As of Friday, same-sex marriage is now protected in all 50 states under the 14th amendment to the US Constitution. Justice Anthony Kennedy delivered the 5-4 decision:
“It would misunderstand these men and women to say they disrespect the idea of marriage. Their plea is that they do respect it, respect it so deeply that they seek to find its fulfillment for themselves.”
“Their hope is not to be condemned to live in loneliness, excluded from one of civilization’s oldest institutions. They ask for equal dignity in the eyes of the law. The Constitution grants them that right.”
Before today’s decision, same-sex marriage was legal in 36 states, covering 70 percent of the US population. The remaining 14 states included: Alabama, Arkansas, Georgia, Kentucky, Louisiana, Michigan, Mississippi, Missouri, Nebraska, North Dakota, Ohio, South Dakota, Tennessee and Texas.
The Sixth Circuit Court of Appeals in Cincinnati had previously determined that states should define marriage laws, and “to allow change through the customary political processes” instead of the courts. In recent years, public opinion has shifted rapidly. A Gallup poll in 1996 indicated that 27% of people approved of same-sex marriage, up to 60% now. Over the last year and a half, 60 decisions struck down same-sex marriage bans.
This is Audrey. Audrey is a high achiever, likes nice things, and is lots of fun to be with. Her goal is to have a nicer house. She likes to share things, but her house will be her own.
Audrey has no interest in history or politics which is ironic because she causes them. Why? Because the desire for your own place is the driving force behind human history.
This is Audrey’s current house. Her parents grabbed it when it was cheap. Since then, house prices have skyrocketed, so it’s a nice little nest egg.
The woman in the picture cleaning Audrey’s steps is Jaanai. Jaanai attended the same college as Audrey and got the same grades. but Audrey got a good job, and Jaanai didn’t: she wanted to be an architect, not a cleaner. So what went wrong?
This is Audrey and Jaanei’s college. Audrey spent her evenings networking, and developing a wide range of interests. After graduating she landed an unpaid internship at a prestigious company. Now she is climbing the career ladder.
Unlike Audrey, Jaanai spent her evenings working as a waitress. She thought she could pay her way through college. But an architectural degree is very long, and she miscalculated. She had to drop out and take another job.
The problem? Jaanei had to find $900 in rent every month. Whereas Audrey is free.
Jaanei would have been a really good architect. She could have built Audrey her dream home. But Audrey will never see that home, because Jaanei has to pay too much rent.
Audrey and Jaanei’s story is repeated a billion times around the world. Some people are free to reach their potential and some people are not.
Let’s look at how it all began.
How it all began
The story of mankind is the story of a hundred billion Audreys: we all want our own home, where we don’t pay rent to anybody.
Originally this was not a problem. There was plenty of land. If somebody said “this is my land” people could just say “OK” and move somewhere else. So mankind spread across the planet (See the appendix for details.)
You could walk almost anywhere. There were no borders, and the ice age was ending, so there were convenient land bridges/ As the ice receded more land became available.
But some land was much better than others. Soon Audrey’s ancestors were fighting over the best bits, like the warm fertile coasts and rivers of the middle east. Often they were willing to share the land, but only if Jaanai paid them rent. Because Audrey got there first.
But once land was scarce, Jaanai’s ancestors could not move on. They had to pay Audrey’s ancestors rent. This changed everything. Audrey’s ancestors were now rich, and Jaanei’s ancestors were now poor.
Audrey’s ancestors no longer had to be “better” to own the land: they could pay other people to do the fighting and thinking. All they had to focus on was keeping the rent coming in.
Since kings own the land that people need, people have to do what they say. So even those who disagree with the king become his unpaid servants.
Unpaid servants can never reach their potential. They cannot make their own decisions and they cannot invest in their own future.Just as bad as the lack of investment is the lack of critical thinking. Kings must discourage people from questioning their authority. A third weakness, besides the lack of investment and the subjugation, is war. The quickest way for a king to increase his power and income is to have a war: grab more land and collect more rent (called taxes). But wars are expensive and destructive.
The combination of no investment and periodic wars meant most nations were dirt poor and stayed that way for thousands of years. Some nations however won the wars, and gained more land. This made it easier to win the next war. Gradually kingdoms became empires, and empires grew bigger.
But the unwillingness to share land made the empires weak. Pliny the Elder (the Great Roman statesman) identified the problem:
“latifundia perdidere italiam”
(“the great estates destroyed Italy”)
Every rich person wanted to grab land; soon the land was covered by a few gigantic estates. These estates were so big that they became self sufficient. They no longer cared what happened in the city of Rome. So, Rome became weaker and weaker, and eventually fell. Other kings grabbed the land.
The common people didn’t like this endless war and poverty. A lot of them preferred the teachings of “holy men” who said we should share. But the words of “holy men” could be used selectively, allowing rulers to say “we must be the chosen people” and grab even more land.
Eventually “new” lands were discovered (such as America), leading to more land grabs.
Gold (and other loot) from America allowed Europe to finance even more land grabs. Soon Europe had the biggest empires of all.
Britain grabbed the most land, because as an island it had the best navy. France grabbed the second largest amount because it had Napoleon.
Africa was a popular place to grab land, as it was nearby. The Europeans just walked in, measured it up, and took almost everything.
The Europeans were still fighting each other, of course. In this picture the German leader tries to grab all of Europe in the First World War .
Meanwhile something amazing was happening in America.
Earlier we saw how concentrating land is economically inefficient, as the poor people cannot reach their potential. The people who moved to America learned from this: they decided to have no kings, but to share the land a little more. So America quickly changed from just another colony to being the most powerful nation on Earth.
But the same old forces still applied. Americans who grew rich grabbed the land. America produced a different kind of king: the global corporation. Big farms bought smaller farms. Railroads bought land for the rails plus a lot of land on each side. Businesses that did not need land found ways to influence the government (the effective landowners) and get favorable rules. This picture shows Standard OIl, a corporation that grabbed most of the oil bearing land and made everybody else pay.
And so history continues as it has always done, as one big land grab. That is the history of the world in a nutshell. Like children, we often do not want to share. Children fight over sweets, but adults fight over land. Because whoever grabs the land wins.
So when Audrey wants to own her house without paying rent, and Jaanai has to pay too much rent, they are acting out the history of the world, and ensuring that it continues as usual.
The problem with grabbing too much land
1. Even the rich eventually lose.
People with the most land always want more. So the land, especially the most valuable land, goes to fewer and fewer people.
The game of Monopoly (originally called The Landlord’s Game) was invented to show why this is a bad thing. If you don’t share the value of land then one by one everybody goes bankrupt.
It’s fun for the winner, but only for a short time. Because once everybody else is bankrupt there is nobody left to give you money, and it’s game over. Society ceases to function.
2. Even when they win, they lose.
Being a king has its downsides. You can never sleep easily. Somebody somewhere is always out to kill you: they all want your job.
Worse, by keeping other people poor you stop scientific progress. So when a really big problem appears, you can’t solve it. If the next kingdom is more efficient, you lose. And if you get sick you are more likely to die.
Audrey will never get the house of her dreams because Jaanai could never become the architect she was destined to be.
All those poor people who can’t pay their rent could have been doctors and scientists, architects and great thinkers. They could have solved our biggest problems. However, they never reached their potential, and that hurts everyone -even the rich.
The Rise of Earth Sharing
After thousands of years of war and poverty, things did began to improve a little. Science began to advance. Hunger began to go down. Why? Because a few more people gained the freedom to reach their potential.
Gradually more people gained some land. They then created laws to reduce poverty. This gave more people the freedom to reach their potential. More people could get an education and then invest in their futures. They created businesses, machines and ideas. Each advance led to another advance, so progress accelerated.
How people began to break free
How did more people gain land when the king wanted to be all-powerful? Largely due to war. Not sharing leads to war, and war shakes up the economy. After each war a few more people gain land: this is why:
Wars drive down incomes, so landowners have to charge less in rent. But after a war the government has to rebuild, so more people have jobs. There is a brief period when land is cheap but people have more jobs . Remember Audrey’s parents? They bought their house soon after World War II, before prices went up and jobs went down again.
So many people gained a share of land after World War II that unprecedented numbers of people were free to try new ideas. Science and technology exploded, as did funding for new science. People could see a better world.
