Articles etc./Free Lunches Yes: Free Markets No
An article in Resurgence extracted from the Alternative Mansion House speech of June 2000. (Jan/Feb 2001)
Fairer sharing of the value of common resources is
practical politics, not just a utopian dream.
In response to calls for social justice and ecological responsibility, right-wing libertarian economists have proclaimed "TANSTAAFL (There Ain't No Such Thing As A Free Lunch)". They are wrong. The truth is that today's world offers free lunches on a massive scale. They are enjoyed by rich and powerful individuals, businesses and nations.
Right-wing libertarian economists are also wrong if they think there can be such a thing as a totally free market. Some markets can operate more freely than others. But all are bound to operate within a social and political framework of one kind or another. This is shaped by law, taxation and public spending programmes - or, in the absence of those, by the freedom of the powerful to diminish the freedom of everyone else.
One of the things we are talking about here is 'enclosure'. Historically, enclosure of land has widened the gulf between rich and poor, and land is still the most obvious common resource. But, as we shall see, there are many others. The value of these resources should no longer be enclosed as private property. It should replace many existing taxes as the main source of public revenue.
But let us start with the real-world situation today. Pressures to reduce existing sources of public revenue will grow.
- Faced with increasing mobility of capital and highly qualified people in a globalised economy, national governments will continue to reduce taxes on incomes, profits and capital.
- In ageing societies, opposition will grow to taxing fewer people of working age on the fruits of their efforts in order to support a growing number of 'economically inactive' people.
- Internet trading will make it more difficult for governments to collect customs duties, value added tax and other taxes and levies on sales - especially of products and services like music, films, pictures, games, advice and information that can be downloaded directly. The internet will also make it easier for businesses and people to shift earnings and profits to low-tax regimes.
bodies like the OECD and the EU will continue
to press for action against tax havens. In 1998
the £400 billion invested in British tax havens like the Channel Islands and Isle of Man was depriving the UK exchequer of £20
billion a year in tax. The $6 trillion held in
tax havens worldwide was resulting in lost tax,
economic distortions and criminal money-laundering
on a huge scale. Here is another reason for shifting
tax off things that can migrate to tax havens
- like incomes, profits and capital - on to things
like land which cannot migrate.
These pressures will reinforce the positive arguments for a radical restructuring of today's tax system - which is perverse, illogical, unjust.
- It penalises employment and people's rewards for work and enterprise, but not the use of natural resources. So it perversely encourages both the over-use of natural resources (including the environment's capacity to absorb pollution), and the under-employment and under-development of human effort and skill.
- It illogically taxes the value added by activities which meet other people's needs and wants, but not the value subtracted by the use or monopolisation of scarce resources.
- It unjustly allows rich people and businesses to minimise their tax obligations by the use of tax havens, family trusts, stock options, 'mixer companies', and other such devices.
Important common resources include:
- land (its site value)
- energy (its unextracted value)
- the environment's capacity to absorb pollution and waste
- space - for road traffic, air traffic (e.g. airport landing slots)
- water - for extraction and use, and for waterborne traffic
- the electro-magnetic (including radio) spectrum
- genetic resources
- the value arising from issuing new money.
Their aggregate annual value is very great. Collecting it as public revenue for the use of all citizens would go far to eliminate the need for many existing taxes.
'Common resources' are resources whose value is due to Nature and the activities and demands of society as a whole, and not to the efforts or skill of individual people or organisations. Take land as an example. The value of a particular land-site, excluding the value of what has been built on it, is almost wholly determined by the activities and requirements of society around it. For example, when the route of the Jubilee line in London was published, properties along the route jumped in value.
Access to them was going to be much improved. So, as a result of a public policy decision, the owners of the properties received a windfall financial gain. They had done nothing and paid nothing for it. They got a 'free lunch'. The absence of a site-value tax on land is costing £50bn to £90bn a year to ordinary UK taxpayers. Collecting the value of common resources as public revenue need not be difficult. Last year's [2000's] auctions of licences to use the radio spectrum for the third generation of mobile phones over the next twenty years raised £22.5bn for the UK government and about £30bn for the German government.
