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Peter Barnes: A New Economics for a New Era of History

In a talk given at the Schumacher Center for New Economics, Peter Barnes walks us through the changes that need to happen and the flaws in our current system that are preventing it.

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Image from Flickr user Ars Electronica.

By Peter Barnes
By arrangement with On the Commons

We are entering a new era in which the current way we run our economy won’t work.

Let me tell you about my career in economics. It started when I was ten and my father, a real economist, hired me to crunch numbers for a book he was writing about the stock market. I used an old Friden mechanical calculator, which literally put the crunch in number-crunching. I had no idea what the numbers meant, but I really enjoyed crunching them.

Later, thinking that I had some aptitude with numbers, I decided to major in math at college. Big mistake. It was way over my head. So I wound up majoring in history and became a journalist for thirteen years after I graduated.

But then, in my thirties, I had the inevitable mid-life crisis. Did I want to spend the rest of my life writing about what other people were doing? Or did I want to do something myself?

So I decided to start a worker-owned solar energy business. Now, bear in mind that there was no solar industry at the time. I didn’t know anything about solar energy and I didn’t know anything about running a business either. It was madness. But it turned out to be wonderful madness, and it worked for six years until Ronald Reagan abolished the tax incentives for solar power. I then co-founded Working Assets, which later became Credo Mobile.

In all, I spent 20 years as an entrepreneur, turning interesting ideas into businesses. And the reason I spent 20 years doing this was not to get rich, but to learn from the inside how capitalism worked, and how far its boundaries could be pushed.

During these years, I road-tested a variety of alternatives to the standard capitalist model: worker-ownership, socially responsible investing, and socially responsible spending. Eventually, I concluded that none of these worthy alternatives, or even all of them put together, will save us from capitalism’s two tragic flaws—its relentless destruction of nature and its equally relentless widening of inequality. These flaws are coded and hard-wired into our current capitalist system. If I wanted to learn how to fix them, I had no alternative but to go back to economics, which, after I retired from business in 1995, is what I did.

An Economy That Works For All

Now, nineteen years later, I’ve come to some conclusions and I want to share them with you tonight. These conclusions can be summed up in three sentences:

We are entering a new era in which the current way we run our economy won’t work.

In this new era, our economy must do two things it doesn’t do now: operate in harmony with nature and provide adequate income for all.

The best way to achieve these goals—that is, the way that requires the least involvement of government—is to “propertize” some common wealth and share the income from that wealth equally. (I’ll explain what I mean by ‘propertize’ in a minute.)

Why is this important? It’s important because if we do what I’m proposing, we can have a market economy that does what a 21st century economy needs to do. We can have a market that works for all, including our shrinking middle class, nature, and future generations. We can have the kind of locally rooted economies that many of you are working to build in the Berkshires and elsewhere—economies that will flourish once the global corporate economy is made to pay the costs of using common wealth—costs that it’s not paying today. To get from here to there, the key is to think differently about the wealth we own together, and to organize that wealth in new ways.

Let me ask a question now. How many of you have heard the term “Anthropocene” before? That’s impressive. So most of you know that the term refers to the geological era we are now living in, as opposed to earlier geological eras such as the Jurassic, Cenozoic, and so on. The term was coined in 2000 by chemist Paul Crutzen from the Greek root for human, anthropos, and it means the Current Human Age.

What’s normal today—and I’m speaking here of normal economic behavior—can’t be normal tomorrow.

What distinguishes the Anthropocene from the Holocene—the era that began when the last Ice Age ended—is that we humans have become a dominant geological force on our planet, if not the dominant geological force. Our impacts on oceans, forests, fresh water, topsoil, biodiversity, and the atmosphere have been devastating, and they continue getting worse at an accelerating rate. In short, the human species is out of control.

I don’t want to diminish our species’ accomplishments during the Holocene; they’ve been momentous. But we can’t continue doing business in the Anthropocene the way we did in the Holocene. What’s normal today—and I’m speaking here of normal economic behavior—can’t be normal tomorrow. We need a “new economic normal” in which, at a minimum, the two tragic flaws of our current economic system are fixed.

Three Visionary Economic Thinkers

I began my post-entrepreneurial explorations by re-reading three economic thinkers that many of you will be familiar with: E.F. Schumacher, Henry George, and Thomas Paine. Schumacher’s chief concern was harmonizing our human economy with what he called the meta-economy of nature. With this in mind, he encouraged the development of appropriate technologies, worker-owned businesses, and locally-rooted economies. In my view, these activities describe the kind of world we want to get to. The problem is: we can’t get there from here until we stop the juggernaut that’s devouring our planet and turning our society into a plutocracy. That’s why we need to fix those major systemic flaws.