Those who control the world’s resources are still very powerful. There will be setbacks. But Earth sharing is happening, slowly. And every tiny step makes the world a better place.
Most people are kept back from reaching their potential because they don’t have their share of the planet. They cannot take chances and invest in their future because they must spend all their spare money on rent just to live.
We are losing generations of scientists and artists and thinkers because they are not free to develop. This hurts everybody, including the rich.
Life can be many times better for everyone, wonderfully better, if we just let everybody reach their potential.
Appendix: early land monopoly
On territoriality (i.e. grabbing land as your own):
“As with other vertebrates, the territoriality of protohominids and early hominids had a significant influence on their behaviour. In the case of primates quite generally, the relevant territory is that of the band as a whole, i.e. the group’s territory. […] the defence of the territory is taken on by all the fit members (males) in the group. However, while both protohominids and their arboreal forebears were group-territorial, the nature of their territories differed. When the ancestors of humans became hunters, their group territories went from being relatively small and vegetation-dense to being large and open, encompassing the whole of the area in which they migrated throughout the year.” (“Too Smart for Our Own Good: The Ecological Predicament of Humankind” By Craig Dilworth, Cambridge University Press, 2009, p.172)
On fights over who controlled the land:
“Attempts to exclude others and utilize a territorial system provide advantages if there is competition for available resources. Among early hominids this was probably the case. Starting out as omnivores, they probably competed with members of the same species, and with other species, for the same food sources. Thus, if members of one group were able to exclude others using some type of territorial strategy, they were preserving more resources for themselves and thus enhancing their fitness.” (“Human territorial functioning: An empirical, evolutionary perspective on individual and small group territorial cognitions, behaviors, and consequences” by Ralph B. Taylor, Cambridge University Press, 1988, p.37)
On how people left when other land became available:
“[There is no evidence that early humans migrated due to learning new skills.] However, as a result of the warmer climate conditions, the habitats to which East African australiopithecines became adapted may have shifted ever further away from the equator. Although paleobotanical evidence for vegetation conditions is largely absent in the Pliocene, it can be assumed that the southern part of the East African Rift Valley might have served as a prime corridor linking eastern and southern Africa.” (From the chapter “Origins of human territorial functioning” in “The Global Prehistory of Human Migration” by Immanuel Ness and Peter Bellwood, Wiley-Blackwell, 2014, p.11)
On how increasing wealth led to increasing investment in keeping others out:
“Given the emergence of elite groups marked by warlike status kits, it would be very surprising if competition and wealth accumulation did not extend to land and to the crops and stock it supported: the substantial palisades around the major settlements presumably served to keep the stock inside and the raiding party outside.” (“Prehistoric Farming in Europe” by Graeme Barker, Cambridge University Press, 1985, p.150)
Notes and images
The names are fictional, but the situation is a simplified composite of a common scenario: one person is able to get a better education due to parents not having to pay a mortgage or rent. The name “Audrey” means “noble strength.” The name “Jaanai” means “answering afflicted, made poor”.http://www.meaning-of-names.com/israeli-names/jaanai.asp
The house steps image is from the out of copyright magazine Punch, October 3rd 1917, via Project Gutenberg.
The school image is the author’s own work, based on the public domain image “Arsenal Technical High School” from the Historic American Buildings Survey, via Wikimedia.
The migrations map is “Human migration out of Africa” by “Ephant”, Creative Commons 3.0 (sharealike), via Wikimedia.
The fertile crescent sketch map is from the out of copyright book “Ancient Man”, by Hendrik Van Loon, via Project Gutenberg.
Other sketch maps and similar graphics: from the out of copyright book “The Story of Mankind”, by Hendrik Van Loon, via Project Gutenberg.
The painting of Columbus is from “The return of Christopher Columbus; his audience before King Ferdinand and Queen Isabella.” by Eugene Delacroix (who died in 1863), via Wikimedia.
The slaves painting is from “Israel in Egypt” by Edward Poynter (1867), via Wikimedia.
The crusaders image is from the out of copyright book “The Story of the Crusades” by E. M. Wilmot-Buxton, via Project Gutenberg.
The Cecil Rhodes image is: “The Rhodes Colossus” from the out of copyright magazine Punch, December 10th 1892, via Wikimedia.
The assassination image is from the out of copyright book “Beacon Lights of History, Volume X, by John Lord” via Project Gutenberg.
The dying aristocrat image is from the out of copyright book “History of France” by Guizot, Volume I, via Project Gutenberg.
The Pliny the Elder image is public domain, via the National Institutes of Health, via Wikimedia.
The Kaiser eating the world is “Guerre 14-18-Humour-L’ingordo, trop dur-1915”: an out of copyright propaganda image from 1915, via Wikimedia.
The Standard Oil Octopus is from the out of copyright magazine “Puck”, v. 56, no. 1436 (7th Sept 1904) via Wikimedia.
The Landlord’s Game is an out of copyright image (from 1906) via landlordsgame.info.
The image of carving up the world is from the out of copyright image “plum pudding” by James Gilray, via Wikimedia.
The other charts’ copyright details are printed on the charts.
I once introduced a paper at a conference with the laugh line, “Many of the papers you’ll hear this week make extensive use of mathematics, but mine is a bit different: it makes extensive use of arithmetic.” The economists in the audience knew what I was getting at: minutiae can be examined in fascinating (sometimes Nobel-winning) detail, but often the really important points are made by keeping track of the relevant orders of magnitude — in other words, by counting the zeros.
Here’s an example, to get us started. How many days, months, whatever, does it take for a million seconds to go by? I whipped out my calculator and discovered that a million seconds equals about 11.6 days. Surprised? Well, then, how about a billion seconds? That’s a thousand times longer: 31.7 years. The next one is easier, because we’re sticking with the same unit, but it boggles the mind nevertheless: a trillion seconds equals 31,709 years.
Let’s explore the wonders of zero-counting by comparing and contrasting a couple of lines in the budget of the United States.
Amtrak’s Northeast Corridor Passenger Rail Service
The F35 “Lightning” Joint Strike Fighter
— relatively inexpensive; mildly profitable
— most expensive weapon in history
— deeply maligned, desperately underfunded
— despite criticism, lavishly funded
— used by over 11 million passengers annually
— appropriations shared by contractors in 46 states
— ridership increasing as highway congestion worsens
— not yet cleared to fly in inclement weather
Dear reader, you can probably see where I’m going with this, but please bear with me: the numbers involved are noteworthy.
The F35 is, in terms of its design parameters, one seriously groovy airplane. It is a “fifth-generation” fighter jet, intended to supersede a number of the fighter jets that are now in use. It is called “joint strike” because the basic plane would be used, with some modifications, by various branches of the military in different missions: fly from carriers for the Navy, take off and land vertically for the Marines, evade radar detection, and locate enemy fighters long before they’re able to locate it. Its pilot will wear a helmet designed to make the plane an extension of his brain; all manner of information will be displayed right before his eyes; next-level optics will allow the pilot to see through the plane as if it were transparent. This is majorly awesome, sci-fi stuff. Lockheed Martin puts it this way:
The supersonic, multi-role F-35 represents a quantum leap in air dominance capability with enhanced lethality and survivability in hostile, anti-access airspace environments…. Missions traditionally performed by specialized aircraft — air-to-air combat, air-to-ground strikes, electronic attack, intelligence, surveillance and reconnaissance — can now be executed by a squadron of F-35s.
However, alas, the F35 is also far behind schedule, and way over budget. “A single Air Force F-35A costs a whopping $148 million.” writes Winslow Wheeler, for the Project on Government Oversight. “One Marine Corps F-35B costs an unbelievable $251 million. A lone Navy F-35C costs a mind-boggling $337 million. Average the three models together, and a ‘generic’ F-35 costs $178 million.” That’s per plane — and, because the F35 is being tested as it is produced, and faulty systems must be retrofitted on planes that are already being flown, the per-plane cost is likely to increase.
The following cost figures for the F35 program were reported by CBS news: $400 billion will be spent to buy 2,400 aircraft — twice as much, in constant dollars, as the Apollo program. To date, the F35 program is $163 billion over budget. It will cost approximately $1.5 trillion over the life of the program. In 2014 we spent approximately $6 billion on the F35.
