Schumacher Lecture 2: Economics for the Anthropocene

Schumacher Center for New Economics, Great Barrington, Massachusetts, July 27, 2014

WE’RE GOING TO TALK about economics tonight, so 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 was the kind that literally put the crunch in number-crunching.  I had no idea what the numbers meant, but I really enjoyed crunching them.

Later, thinking 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 13 years after I gradu­ated.

Then, in my 30s, 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.  Bear in mind that, at that time, there was no solar industry, 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.  I then co-founded Working Assets, which became Credo Mobile.

In all, I spent twenty years as an entrepreneur, turning inter­esting ideas into businesses.  And the reason I did this wasn’t 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-owner-ship, 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 equally relentless widening of inequality.  These flaws are coded into the system.  If I wanted to learn how to fix them, I had to go back to economics.  Which, after I retired from business in 1995, is what I did.

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 two sentences.

1)  In the era we are entering, our economy must do two things it doesn’t do now: operate in harmony with nature and provide adequate income for all.

2)  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 twenty-first 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.

The key is, to get from here to there, we have to think differently about the wealth we own toge­th­er, and we have to organize that wealth in new ways.

THE TERM ‘ANTHROPOCENE’ 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 Crutze from the Greek root for human, anthropos, and it means the Current Human Age.

What distinguishes the Anthropocene from the Holocene — the era that began when the last Ice Age ended — is that we humans have become a, if not the, dominant geological force on our planet.  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 a word, 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.

I BEGAN my post-entrepreneurial exploration of economics 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 would like to live in.  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 tragic flaws.

Henry George’s primary concern was the maldistribution of income.  Writing in the 1880s, he asked why poverty continued, and even grew, as America got richer.  And 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 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 eighteenth 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.

I WANT TO JUMP now to two less familiar economists: Arthur Pigou and Ronald Coase.  Pigou, a col­league of Keynes’ at Cambridge, was the first economist to focus on the market’s failure to incor­por­ate external costs such as pollu­tion.  This is the flaw that is re­sponsible for climate change, among other ills.  The essence of it 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 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, impose appropriate taxes and collect them.  This supposes an adept and enlightened government, free from the sway of externalizing indus­tries — a supposition that’s hard to make these days.

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 EPA 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 2000s, 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 model 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.

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.

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 the pieces together.  My thinking about how to fix the two tragic flaws of capitalism is a mélange of Paine, Coase and complexity economics.  What holds the mélange together and makes it work is 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 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, other species (when appropriate) and all living pe­r­sons equally — or, as legal scholar Carole 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 Capitalism 3.0, 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 is that propertization 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.  Thus:

Tragic Flaw #1:  In the current version of capitalism, 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 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 represented is that of 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 in real-time with repre­sent­a­tives of nature, future generations and members of society together.  “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 being encouraged to extern­al­ize more, cor­pora­tions would be forced to externalize less.

Tragic Flaw #2:  Propertizing common wealth can also reduce 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.  It’s sim­ply a fact that in a competitive economic system, wealth will flow dis­pro­­­portion­ately to those who have the strongest 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 the Alaska Permanent Fund has been demonstrating 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 equally.  If this were done at scale, we’d wind up 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.

FINALLY, let me say a few words about my new book, With Liberty and Dividends for All. 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 also 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.

And 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 wouldn’t 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), and
• Transpartisan (appealing to libertarians and pro­gress­ives).

On top of these virtues, 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 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.  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 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 wherever pos­sible.

If you do that, there’s at least a chance that, after the next crisis, we can fix the tragic flaws of capitalism and build a new normal for the Anthropocene.