Henry George’s primary concern was the maldistribution of income. Writing in the 1880’s, he asked why poverty continued, and even grew, as America got richer. His answer was land rent. Land rent, George wrote, was like “an immense wedge being forced, not underneath society, but through society. Those who are above the point of separation are elevated, but those who are below are crushed down.” I’ve never forgotten George’s image of rent as a wedge between rich and poor. It accurately described reality in 1880 and still does today if we expand the scope of rent beyond land. But in thinking about George’s proposed remedy—a single tax on land—I concluded that it’s insufficient. It would recapture some unearned rent from landowners but would channel that money to government rather than to those crushed by the wedge.

Then I re-read Thomas Paine. Amazingly—since he was writing in the 18th century—I found Paine’s thinking more relevant to the Anthropocene than anyone else’s. Paine’s economic thinking is contained in his essay “Agrarian Justice,” which, despite its title, isn’t about agriculture but about property rights. “There are two kinds of property,” Paine wrote. “Firstly, natural property, or that which comes to us from the Creator of the universe—such as the earth, air, water. Secondly, artificial or acquired property—the invention of men.” The latter kind of property must necessarily be distributed unequally, but the first kind rightfully belongs to everyone equally. It is the “legitimate birthright” of every man and woman, “not charity but a right.”

Paine’s genius was to invent a practical way to distribute income from shared ownership of natural property. He proposed a National Fund to pay every man and woman roughly $17,000 (in today’s money) at age twenty one and roughly $12,000 a year after age fifty five. Revenue for the fund would come from ground rent paid by landowners. Paine even showed mathematically how this could work. Presciently, Paine recognized that land, air, and water could be monetized, not just for the benefit of a few but for the good of all. Further, he saw that this could be done at a national level. This was a remarkable feat of analysis and imagining.

Two Less Familiar But Important Economists

I want to jump now to two less familiar economists: Arthur Pigou and Ronald Coase. Arthur Pigou, a colleague of Maynard Keynes’ at Cambridge, was the first economist to focus on the market’s failure to incorporate external costs such as pollution. This is capitalism’s Tragic Flaw #1 that is responsible for climate change, among other serious ills. The essence of the problem is that, because markets charge nothing for pollution, companies pollute far more than they would if markets charged a substantial price. Pigou’s remedy was for government to estimate the costs that are externalized—let’s say the costs of pollution—and to tax polluting activities enough to reduce them. Though Pigou’s fix would work through markets, it isn’t entirely a market fix because it requires government to calculate external costs, and impose appropriate taxes and collect them. This supposes an adept and enlightened government, free from the sway of the externalizing industries—a supposition that’s hard to make these days.

Ronald Coase was a colleague of Milton Friedman at the University of Chicago. His breakthrough was to show that markets could set prices for pollution without government. Markets could do this if—and it’s a big if—polluters and pollutees had property rights and could bargain with each other easily. They’d then arrive at an amount and a cost of pollution that was agreeable to both sides. Pollution would cost more and there’d be less of it—with no Environmental Protection Agency needed.

Coase’s model intrigued me, but I saw a few problems. First, pollutees—which is to say, all of us—presently have no property rights with regard to ecosystems being polluted, and thus no way to bargain with polluters. If Coase’s model is to have any practical use in the real world, that problem must be solved. A second problem is that, while the agreed amount of pollution would be “optimal” for buyers and sellers of pollution rights, it might not be optimal for nature, which isn’t included in the bargaining. A third problem lies in the distributional impacts of Coase’s model—which, if it were adopted widely, would be huge. One of the key questions Coase avoided was who should pay whom. Should polluters pay pollutees for the right to pollute? Or should pollutees pay polluters to pollute less than they currently do? Coase argued that for the optimal price and quantity of pollution to be reached, it makes no difference who pays whom. This may be true theoretically, but in the real world, who pays whom makes a big difference. If pollutees have to pay higher prices to polluters, polluting corporations would benefit and ordinary people would see their living standards fall.

While thinking about climate change in the early 2000’s, I saw a way to solve all three problems in Coase’s model. A “sky trust” could be created to hold America’s atmospheric pollution rights in trust for future generations and living pollutees equally. Using peer-reviewed science, the trust would decrease its sales of pollution rights over time until a safe level for nature was reached. Meanwhile, revenue from the sales would be distributed equally to every legal US resident with a Social Security number, offsetting—and in many cases, more than offsetting—the impact of higher fuel prices.