Maybe you didn’t hear me. I said: twice the cost of the Apollo Program.
Reasonable people can disagree about the urgency of the United States’s need for this airplane. The stated mission is to assert overwhelming superiority, in any aerial combat mission, over any plane the Russians or Chinese might plan to build in the foreseeable future. The US already has a fifth-generation fighter in service, the F22A Raptor — which itself costs some $150 million per unit and, according to the US Air Force, “cannot be matched by any known or projected fighter aircraft.” Only Russia has any plane that is even remotely comparable, and Russia is obviously throwing much less money at the problem than the US is.
The thing about the F35, though, it that its development and manufacture is distributed with great skill through a multiplicity of key Congressional districts. “Lockheed takes every opportunity to remind politicians that the airplane is manufactured in 46 states and is responsible for more than 125,000 jobs and $16.8 billion in “economic impact” to the US economy….” wrote Adam Ciralsky in Vanity Fair. “Political engineering has foiled any meaningful opposition on Capitol Hill, in the White House, or in the defense establishment.”
To make a long story short: it is virtually certain that — whether we need it, or can afford it, or not — we’re going to have the F35 “Lightning” Joint Strike Fighter. That nickname, by the way, is ironic, because the F35 has not yet been cleared to fly within twenty miles of a thunderstorm.
Fixing Our Trains
Amtrak, the US’s much-maligned passenger rail system, operates 21,300 miles of routes. But, for the purpose of our present comparison, we’ll concentrate on the 471-mile segment that actually turns a profit: the Northeast Corridor. This is the rail service between Washington, DC and Boston, on which Amtrak carried 11.4 million passengers last year. It is only on this route that Amtrak operates its Acela express trains, which can go over 150 mph — they can, at least, on the few sections of track that are in good enough repair. Amtrak owns and maintains these tracks, which are also used by commuter-rail systems in DC, Baltimore, Philadelphia, New York and Boston — and some of them have gotten quite rickety over the years.
To pick one of many examples, the Portal Bridge over the Hackensack River in New Jersey is 100 years old and carries 450 trains a day — if things stay on schedule. The old swinging drawbridge causes many delays. It would cost $900 million to replace it with fixed bridge. Republicans have harshly criticized Amtrak for many years — and they can’t all be wrong; it’s likely that there is some significant degree of inefficiency and inertia in Amtrak’s program. The House of Representatives recently voted to cut Amtrak funding for the coming year to the tune of one and two-thirds F35s ($260 million) — the very day after a deadly derailment outside of Philadelphia.
This seemed an exceptionally spiteful move, even for Congress. This particular accident was probably caused by human error. But it could have been prevented, had a “Positive Train Control” system been in place; a 2008 law requires it to be implemented by the end of this year. Such systems are routinely used across Europe. Amtrak, however, is strapped for funds. Its “Vision Statement for the Northeast Corridor” laments:
In the New York vicinity, some areas are operating at 100% capacity, resulting in significant delays from even minor operating disturbances. The [Northeast Corridor] consists of a mix of aging infrastructure, much of it built 80-150 years ago, that will require extensive repair for safe and efficient operations at current traffic levels.
Folks, that’s like commuting to work every day at 70 mph. in an old VW beetle that only goes that fast (and has a tendency to overheat). Nothing against the beetle, but — how long could you count on that?
Reasonable people can disagree about the efficacy of subsidized passenger rail service in the megalopolis between DC and Boston. I don’t think anyone disputes, however, that the highways in that region are getting more congested all the time, and that reliable, reasonably-priced intercity rail service wouldn’t be a bad thing. But, can we trust Amtrak to provide that? Not according to Rep. John Mica (R-FL), who said this on the day of the budget vote: “The problem is you give Amtrak the money and they blow the improvements or squander it. Congress does not trust Amtrak. They’ve given them the money before.” Mica’s largest campaign contributor is the air travel industry.
Let’s talk numbers
Amtrak’s overall operation was $329 million in the red for 2014, but its Northeast Corridor service made a profit of $286 million. You heard that right: that means that the 20,829 miles of non-NEC Amtrak routes are subsidized by over half a billion dollars a year! That’s fully ten percent of what we spend annually on the F35 “Lightning” Joint Strike Fighter! (And, it’s eight percent of what the British government spends annually on passenger rail.)
Amtrak’s “Vision for the Northeast Corridor,” offers various proposals for improving service and reliability, which are echoed in somewhat greater detail in a report by the by the Federal Railroad Administration. The proposals are graded, A through D, in escalating wish-lists. The ones in section A amount to simply maintaining existing capacity (which nevertheless calls for some rather expensive catching up). The suggestions in section D, though, are the stuff of Republican apoplexy; they propose to:
transform the role of rail, so that the rail system would accommodate a significantly higher percentage of travelers and passengers, enabling new travel patterns and new markets to be served… positioning rail as a dominant mode. This would be accomplished through a major increase in the capacity of the NEC along its entire length, service to new markets, and a dramatic reduction in trip times.
What the heck, you might as well ask for what you want. This dramatic vision (including such luxuries as replacing the Portal Bridge in Hackensack), this pie-in-the-sky wish list, way more than Congress would ever appropriate, this tremendous infrastructure enhancement that would make life so much more efficient and convenient in the Northeast (not to mention conferring significant environmental benefits) — this commie-liberal subsidized rail boondoggle — would be gradually implemented between now and 2040, at a projected cost of $151 billion. That would amount to about $6 billion per year. Does that figure sound familiar? It’s the amount that we spent in 2014 on the F35 “Lightning” Joint Strike Fighter.
To reiterate: the total projected cost of the most ambitious plan for a long-term upgrade of Northeast Corridor Rail infrastructure is $151 billion. The amount by which the F35 program is over budget, so far, is $163 billion. It really helps to count the zeros.
Two P. S.’s
1) It is widely known by economists and smart people everywhere that quality public transportation facilities increase real estate values. The city of London has capitalized on this obvious fact to fund rail improvements with levies on the windfall gains that the railroads have created. In Florida, a private concern, Florida East Coast Industries, has bought up lots of land around the terminals of a passenger rail service it plans to introduce between Miami and Orlando. Indeed, this is exactly the way the transcontinental railroads in the US were financed. Financing passenger rail improvements with taxes on land values is an easy, sensible and fair policy; we should start doing it immediately!
2) By the way: If you really want to get your mind boggled, you gotta check out Wikipedia’s page on Orders of Magnitude!
Howard H Aiken, a pioneer in computer engineering, has famously urged others to “[not] worry about people stealing [your] idea. If it’s original, you will have to ram it down their throats.”
Such reminders are especially useful when considering the various reasons that groundbreaking ideas don’t always achieve notoriety in history textbooks or mainstream culture. Marie Howland, a passionate advocate of women’s economic independence in the nineteenth century, is an apt exemplar of Aiken’s claim, for although she was a woman of revolutionary ideas, she is hardly a household name. As a white working-class woman, Howland was among the first of her class and gender to publish a novel in America and to participate in the women’s rights movement, challenging fundamental social conventions that limited the influence of women to domestic sphere. In alignment with authors like Jane Austen, Howland was deeply troubled by the way social conventions served to reinforce the systemic economic dependence of women on men. This has hardly been resolved: “equal pay for equal work,” one of the cornerstones of Hillary Clinton’s current presidential campaign, is merely one example of the work that remains to be done towards Howland’s goal of achieving economic equality among genders. What is most compelling about Howland, then, is how relevant her ideas for the economic equality of women continue to be today.
A concise summation of Howard’s worldview would be to say that she wished to see opportunities for women to achieve financial independence; this idea, however, necessarily challenged traditional boundaries separating the domestic and public spheres. Whereas a man might have many opportunities for different kinds of paid work outside of the household, a woman’s work was restrained to the household, where economic value was not so easily quantified. It was this distinction that, early on, led Howland to embrace the writings of French intellectual Charles Fourier. She admired Fourier’s idea that women ought to be empowered to select their work – primarily in a communal setting (phalanx) with other women – and be materially compensated. It is important to distinguish here that while many women in working-class families were, in fact, compensated for employment outside of the household, Howland recognized that this did not absolve them of traditional household duties; women, in many cases, worked a “second shift” on the home front and remained relatively imprisoned by this economic and social model. As Cliff Cobb states in his introduction to a special issue on Marie Howland in The American Journal of Economics and Sociology, “The only way to let women out of [their domestic] prison[s] was to knock down the walls that have separated the oikos (household) from the polis (public arena), the domestic and the non-domestic spheres” (74.5, 859).
