levers” that wise policymakers could use to fine-tune the economy. This was in the early 1960s, still the heyday of Keynesianism. I imagined an economic control room full of gauges and valves, staffed by tweedy academics. Handsome, brainy men (it was still mainly men in those days) would scan readouts, puff on their pipes, and twist a few dials. Others would murmur praise. All would remain calm.

As I grew older, I learned the world is more chaotic than that. In reality, there’s no economic control room. There’s only one big valve — the money supply — and one person (with a few helpers) who turns it: the chair of the Federal Reserve. That valve has some effect on economy activity — when it’s loose, interest rates fall and economic activity perks up; when it’s tight, interest rates rise and economic activity ebbs. But the Fed’s valve doesn’t control everything our economic engine does. In particular, it has little impact on the rate at which we pour pollutants into surrounding ecosystems. To address this problem, we need more valves.

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.

A Second Set of Books

Mental models begin with assumptions. Most economists today assume there are only two kinds of property, private (that is, corporate or individual) and state. There are no shared assets, no inter- or intragenerational obligations, and no nonhumans other than those we eat.

Yet as we’ve seen, many things are missing here. The most obvious omission is the great economy of nature within which the human enterprise operates. We’re borrowing prodigiously from that economy, but not recording the loans. Equally absent are future generations, from whom we’re borrowing just as wantonly and surreptitiously. In a proper bookkeeping system, every loan shows up on two balance sheets, the borrower’s and the lender’s. One entity’s liability is another entity’s asset. But this isn’t true in contemporary economics. When the human economy grows, assets on corporate and individual balance sheets go up, but nowhere is there a debit. In fact, there aren’t any accounts that could be debited. There’s only good growth on one side of the ledger, and on the other, a void in which illth and debt accumulate, uncounted and unnoticed.

In recent years, economists have added a few bits to this stripped-down model. For example, they now recognize public goods and ecosystem services as contributors of economic value. Public goods are services like national defense, education, and flood control, which benefit everyone but can’t easily be sold at a profit. Because markets don’t adequately supply them, governments step in and do so. Economists sometimes debate whether the value of these public goods exceeds the “burden” they impose on taxpayers, but they don’t see the expenditures as adding value to any account, or to any asset owned by anyone.

Similarly, many economists now recognize ecosystem services as valuable inputs to the economy. However, the ecosystems that produce these services have no owners or balance sheets. They’re just there, floating in space, with no connection to humans. What I’m suggesting is that economists treat them as if they were common property held in trust. This simple supposition would not only put ecosystems on the books, enabling us to track them better; it would also pave the way to real-world property rights that actually protect those ecosystems.

Beyond Coase’s Supposes

“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.

This macroeconomic phenomenon — that less pollution yields more income for citizens — is the ultimate knockout punch for commons trusts. It aligns the interests of future generations with, rather than against, those of living citizens. By so doing, it lets us chart a transition to sustainability in which the political pressure is for faster pollution reduction rather than slower.

There’s one further argument for recycling commons rent through trusts. As rent is recycled from overusers of the commons to underusers, income is shifted from rich to poor. That’s because rich households, on average, use the commons more than poor households. They drive SUVs, fly in jets, and have large homes to heat and cool — thus they dump more waste into the biosphere. Studies by Congress and independent economists have shown that only a rent recycling system like the one just described can protect the poor. Absent such a system, the poor will pay commons rent and get nothing back. In other words, they’ll get poorer.

As always, there are a few caveats.

* First, to the extent commons rent is used for public goods rather than per capita dividends, the income recycling effects are diminished. This is offset, however, by the fact that public goods benefit everyone.
* Second, the less-pollution-equals-more-dividends formula doesn’t work indefinitely. At some point after less polluting technologies have been widely deployed, the demand for pollution absorption will become elastic. Then, lowering the number of pollution permits sold will decrease income to citizens. But that time is far in the future, and when it comes, the world will be a healthier place. And even then, trustees won’t be able to increase the number of pollution permits without violating their responsibility to future generations. ...

Accountability and Democracy

The question I’m most often asked about commons trusteeship is: How can we be sure trustees won’t succumb to corporate influence, just as politicians have? My answer is that, while there can be no guarantees, the odds of escaping corporate capture are much better with trustees than with elected officials.

The key reason is accountability. In the world of corporations, accountability is quite clear: directors must be loyal to shareholders. In the world of government, accountability is less clear. Elected officials must uphold the Constitution, but that’s about it. If there are conflicts between workers and employers, polluters and pollutees, voters and donors, or future generations and current ones, whose side should politicians be on? There are no requirements or even guidelines. Elected officials, as sovereign political actors, are free to do as they please.

The fact that politicians operate this way is no accident; it’s what the Founders had in mind. The job of democratic government isn’t to take, consistently, one side or another. Rather, it’s to resolve disputes among factions peaceably, without trampling minorities. James Madison made this plain in the Federalist Papers. Voters can “fire” elected officials at regular intervals if a majority so chooses, but they can’t expect loyalty to any particular constituency between elections. It’s this absence of built-in loyalty that opens the door to corporate influence, a force the Founders didn’t — and couldn’t — foresee.

The decision-making of judges, it should be noted, isn’t as untethered as that of legislators and executive officeholders. Their duty is to uphold not just the skeletal bones of the Constitution but the full flesh and blood of the law, with its thousands of pages and interpretations. They may, on occasion, interpret anew, but unless they’re among a Supreme Court majority, all such reinterpretations are subject to review.

Trustees are in the same boat as judges, rather than the wide-open waters in which politicians swim. Their hands are constrained both by the law and by their fiduciary duty to beneficiaries. This isn’t to say they have no room to wiggle: equally loyal trustees may differ over what’s in the best interest of beneficiaries. Still, they are subject to court review, and they can’t betray their beneficiaries too brazenly.

The tricky thing here is that the beneficiaries to whom we want commons trustees to be loyal — future generations, nonhumans, and ecosystems — are voiceless and powerless. We must therefore take extra care when we set up commons trusts. For example, we should install strict conflict-of-interest rules for trustees and managers. We should require that all relevant information about the trusts — including audited financial reports — are freely available on the Internet. We should ensure that, if a commons trust fails, its assets are transferred to a similar trust rather than privatized. We should build in internal watchdogs and ombudsmen. And we should authorize external advocates, such as nonprofit organizations, to represent nonliving beneficiaries who, by their very nature, can’t take trustees to court. Most states assign this function to their attorneys general, but this is insufficient given the political pressures attorneys general are subject to.

With regard to the manner of selecting trustees, there’s no single method. Trustees might be elected, appointed by outsiders, or be self-perpetuating like the boards of many nonprofits. This is as it should be; we don’t live in a one-size-fits-all world. The important thing is that, once selected, trustees should have secure tenure, and — like judges — lengthy terms. Indeed, trustees should be like judges in other ways: professional, impeccably honest, well-compensated, and honored. Being a commons trustee should be a distinguished and attractive calling.

It might be argued that, by shielding trustees from direct political influence, we’d make them — and commons trusts generally — undemocratic. The same could be said, however, for our courts. The fact is, there are certain decisions, both economic and judicial, that should be shielded from politics and markets. Moreover, neither government nor corporations represent the needs of future generations, ecosystems, and nonhuman species. Commons trusts can do this. In that sense, they’d expand rather than constrict the boundaries of democracy. ... read the whole chapter