The sky trust model was based on the Alaska Permanent Fund, which since 1982 has been sharing oil-based income with every Alaskan equally. In 2009, the sky trust became known as “cap and dividend” and was considered, though not passed, by Congress. It’s still the best climate change solution out there—and one that Congress is starting to re-visit.

A New School of Economic Thinking

Let me end this brisk tour of economics by mentioning a new school of economic thinking based on systems theory. This school is sometimes called “complexity economics,” and one of its leaders is Eric Beinhocker, director of the Institute for New Economic Thinking at Oxford. The basic idea of complexity economics is that an economy, like nature, is a complex adaptive system whose large-scale patterns emerge from the interaction of autonomous agents following simple, internally-coded rules. Another of its tenets is that if a complex system is to remain near equilibrium, its positive and negative feedbacks must be roughly in balance.
Positive feedback is amplifying—i.e., it reacts to an action by doing more of it. The classic example is the screech you get from a sound system when the microphone is too close to the loud speaker. Negative feedback is corrective; the classic example is the thermostat. The danger in any complex system is that amplifying feedback will outweigh corrective feedback. When that happens, the system will flip into runaway mode and eventually crash.

It’s time now to pull all of these pieces together.

The trouble with our current economic system is that its agent population and its feedback mechanisms are both out of balance. In terms of feedback, amplifying feedback far outweighs the corrective kind—thus, the exponential growth of human economic activity and the accelerating rise in inequality. In terms of agents, we essentially have a monoculture of profit-maximizing corporations. These corporations are coded to externalize as many costs as possible—to take as much from workers, nature, and society as they can, and pay as little as they can get away with. Hence, climate change, wealth concentration, and the decline of our middle class.
It’s time now to pull all of these pieces together. My thinking about how to fix the two giant flaws of capitalism is essentially a mélange of Paine, Coase, and complexity economics. What holds the mélange together and makes it work is common wealth.

The Power of Common Wealth

Common wealth—which is to say, wealth that rightfully belongs to all of us together—comes in tangible and intangible forms. It includes tangible gifts of nature such as our atmosphere and ecosystems, and intangible human creations such as our financial system. It also includes the value added by complex systems within our economy—the “emergent” value that exceeds the summed value of a system’s parts. Consider what would happen if the Internet, our power system, or our monetary system crashed—the parts of these systems would have little value on their own. It’s the whole that creates most of the value of the parts.

All of this common wealth is hugely valuable. We couldn’t live without it, and we certainly couldn’t have the amazingly productive economy we now have without it. The trouble is that the market doesn’t see this common wealth—it’s like the dark matter of the economic universe. And that’s what needs to change. We need to make invisible common wealth visible. The way the market ought to see common wealth is as wealth held in trust for future generations, for other species (when appropriate), and for all living persons equally—or, as legal scholar Carol Rose put it, as “property on the outside and commons on the inside.” For this to happen, common wealth must be embodied in legal entities that the market sees and respects. Outwardly, such entities would look like corporations, but inwardly they’d be coded to protect their assets for future generations and to share current income (if there is any) equally.

In my book Capitalism 3.0: A Guide to Reclaiming the Commons, I called this process of legally embodying common wealth propertization— which shouldn’t be confused with privatization, which is the giving or selling of common wealth to private owners. Propertization keeps common wealth common, while at the same time protecting it from private takeover. A great example is the community land trust. My argument then is that propertization of selected pieces of common wealth, if done to scale, can fix capitalism’s two great tragic flaws. By making invisible common wealth visible, it can make the invisible hand of the market smarter and fairer.

Let me walk you through this flaw by flaw.

Flaw #1 (and a solution): The current version of capitalism overuses nature because the price of taking from nature is exactly zero (as is the price of screwing future generations). Hence, despoliation rolls on. The solution, as every economist knows, is to internalize externalities—to make polluters and depleters pay today. To do that, the market must tell large commercial entities, “No externalization without compensation!” The question is how to do that efficiently and economy-wide.

Propertizing common wealth gives us a way to do it. Right now, externalities are invisible to markets because there are no economic actors that turn them into prices that externalizers have to pay. But suppose that the market was populated by what I’ll generically call common wealth trusts. On the outside, these trusts would be to common wealth what corporations are to private wealth—chartered legal entities that represent defined interests. In the case of corporations, the interest is shareholders. In the case of common wealth trusts, it would be a combination of nature, future generations, and members of society as a whole.