The Fourierist model remains relatively obscure when compared to other alternatives to capitalism, such as Marxism, and might best be characterized as the combination of the communal elements of socialism with a view of humanity as an evolving subject striving towards a state of universal harmony in accordance to God’s will. Fourier believed that the divine model for social evolution required a move toward communal living, reducing the inefficiencies of individual households by consolidating and redistributing the work required by the community. Notably, domestic work such as cooking, cleaning, and childcare was included in this model. By normalizing domestic work within the community marketplace, Fourier’s plan for community living also implies a redistribution of power that has traditionally separated the genders, privileging white males above everyone else. It was Fourier’s hope that, by altering domestic work and power in this way, it would facilitate the sharing of power in other spheres.
Late in life, Howland would reside in the Georgist community of Fairhope, Alabama, which was founded on the ideas of American political economist Henry George. These ideas, implemented both in the United States as well as abroad, have yielded enormous economic opportunities. Not surprisingly, Howland found these ideas compelling and even necessary for realizing a more egalitarian world.
To be clear, none of this demonstrates that the core of Howland’s vision regarding the economic liberation of women cannot be better adopted by our contemporary society. If Aiken’s words are to be believed, we might argue that Howland’s ideas continue to pose challenges so significant that they are resisted by mainstream culture. The virtues of Howland’s ideas lay principally within the uncomfortable questions they pose. It is interesting, for example, to consider the widespread negative perceptions that persist regarding “feminism” as a disruptive – rather than restorative – social influence. The myth of an America offering equal opportunity to all regardless of gender, race, and other disadvantaged identities persists. Should continuing inequality be recognized, which groups stand to lose ground, and what type of social and economic justice, as envisioned by Howland, ought to be pursued? The idea of great disparity as a necessary evil (social Darwinism) remains an economic theory so deeply ingrained in our national narrative that it is often revered as unassailable, forestalling conversations that might otherwise pose promising alternatives but that have the potential to revise our current economic paradigms.
If there is anything we can learn from Howland’s ideas, it’s that justice in work relations cannot be achieved within the current capitalist system, nor can they be achieved by simply redistributing property. To secure a just system for women, said Howland said, the caretaking duties that women are often burdened with also need to be redistributed.
Detroit, in the mid 20th century, was a vibrant center of American industrial manufacturing with a prospering middle class. It is now the poster city of blight and urban decay. As industry has collapsed across the region, job scarcity, white flight, and soaring crime rates have driven hundreds of thousands of people out of the city. Thousands of homes, retail spaces, and civic buildings sit empty and dilapidated. Today, due to the faulty set of incentives implemented to encourage investment, real estate investment–a force that was once thought to have the potential to save Detroit–is worsening blight and costing the city millions of dollars.
After decades of declining investment in Detroit, locals were excited when, beginning in 2013, investors began to purchase large swaths of residential properties. Jimmy Lai, a billionaire based in Hong Kong, purchased 32 homes at a tax foreclosure auction. At the same auction, local real estate agent Wendy Briggs walked away with a staggering 428 properties. Despite the hopes of local residents, it became obvious right away that Jimmy Lai, Wendy Briggs, and the myriad others snatching up Detroit real estate had no plans to invest in their properties. Instead, they anticipated that Detroit would experience a real estate boom in the next several years, allowing them to unload their properties at a large profit.
Thousands of homes owned by speculators have fallen into disrepair as their owners wait for a real estate boom that does not appear on the horizon. In the meantime, a house at 3383 15th Street, owned by Jimmy Lai, partially burned down in 2015. To date, he’s made no effort to clear the wreckage, which poses a safety hazard in the neighborhood. At one point, Detroit paid over $200,000 demolishing a single speculator’s properties after they fell into disrepair and then into foreclosure.
So what factors are driving this mess? A big cause is real estate taxation in Detroit. Facing debilitating revenue shortages during the 2008 financial crisis, Detroit over-valued residential properties with the hope that increased revenue from property taxes could help the city stay afloat. They did this without the understanding that increasing property taxes reduces incentives to build or rebuild. Without this understanding, Detroit’s taxing strategy proved disastrous. In 2016 alone, the city sent 38,000 foreclosure notices due to unpaid taxes. The majority of tax bills totaled less than $2,000. If overdue taxes couldn’t be paid, the homes went up at tax foreclosure auctions, where speculators would subsequently make the majority of their purchases. It simply was too easy for speculators to game the system–with minimal cost to them and minimal gain for the city.
Many speculators fail to consider taxes in the total cost of their investment, now owing Detroit millions of dollars in back taxes. Wendy Briggs alone, who purchased 428 properties for just $379,000, owes $4.7 million in back taxes. 95% of her properties will be auctioned in 2016. In fact, nearly 80% of all properties purchased at the 2013 tax foreclosure auction are back in foreclosure. So not only do speculators let their properties fall into decay, they fail to pay their taxes, which deprives the city of a critical revenue stream and puts homes back into the tax foreclosure auction. This cycle continues to repeat itself.
Detroit and Michigan are taking steps to reduce the number of foreclosures and ability of investors to hoard properties. The state has cut interest rates on tax repayment plans by two-thirds, reducing the number of homes foreclosed due to unpaid taxes. Wayne County has closed a loophole that allowed speculators owing back taxes to purchase additional properties at auction. In addition, property assessments are expected to drop. The next step would be to eliminate taxation on buildings and focus solely on taxing land values. Both measures, if implemented worldwide, are predicted by experts to induce landlords to either immediately develop their properties or to sell to those who will.
These measures have cooled investor interest in Detroit. In 2016, the top ten investors bought nearly half as many homes than they did in 2013. Although housing activists applaud this progress, they believe more can be done. Local residents propose making it easier for people in poverty to file property tax exemptions and further decreasing the number of real estate investors in the market. However, this could have the opposite effect, as low property taxes decrease property owners’ incentive to develop their properties.
Detroit residents, having learned that speculators tend not to care about their communities, are thrilled to see them go. “They think Detroit is just a bunch of criminals who don’t care and the city is meaningless to them. The idea of a neighborhood or community is a foreign concept to these people,” says Bill Cheek, a resident in the North Corktown neighborhood. The challenge, some believe, will be keeping them out. By implementing sufficient land value taxation and exempting buildings from taxation, they should be able to do just that.
It’s sounding again like the drought of 1976-77: “Shower with a friend.” “Put a brick in your toilet tank.” “Fix your leaky faucet.” “Replace your lawn with a cactus garden.” And then the pictures: denuded ski slopes, boat docks resting on the bottom of empty reservoirs, dry brown furrows stretching to the horizon.
Despite all the focus on urban water conservation, agriculture consumes some eighty percent of California water. California is basically a dry state, subject to periodic severe droughts. So, how come the largest water user is cow pasture, watered with giant sprinklers sending great sprays into the atmosphere? How come farmers irrigate those long brown furrows by flooding them, losing great quantities of water to evaporation, and bringing harmful salts to the surface? And how come some farmers even grow rice in flooded paddies, seeding them from airplanes? Why do we see so few elementary efforts to conserve water, such as drip irrigation or mulching fields to protect the soil? Why are irrigation canals not lined and covered to prevent water loss?
Why? Because California farmers get their water free, or close to free. Any of us who have taken elementary economics should be shouting from the rooftops or blasting through cyberspace: if you make something free, you will get waste and shortages!
California’s water crisis derives from history, ideology, and politics.
The California Constitution says that the water belongs to the people. However, farmers may take water provided they put it to “beneficial use,” first come, first served. This is the basis of California “water licenses”, which attach to pieces of land, dated to the time water was first “appropriated.” Absent any definition of “beneficial use”, this is already a recipe for waste: A “senior” water license downstream, used for low-value irrigated pasture, takes precedence over a “junior” water license upstream, used for high-value orange groves.
From 1935-55, federal agencies built many dams and canals, supplementing pre-existing farm water supply on the east side of the Central Valley. The part of that federal water that was administered by the Federal Bureau of Reclamation, however, was subject to the “160-acre limitation,” restricting the amount of land entitled to nearly free water to 160 acres per landowner, and limiting the term of this giveaway to 40 years. (160 acres is a quarter of a square mile.) California’s giant landowners—some left over from 1848 when the U.S. took California from Mexico, but validated the existing Spanish and Mexican land grants—chafed under these restrictions. In the 1960’s, they found a way around it: the California State Water Project (SWP). The SWP brings water from the Feather River in the Sacramento Valley south through the long-abused Sacramento delta, then pumps it up to a canal running south along the west side of the Central Valley, pumps it up again 2000 feet over the Tehachapi mountains into Los Angeles, and conducts it even further south to San Diego. The SWP was financed by California taxpayers, frightened by claims that southern farming and then LA would dry up and blow away without an assured water supply into the 22nd Century. Meanwhile, half that water has gone to irrigate the holdings of the west side land barons. These include the J. G. Boswell dynasty (200,000 acres) and their in-laws the Chandlers (145,000 acres), at that time owners of the LA Times.
The Environmental Defense Fund has proposed a “market” solution to the water problem: transform water licenses into secure and transferable property—and let the market work its wonders! This is equivalent to “cap and trade,” which gives secure “pollution rights” to polluters based on their pollution history. However “cap and trade” at least limits pollution. “Transferable water licenses” simply wouldn’t work. On the one hand, it would invite speculators to grab up water licenses and hold them by wasting water, creating an astronomical “spot market” for emergency water. On the other hand, most owners of water licenses wouldn’t sell, but would rather keep on operating the old inefficient way. “Transferable water licenses” would lock in a system under which every subsidy and giveaway engineered by pork-barrel politics becomes sacrosanct, perpetual property, and taxpayers forever incur ongoing costs of $60 per acre-foot* or more to deliver water for $3.50 per acre-foot to landowners who can resell it for $400 per acre-foot. This is the absurd, unjust sequitur of condoning private seizure of public domain.
Poor perpetually-broke California, trapped by Proposition 13 and other handcuffs on its taxing power! Yet there’s liquid gold underfoot. The state could charge for water, thus recognizing that we the people own the water. Prices would depend on the region: low near the sources, and high at the end of long canals. The state could put a meter on every ground-water pump, and charge accordingly. Overnight, California’s fiscal deficit would become a surplus. Yes, some water-hogging crops like rice and hay and alfalfa might move away, as they should. That would release water for the more valuable, intensive fruit and vegetable crops for which California is famous—and which provide far more employment. The farmers might threaten to “pass on” higher water prices to consumers. But that’s an idle threat, because shifting land and water into higher-valued and more intensive crops will raise the total supply of food marketed. And when the rains come again, the reservoirs will fill and stay filled, and all the little boats will put in again.
Last week, we found ourselves in between washing machines, the old one having died before the replacement arrived. So, when the laundry piled up, I drove 20 miles into town. To be honest I wasn’t upset about this. I had some correspondence-course lessons to read and grade while I waited. I shouldered the two big bags, secure in the knowledge that the foliage along the route was breathtaking, and the next couple of hours wouldn’t overtax me. I dumped my loads in machines, found a plastic chair near the door and started in on my paperwork.
A mother and daughter came dancing in and started piling and sorting with pizazz. I felt fortunate to have the paraphernalia of my work to look busy with, as I watched them. The mom was a beauty: quite short, flamboyantly redheaded and freckled. She had a laughing, elvish air — except that her eyes seemed to belong to a wiser and older being: bright, deep grey, creased and wry. The little girl was about six, and a bit darker — auburn instead of fiery red — and clearly thought her mom was the coolest person in the entire universe.
The mother was teaching the daughter the technique of the Old Shell Game, using three bottle caps and a little red pill. She would say “Timing, honey!” and “Don’t watch your hands, punkin,” and “Fold that pinky under…” while the girl practiced with tongue-clamped diligence.
I was so busy pretending not to watch that I missed the fact that I was being watched: she appeared — Presto! at my side. “I’ve read this book.” She was holding my copy of Progress and Poverty. “Jeez, that takes me back to a weird time in my life. It was the guy who taught me sleight-of-hand, a fascinating and evil fellow. The book was on his shelf; I don’t know if he ever read it.” She shook the book a few times as if its ideas rattled with a familiar sound. “I wasn’t feeling that much need to sleep, in those days.” She laid a finger beside her nose, rolled her eyes and gave a small sniff, as if to explain. “I think I must’ve read this thing straight through. But I haven’t thought about it in a long time.”
I asked her if she were still a sleight-of-hand artist. “Not professionally, but — yeah, I can pretty much direct the eyes away from the business at hand.” I followed her eyes to the little girl, who was struggling to retrieve the little red pill from beneath one of the washing machines. “Monica! Jeez.” Monica’s mom produced a little bottle of ibuprophen from her bag and took out another pill. “Really. Take it easy, honey!”
Monica accepted the pill sheepishly and went right back to practicing. “I keep gettin on the wrong side of it.”
“My name’s Ramona.” She thrust out a hand as if to shake mine, and handed me my wallet. “There you go. My husband and I and the girl moved up here two years ago from Ohio, where we learned Henry George’s lesson the hard way.”
I introduced myself, trying to stay cool as I replaced the wallet in my back pocket, and explained that I’d also just moved to the area, with wife and boy, from New York City.
“I think I could’ve liked New York,” Ramona mused, “Lots of decent magicians there. So, are you a Henry Georgist?”
I admitted that. I asked Ramona what she had meant about learning Henry George’s ideas the hard way.
“Ohh, that’s a story that old Henry George would appreciate. Do you have time for a story? I suppose you do.” She looked far away for a moment, as if the tale might be too sibylline for chance encounters in laundromats. “Ahh, well. I met my husband, Greg, when he picked me up hitch-hiking at the corner of High and Gay streets in Columbus, Ohio. I had sustained a few beatings at that point. Inside and outside. High and gay. My self-image was lower than it needed to be.”
At some point, as Ramona said on, I noticed that little Monica’s hands had stopped moving, and mine had, too.
“Our experiences could hardly have been more different, but emotionally we were in the same low place. He thought he wasn’t worth a shit, and I knew I wasn’t — but, he was in for the long haul. I went on to have love affairs with his three best friends — before my, y’know, my personal mud settled to the bottom of the pond — who knows how, or why, people’s lives get knitted together? The five of us shared a huge adventure. You know, I said he fell for me, but I wasn’t his first love. Greg’s first love was the earth under his home town, Elmwood, Ohio. There were things to love about that town; he made me sorta love it, too. One of those things was the ancient Indian mounds they have in Central Ohio. Some of them are famous, but most aren’t. Some were plowed over by farmers before anybody knew. Anyway, one day he took me on a hike, past the golf course, through a stand of woods, over a crik, y’know, a walk like that was his favorite thing to do — but he wanted to show me this place he called Dragon Hill. So we got through to the edge of the woods, and there was a little hill, very steep, not like any of the other hills around there, with one old, gnarled maple tree on it. He said there was this shape, this effigy on the top of the hill. He said it had a long coiled tail. We climbed up; I stood there. I couldn’t see anything but grass. Greg took my hand and stooped down to make me feel this little depression in the ground on the hilltop — just a, little depression, maybe the size of a bowling ball, but smoothed-out. This meant nothing to me. But then he walked me four steps over, stooped down again and made me feel this rock — this dark red, smooth, polished rock that was like three-quarters buried in the ground, and — My God! It was the thing’s eye. And there it was, I saw the head, the legs, the coiled tail, just like it had — risen out of the ground, before my eyes! And I went and grabbed this poor guy and tackled him, just about had his clothes ripped off before I realized what I was doing.” She lifted up both her hands, palms upward. “I don’t know what it was. I don’t know — what it was. The sex thing was just — panic. I was shaking! He was too. Something. Had happened. To us. At that place. I’m shaking now, thinking about it.”
Ramona tossed her head quickly about, walked over and quickly tickled Monica’s armpit, and gestured for her to go back to practicing her shell game. “It was Greg’s idea to build a house there. Not for our little nuclear family; that came later. We decided to build a place for the five of us, we were going to make create our own kind of family. After a while, the other three started calling us ‘Mom and Dad’ — it was a kind of mean joke on Greg, and yet it was also kind of true. Somehow those years just seemed to happen, without my say-so — it was a long, sweet story, with just enough pain.”