If the market were populated by such trusts, corporations couldn’t just shift costs and pay nothing. They’d have to bargain with representatives of nature, future generations, and members of society as a whole. “No externalization without compensation” would become the rule. This would affect prices throughout the economy, and in the process, flip positive feedback to negative. Instead of having an incentive to externalize more, corporations would be forced to externalize less.

Flaw #2 (and a solution): Propertizing common wealth can also fix the second tragic flaw of capitalism, widening inequality. Remember Henry George’s image of rent as an economic wedge, continuously widening the gap between rich and poor? The reason this happens is that the rich have powerful agents on their side—namely, corporations—while everyone else has weak or no agents on their side. And it’s simply a fact that in a competitive economic system, wealth will flow disproportionately to those who have the most powerful collection agents.

But remember those common wealth trusts we created to solve the problem of externalities? It turns out they can serve a second function: to represent all living members of society in the marketplace, as Paine argued in 1797 and as the Alaska Permanent Fund has been proving since 1980. When corporations are properly charged for using or depreciating common wealth, the trusts can distribute some or all of the proceeds to all members of the community—one person, one share. If this were done, we’d wind up over time with two parallel systems for distributing income: the highly unequal system based on private wealth that we have today, and the exactly equal system based on common wealth that would run alongside it. That second system wouldn’t eliminate economic inequality altogether, but the bigger it got, the more it would level things out.

Liberty and Dividends For All

Finally, let me say a few words about my new book, With Liberty and Dividends for All: How to Save Our Middle Class When Jobs Don’t Pay Enough. It has now become clear that, thanks to globalization, automation, and the decline of labor unions, there won’t again be enough good-paying jobs to sustain a large middle class in America. This is an inconvenient truth, but it is the truth and we have to face it. Though politicians (and most economists) still talk as if jobs and jobs alone are the answer, the fact is that, if we want to have a large middle class in the future, we have to supplement labor income with non-labor income.

Here there are two possible paths. One is to raise taxes on the rich and distribute the revenue to others using some kind of means test. The other is to pay dividends to all from wealth we own together. For reasons you can now understand, I favor the latter approach. The dividends would come from a nationwide fund similar to Alaska’s Permanent Fund. The fund’s revenue would flow from a variety of common assets, starting with our atmosphere and our financial system. Over time, its dividends could grow to about $5,000 per person per year. These dividends would not be welfare but legitimate property income, and they’d provide much-needed security to our shaky middle class.

This form of non-labor income is appealing because it’s
• Simple
• Fair
• Transparent
• Inclusive of everyone
• Direct (no trickle down)
• About ownership, not redistribution
• Market-based
• Easy to administer (a mid-sized computer could do it)
• Transpartisan (appealing to libertarians and progressives)

But this method for distributing non-labor income is also part of the larger vision I outlined earlier—a first step toward an economy fit for the Anthropocene, an economy in which organized common wealth sustains our planet and our middle class simultaneously. My hope is that, over the next twenty years or so, we can put some of the key pieces of such an economy into place.

I want to close by addressing the question of how this can actually happen. We all know that Washington today is incapable of doing anything, much less fixing the fundamental flaws of capitalism. But let me quote the Nobel Prize-winning economist Milton Friedman here: “Only a crisis—actual or perceived—produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around.”
We didn’t respond very well to the crisis of 2008 because, frankly, we didn’t have any ideas lying around. We can’t waste another opportunity like that.

The way to prepare for the next crisis is to spread the idea of common wealth. Talk about it. Tweet about it. Blog about it. Start saying things like “We own the air together” and “Our monetary system belongs to everyone equally.” In other words, start naming common wealth, and start organizing it locally where possible. If you do that, there’s at least a chance that, after the next crisis, we can fix the fundamental flaws of our current capitalist system. And that’s how we can build a new normal for the 21st century.

From a talk given at the Schumacher Center for New Economics, Great Barrington, MA, on July 27, 2014. It first appeared in Kosmos Journal, a print magazine focused on global transformation.

Peter Barnes is author of the recent book With Liberty and Dividends for All: How to Save Our Middle Class When Jobs Don’t Pay Enough. He is co-founder of On the Commons and other of numerous books, including Capitalism 3.0: A Guide to Reclaiming the Commons.

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