One of her washers stopped spinning and clicked off. She spun back to her work, emptying little-girl and old-man clothes into one of the wheeled baskets. As she went on with her story, she made wordless comments, gigglingly affirmed by Monica, about the rippedness or dorkyness of various bits of clothing.
“Dragon Hill was on farm that was owned by this crumpled-up woman named Jimison. I never knew her first name. She lived by herself in a big, old farmhouse. We went and asked her if she’d sell us a little piece of land containing the hill. She kept us standing there on the porch for a long time. Finally she said, Yeah, you can have it; it’s no good to me. But I won’t take money for it. She turned this evil eye of hers toward Greg, and she said, I’ve seen you up there. Yes, I’ve seen you. You bring me the dragon’s other eye, and you can have the hill. I am like, The dragon’s other eye? Are you fucking kidding me? But I had to hand it to Greg, he kept his cool. He asked her if that was really her deal. She said yes. And you know what? It never occurred to him not to believe her. Greg started right in doing research. And then, I couldn’t leave, y’know? I mean, how could I have left, in the middle of this? He haunted the local library, he talked to all the old folks who might remember something. Somehow he managed to track down this old guy, this guy out of some weird movie. He lived in a shack beside a tobacco farm in North Carolina. The old guy had, there, in his shack, beside a tobacco field in North Carolina, a smooth dark-red stone about the size of a bowling ball. Greg suffered some broken bones getting his hands on that stone. I wasn’t along on that trip, and I never got the whole story, but — well, that October, he came back. Walking on crutches, straining to carry the stone in a vinyl bowling-ball bag. He rested and healed through the winter. As soon as the ground thawed next spring, we set the other eye back in the dragon’s head. Jimison couldn’t believe it. She acted almost as scared of us as we were of her. Looking back now, I think it was her reaction — how freaked-out she seemed — that made me suspect the whole thing was real. She said, Take it! It’s yours. And slammed the door in our face.”
I could still hear the tiny scraping of little Monica’s bottle caps on the smooth table, but every other conversation, whining kid, spin cycle, dryer alarm had gone silent, as if to give Ramona a few seconds, all she could get, with what she remembered. I was, of course, dumb; I couldn’t have spoken to claim a Megabucks prize.
“We started digging, like we never dug before! We disturbed — respectfully I hope — someone’s ancient rest. That was a crazy day. We got sore, sorely tired and sore. Our three strong men did most of the physical work. Vallorie and I were less doughty, so we took jobs, to keep our homestead stocked with tools and food. And we got an apartment — for our evil selves — with a hot shower that the guys appreciated. We spent a whole summer and a fall, ramming earth. Very, very, very slowly we built ourselves a house out of rammed earth and local timber, with a nice-drawing chimney and an airtight wood stove. And we were comfy there, for a little while. The five of us. But — before long, those three started drifting off into their own lives, as we all knew, without ever saying so, that they would. They would come over on Saturdays to Mom and Dad’s house; they’d still help get the firewood in. But the writing on the wall was — we actually did have writing on the wall, by the way, our walls were decorated with hundreds of quotes and sayings, you could spend a very happy forty minutes walking around and reading them. And then little Monica came along.”
I suddenly had a vision of this Greg fellow, helplessly smitten from the start, waiting and waiting, finally turning over one wintry morning to embrace his heart’s desire. I whispered, “You were all set.”
“It seemed that way. Yes, it did. I had old lovers who’d become my best friends, I had a husband who adored me, I had a beautiful little girl — I don’t know where this munchkin came from —”
Monica blew a big wet raspberry.
“And, are you familiar with rammed-earth construction? It’s really like nothing else. It seems like a natural rock formation. In the shape of — your house. So, you see. We had every right to that little piece of land, we’d put blood, sweat, hard work and spirit into it; we built a thing that will be there as long as that dragon will. But old Jimison taught us Henry George’s lesson the hard way. Ohh, yes, she did. One morning a gang of heavy equipment came banging up Jimison’s lane. She wasn’t there. She was nowhere to be found. Pretty slick, huh? We had never seen a ‘for sale’ sign — but she took the proceeds from her farm, and blew off to wherever the hell she blew off to. I have to admit, I kind of admired that. She was calm and cool while she played us.”
“Holy shit. So you got nothing?”
“Not quite that melodramatic. There were no legal documents of any kind, but the whole county had seen us building our house — hell, the local paper had come out to interview us. We were told that we could recover the value of the house — good thing they didn’t know how ill-prepared we were to sue anybody! But the developers settled. They gave us fifteen thousand dollars, with which we paid down on ten nice acres over on Knox Ridge. And I assure you that we have full, legal title to this bit of real estate.”
Those new-moon eyes of hers let me know, that she knew, that I could think of nothing to say; she didn’t mind, and besides, there was laundry to finish. She gave Monica a loud kiss on the head and we went back to work, she to folding, and I to distractedly staring at my lessons, as my dryer-loads finally got going.
Maybe ten minutes later, Ramona came back over to me. “You know, I just remembered something about that book, Progress and Poverty. You know what really impressed me about it? What really made me think this guy’s kind of a genius?”
“It’s where he says that economics is easy, once you see the trick.” Ramona seized the three bottle caps from Monica, whose eyes lit up. While she spoke, she began to whip the caps around, and neither her little apprentice nor I had the slightest chance of following that pill. “The odds are definitely against you!” Ramona grinned. “But no, I’m serious. Why would I have remembered a book about economics? Feh! It’s the opposite of a sexy subject. I mean the exact opposite. Your turn, honey!”
Monica went back to her laundry-table stage, wiped her hands professionally on the front of her overalls, and said, “Follow the rent, bet you can’t!” She deftly shifted the caps around for a while, revealing the little red pill here and there, and then she gave me an opportunity to choose, while her mom, loading a dryer, watched with pride. I picked. The pill wasn’t there, of course, although I did sort of see the technique through which it came not to be. I didn’t let on, but Monica said, “Rats. My pinkies are too small!”
“Honey, how can they be too small, if they keep getting in the way?” Ramona winked at her. “You’ve almost got it!”
I ventured to comment, “She’s going to make lots of money, before long.”
“Oh, no, no, that’s not what it’s about, and she knows it. Nimble fingers are useful things, but I don’t believe in gambling, anymore.”
“I see. So, no mother and daughter streetcorner hustles, huh? Wow, the two of you could clean up in Central Park.”
“No ill-gotten gains for Monie and Monnie. In fact if I ever find out she’s extorted so much as a nickel from any other kid, she’s gonna be in truh-bull! Right, my darling?” Monica gave us a very big and sober nod, but there was a sparkle behind it.
Matthew Rognlie’s analysis of Thomas Piketty’s predictions on increasing inequality is on point regarding both the role of housing and the poor substitutability of capital for labor, but it’s blind to the very existence of money and to the role of the interest rate on risk-free bank deposits in determining the costs of real investments.
The returns on capital can only diminish if the interest rate, and thereby discount rates for real investments, falls further. Currently, this cannot happen because the zero lower bound (ZLB) of interest rates acts as a “minimum wage of capital.” No matter how eager people would be to save, the return on monetary savings cannot fall any further (as this article will explain). Hence also the returns required from other assets remains high.
Eliminating the ZLB and implementing a land value tax (LVT) simultaneously would solve the majority of our economic concerns, such as chronic unemployment, heavy taxation of labor, the polarization of income and wealth differences and the growth dependence of our economies, which prevents tackling our environmental threats. It would also be feasible for any first mover nation or monetary region, as it would actually improve its competitiveness over real, productive investments.
Otherwise the “oversupply of capital” in the sense of an oversupply of saving — and hence essentially an oversupply of labor — will just drive the economy into a more severe depression. The unemployment, deflation pressures, and public deficits we are currently seeing in Western economies are the results of the ZLB and the low substitutability that Rognlie emphasizes.
If there is one thing we should’ve learned from the financial crisis, it is the danger of making real-world predictions with economic models that ignore the monetary and financial system .
Apparently we didn’t.
Not only housing, but all real estate — which is unequally distributed
MIT graduate student Matthew Rognlie has received a lot of attention with his criticism of Piketty’s “r>g theory,” which predicts that income and wealth inequality will continue to rise when the rate of economic growth (g) falls below the average return on capital (r). Rognlie’s work sure is admirably thorough.
Before going into the biggest omission both of their analyses, let’s point out that Rognlie is not the first nor the only to notice that most of Piketty’s “increase in the amount of capital” is actually an increase in the value of land (see e.g: Stiglitz, Karl Smith, Galbraith).
Many like to conclude from Rognlie’s analysis that “since the housing ownership is much more evenly spread than productive capital, it may be less worrying for inequality.” (It maybe partly because of this framing that Rognlie’s critique receives so much attention.) However, this is not the case. Homeownership is one of the biggest unearned polarizers of both income and wealth differences; the higher and more reliable your income, the bigger and cheaper a mortgage you can get.
Also, the issue of rising land values does not only apply to housing but to centrally located real estate in general. This includes office buildings in business districts. Overall, the limited resource of land (location) is very unequally distributed. (In fact, the distribution of land ownership was one of the first cases to which Vilfredo Pareto applied his famous 80–20 principle.)
Also, some city planning is very useful and valuable, as all land use has externalities (positive and negative) on the value of adjacent land. Zoning makes these predictable- mitigating windfall gains and losses. The absence of planning would also result in less efficient infrastructure and transit systems, further reducing the availability of locations with good accessibility.
High depreciation rates = low capital intensity of technologies -> low substitutability
Unlike some Chicago economists believe, capital is not some generic “putty clay” that can be applied productively in different quantities at will. The opportunities to increase capital intensity in production are significantly limited by available technologies. If we assume that all capital assets can be produced with labor (i.e. we omit land and natural resources), capital intensity essentially means how much beforehand on average all the work required for producing the end product needs to be done.
As The Economist paraphrases Rognlie’s point on the changing nature of capital:
“Modern forms of capital, such as software, depreciate faster in value than equipment did in the past: a giant metal press might have a working life of decades while a new piece of database-management software will be obsolete in a few years at most.”
This higher rate of depreciation essentially means that new technologies are less capital intensive than earlier ones — even if they increased labor productivity significantly. In other words, even if they allow a more valuable output with the same amount of labor, they don’t need as much work to be done before it’s usable capital. Of course, robots that make, repair, and program themselves could eventually turn this trend on its head. But for now, Rognlie’s arguments for a low substitutability of capital for labor are well grounded. Piketty mistook the rise in land values for a rise in capital intensity.
Also, Piketty seems to imagine that capital can always be accumulated by saving up more money. However, in a closed economy, net savings are limited by profitable real investment opportunities. Rognlie is on the right track in that, theoretically, an increased desire to save should result in the yields of capital falling. According to supply and demand, a factor or resource in abundant supply should fall in market price. This was already pointed out by Banko Milanovic of the World Bank in his 2013 paper:
“But, the reader will ask, if the capital/output ratio increases so much, would not the marginal return to capital diminish? Would not r go down? This is obviously a soft point of Piketty’s machinery.” (Milanovic 2013, p. 9)
“Will the reader be convinced by the argument that the elasticity of substitution between capital and labor is likely to remain high, and that an increase in capital will not drive r down?” (Milanovic 2013, p. 10)
Unfortunately, high substitutability of capital for labor is not the only factor that can maintain high returns on capital. Tragically, the economics discipline is so segregated that capital theorists don’t understand macroeconomics — and neither capital theorists nor macroeconomists (want to) understand money.
“Capital” has two different meanings
Before explaining the role of money and the risk-free interest, it might be useful to avoid a possible source of confusion in terminology.
In economics, “capital” usually refers to real assets that allow easier production or provide some other real benefits in the future. In addition to physical production goods (machines, buildings, tools etc.), this includes for example, technologies and new product designs created by innovation. This was also the meaning used above when discussing “capital intensity.”
In finance and accounting on the other hand, “capital” refers to “financial capital,” which is any property or security that can generate income in the future for its holder. In addition to the ownership of real capital assets (directly or indirectly through shares in companies or funds), this includes all forms of credit (including money), immaterial property rights, and other kinds of privileges that can be owned and traded (e.g. taxi badges and patents).
In the case of a company, real capital assets appear on the “assets” side of the balance sheet (together with any credit and IPRs the company might hold), while “capital” in the financial sense refers to the “liabilities” side of the balance sheet: The capital structure of the company determines how the risks of the company’s assets and business are allocated between shareholders and creditors. (The shares and bonds of the company are of course assets for their owners. One’s liability is another’s asset.)
Rognlie importantly points out that the market value of a company’s shares (its shareholder equity) can diverge significantly from the book value of its assets in excess of debts. (Rognlie 2014 p. 15) Even if a company with a relatively small balance sheet can be valued at billions. This is not only the result of those product designs, human capital, or other immaterial assets that a company cannot capitalize into its balance sheet for accounting reasons, but also any monopoly rents (as explained by Stiglitz) or competitive advantages established through a strong brand or customer relations. Also, the whole is often “more than the sum of its parts” — and so it should be with a company.
This distinction between “real capital assets” and “financial capital” is even more important for what we mean by “the cost/price of capital.” Rognlie writes about “capital” in the first sense, and by the “real price of capital” (Rognlie 2014, e.g. p. 2–3) he means the production or acquisition cost of the assets in question. So to him, a rise in land value is a “rise in the real price of capital.”
However, when we talk about the “cost of capital” in finance, we mean an investor’s profit requirement for an investment or company in question. For credit finance, this is the interest rate on the company’s debt. The cost of shareholder equity is the return that would make an investor deem the investment “profitable,” i.e. worth making. This depends on the interest rate on deposits and the perceived risks involved, as will be explained. For a company’s real investment decisions, it is common to calculate the Weighted Average Cost of Capital (WACC) from credit and equity costs and to use this as a discount rate for expected cash flows. Discounting means that future expected cash flows are “devalued” by the discount rate (i.e. the profit requirement) – the more times the further they occur in the future.
The interest rate determines the returns on producible capital
Rognlie’s analysis is based on an economic model without a monetary system — which is a typical neoclassical approach. This assumes that all savings are automatically turned into real capital investments. Increased saving hence increases the supply of production goods and automatically lowers their net yields.
Moreover, the return yielded by risk-free credit — bank deposits — determines the costs of equity: the profit required of real capital investments.
As long as the risk-free interest rate follows the natural rate of interest — the rate at which overall desires to save are approximately in balance with profitable real investment opportunities — the outcome is pretty much the same as in a model omitting money. However, if the interest rate fails to keep the macroeconomy in balance, the story is very different.
Diminishing returns on capital — or a worse depression? The interest rate decides
Let’s assume we have a closed economy or an externally balanced open one, i.e. one with a balanced current account. This means that the economy is not falling into debt overseas, nor accumulating net foreign financial assets.
If the overall desire to save exceeds the available profitable investment opportunities, this essentially means that not everyone gets to earn and save as much as they would like to (unless the government facilitates this extra private sector monetary saving by going into debt itself, i.e. unless there is continuing fiscal stimulus). In practice, this oversupply means involuntary unemployment and underemployment. In the absence of wage regulations and excessively generous social security, this results in lowering pressures on nominal wages, and hence also prices, i.e. deflation pressures.
This is where the central bank would normally lower interest rates to balance the economy. However, currently many Western economies are stuck at the zero lower bound of interest rates (ZLB). In this situation, the result is not increased investment and lower returns on capital but more unemployment — or a need for the government to accumulate more and more debt (to stimulate the economy fiscally) to keep the economy running .
Quantative easing is mainly an inefficient placebo medicine based on the outdated quantity theory of money. It does not lower discounting rates notably nor reduce people’s desires to save.
Many economists and commentators have noted the possibility that even the long-term natural (or equilibrium) rate of interest might have fallen significantly below zero (see e.g. Summers, Blanchrd et al, Avent, Buiter).
The Remedy: a land value tax + removing the zero lower bound
On the other hand, if the real interest rate did fall to e.g. -5 %, we would see our real estate bubbles explode to unprecedented proportions. Land does not erode (Rognlie 2014, p. 13), is limited in supply, and has few direct substitutes. Therefore, in valuing it, we are essentially discounting an infinite cash flow – a “perpetuity .” When the discount rate approaches the expected growth rate of the cash flow, the net present value approaches infinity.* In other words, if you have an asset that forever gives you more every year compared to the previous year than you require your investments to yield, you should not sell such an asset for any price. With a profit requirement of zero or less, even a fixed (non-growing) perpetuity is infinite in price.
While the ratio of producible capital to income is determined largely by the capital intensity of available technologies, the capitalized value of monopoly resources is strongly dependent on the market interest rate.
However, in the current situation, this effect is much more an opportunity than a threat. The biggest obstacle to implementing a proper land value tax (LVT) is that imposing it suddenly would make real estate prices crash, resulting in a massive, unjust wealth transfer in the real estate market. A mere glance at the situation shows that the dilemmas associated with both LVT and removing the zero lower bound solve each other. We can compensate for the lower costs of capital by raising the LVT rate at the same time with removing the ZLB.
With no lower bound on interest rates, Piketty’s r (the average return on capital) can even drop negative. Good bye r>g dilemma and never-ending accumulation of patrimonial wealth.**
Western countries have a unique opportunity to make a shift towards a more equal and prosperous economy. More over, the move would be extremely competitive for any first mover: A lower interest rate would devalue an area’s currency lowering labor costs, and both LVT and negative interest rates government debt would allow reducing harmful taxes on trade (income tax, VAT, corporate taxes), vastly increasing any area’s competitiveness over productive, risk-bearing real investments. It remains to be seen, which economy first realizes the potential in this superior strategy.
Rognlie’s point about the importance of growing income differences between types of labor is also very relevant. To counter this, we need to maximize mobility between professions by removing artificial rigidities and privileges, ensuring access to education, as well as maximizing competition over employees.
The writer is an author, institutional entrepreneur, and economic engineer-philosopher. He has developed the Root Bug hypothesis that identifies the main flaws in our current economic system and provides fresh solutions for a fair, sustainable, and growth-independent economic system that facilitates all desired growth. Follow the Root Bug on Facebook and Twitter, and subscribe to the YouTube channel and the newsletter (in the right-hand column).
A version of this article has also been published on Medium.
*The valuation formula for a growing perpetuity is V = P0/(r–dP), where P0 is the first year’s expected cash flow, dP is the annual growth rate of the cash flow, and r is the discount rate employed, including risk premiums. In reality, the value won’t turn infinite, as increased volatility raises risk premiums. Instead, real estate prices become extremely speculative with negative real interest rates — in the absence of proper land value taxation.
**If we additionally mitigate risks of long-term unemployment and ensure that people have the realistic alternative to work less in the mid-term (if they so desire), we can make supply meet demand on the individual level regardless of aggregate demand. Then g (the economic growth rate) can be whatever people really want it to be. Economic growth becomes a matter of personal preference, while we can allow productivity to grow (unnecessary work to be destroyed) as much as technology allows.
Thomas Piketty’s book Capital in the 21st Century has been flying off the shelves. It’s full of data indicating that the world is rapidly becoming more and more unequal. But if most people are just trying to make ends meet, who has time to read it? Last night, Piketty participated in a high profile talk with economics Nobel prize winner Joseph Stiglitz at a New Economic Thinking event in Paris.
Piketty’s thesis is that extreme inequality results from the observation that income grows faster than the general economy. Stiglitz agrees that inequality is on the rise. The key difference between the two economists however is that Stiglitz emphasizes the importance of rent-seeking, as the primary source of inequality, as opposed to “capital” in general.
They each propose systemic solutions.
What are the solutions you ask?
“It’s about the rules of the game… What is driving the growth of inequality? Minor tweaks in the economic system are not going to solve the problem… Yes, it’s important to improve our education system… Yes, it’s important to improve minimum wages… These will make a big difference, but they won’t solve the underlying problem. The underlying problem is the whole structure of our economy, which has been oriented more at increasing rents than increasing productivity and real economic growth that would be widely shared in our society… a tax on land, rents, would actually address some of the underlying problems… leading to a more equal society.”
Parents often admonish their children to get on the property ladder as soon as possible. They’re right in giving such advice. Wages have actually decreased in recent years while rents soar; Meanwhile, someone who does not necessarily work can make more money speculating on land than doctors and engineers make as part of their normal wages.
What does Piketty Mean by “Capital”?
On one hand, capital can mean buildings and factory equipment. Yet, it is often used to refer to money lent to companies to invest in such assets, and more generally as the sum of all economic assets. If this is how capital is defined, then things like land and other natural resources are subsumed under that definition too.
Why is that important? Well, if you are trying to bake a cake and you assume that baking soda is just another type of flour, you’re going to end up with a pretty disgusting, globally impoverished, cake. Yet, this is how Piketty defines natural resources, just another type of capital. In Stiglitz’s view, land and natural resources are different from man made buildings and manufacturing equipment.
A Global Tax on Wealth?
Piketty recommends a global tax on all capital, all wealth as he defines it, regardless of type. However there are some practical problems with this solution. One is getting all countries to coordinate all taxation. What if tax havens like Switzerland don’t follow suit with the rest of the world? The rich will simply continue to hide money there. As Stiglitz says in the video above, economic models show that such a tax on global capital would simply be shifted on to the poor, regardless of who was nominally billed. There is however a much deeper problem caused by thinking of resources as mere capital; the difference between what ought to be shared and what ought to be private is rendered arbitrary. It is used to justify bizarre conclusions from those on the left and right alike.
For example, Nestlé’s CEO has said that water is not a human right; everyone should pay him for the privilege of drinking. On the other end of the spectrum, communists claim that nearly everything should be collectively owned and managed; even people’s personal possessions, such as pots and pans, were confiscated during China’s “Great Leap Forward.” Both ideologies base their conclusions on the same faulty assumption -all sources of wealth are the same. If however, we can separate what is earned from what isn’t, and implement a sustainable system around this principle, we have a sound basis for creating a fair, meritocratic, and humane society.
The Earth Belongs to Everyone
We all have an equal right to drink clean water, breathe clean air, enjoy land and Earth’s other natural resources. None of us created the earth, it’s ours to share. Instead of taxing regular people for working and exchanging, we ought to tax earth’s natural resources, both their use and abuse. Chief among these resources is land.
“Unlike other assets, land can not be moved to a tax haven.”
As stated before, real estate, more precisely land, is a major source of inequality. Unlike other assets, land can not be moved to a tax haven. Thus, realizing the benefits of taxing land value does not require persuading every country in the world to participate in such a tax regime. Countries that do implement it however will see an enormous reduction in inequality.
For a more in depth response to Piketty, and to learn more about how a land value tax would reduce inequality, click here.
For several years Californians have debated the issue. On one side, extreme environmental groups are demanding water-rationing before it’s too late. On the other… republicans.
It is a serious issue, to be sure. Water levels have been falling in California since long before this most recent drought. In fact, NASA satellite data shows that water storage in California has been at a net loss since 2002. That’s more than a decade and “San Francisco” sounds prettier than “Mad Max- California edition.”
The same NASA data shows that between the Sacramento and San Joaquin river basins, the water level is 34 million acre-feet- almost one and a half times the size of the biggest water reservoir in the entire United States- below normal. Was it just a bad year? Frankly, no. Californians (read: Americans) just suck at conserving water (read: anything). California has lost more than 12 million acre-feet of water yearly since 2011. During droughts, farmers have no choice but to tend their fields with groundwater and farming is so water-intensive that many wells can’t even reach down to the groundwater anymore. Are you ready for a scary fact? It’s time for a scary fact: California only has one year of reservoir water left based on current usage statistics. Are you ready for an even scarier fact? California doesn’t even have a contingency plan. They’re kind of just flying by the metaphorical seat of their collective pants and hoping for the best.
Don’t worry California, I’ll tackle this one. We don’t need to ration water and we certainly don’t need to… republican the issue. Not only will I solve your water problem, I’ll also tackle your public revenue problem and eliminate some poverty while helping small business.
Here’s what you do: everyone gets X kilo-gallons of water for free per month. Anyone who goes above that gets charged increasingly higher water usage fees. This will mean that people conserve water to avoid paying more. What do we do with all that money? You distribute it to the households that didn’t go above the limit so that you’re rewarding them for conserving. Now those families have more money to spend around town and the state doesn’t have to worry about huge water shortages anymore.