Another important potential source of public revenue is the value created by issuing new money. The New Economics Foundation recently published Creating New Money: A Monetary Reform for the Information Age, co-authored by Professor Joseph Huber of Halle University in Germany and myself. It proposes that all new national currency, e.g. pounds sterling in the UK or the euro in Euroland, should be issued and put into circulation by the government as public spending. (It is not about new complementary currencies like LETS or Time Dollars. Those are important innovations, but different.)
At present in Britain less than 5% of new money is issued and put into circulation by the government and the Bank of England as cash (coins and banknotes). The remaining 95% is created by the commercial banks and put into circulation as non-cash money in our current accounts. As J.K. Galbraith has commented, "The process by which banks create money is so simple that the mind is repelled. Where something so important is involved, a deeper mystery seems only decent." The banks simply print the money out of thin air into the current accounts of their customers - as interest-bearing, profit-making loans.
Interest on these loans is estimated to give the UK banks supernormal, special profits of £21bn a year. The annual loss of public revenue from allowing the banks to create non-cash money in that way is greater - about £45bn. Total banking profits from this source in the USA, UK, Eurozone countries and Japan are about $140bn a year. With a free lunch on that scale, no wonder some of the cats get fat!
The necessary reform is in two parts.
(1) As national monetary authorities, central banks should create the amount of new non-cash money (as well as cash) needed to increase the money supply. They should issue it to their governments as public revenue, and governments should spend it into circulation. To safeguard against inflation, politicians should have no say in deciding how much new money to create. Central banks should be democratically accountable, but should operate with professional independence - as the Monetary Policy Committee of the Bank of England now does.
(2) It should be illegal for anyone else to create new money denominated in the official currency. Commercial banks will then be limited to credit-broking as other financial intermediaries are - borrowing, but no longer creating, the money they lend.
This reform will adapt the right of 'seigniorage' to the realities of the Information Age. It will restore the prerogative of the state to capture as public revenue the income that arises from issuing money, in an age when most money is issued as computerised information. Traditionally, seigniorage was the profit enjoyed by monarchs and local rulers from minting coins - the value of which was higher than the costs of producing them.
As, over several centuries, the physical characteristics of money have changed from metal to paper to electronic bits and bytes, and as banking practices have developed, the relative importance of that original source of seigniorage has gradually dwindled. Now that almost all money takes the form of electronic entries in computerised bank accounts, it makes sense to extend the traditional principle of seigniorage to non-cash money.
There are important social, environmental and economic arguments for this monetary reform, on top of the contribution it will make to public revenue. Moreover, it will help to remedy a democratic deficit. It will make it easier for citizens and politicians to understand how money and banking work, and how they could work better for the common good.
As the Commission on Global Governance recognised five years ago in its report, Our Global Neighbourhood , the principle that the value of common resources should be a source of public revenue applies at the world level as well as the national level. It proposed that global taxes and charges, needed "to service the needs of the global neighbourhood", should be based on the use each nation makes of global commons.
These taxes and charges could be:
- on the use of international resources such as ocean fishing, sea-bed mining, sea lanes, flight lanes, outer space, and the electro-magnetic spectrum; and
- on activities that pollute and damage the global environment, or that cause hazards across or outside national boundaries, such as emissions of CO 2 and CFCs, oil spills, dumping wastes at sea, and other forms of marine and air pollution.
The Commission also pointed to the urgency of international monetary reform: "A growing world economy requires constant enlargement of international liquidity". The principle underlying the reform proposed in Creating New Money is relevant to this.
Revenue from raising global taxes and putting a global currency into circulation could then provide a stable source of finance for UN expenditures, including international peace-keeping programmes. But not only that. Some of the revenue might be distributed to all nations according to their populations, reflecting the right of every person in the world to a "global citizen's income" based on fair shares in the value of global resources.
- would encourage environmentally conserving development worldwide;
- it would generate a much needed source of revenue for the UN;
- it would provide substantial financial transfers to developing countries by right and without strings, as payments by the rich countries for their disproportionate use of world resources;
- it would help to liberate developing countries from their present dependence on aid, foreign loans and institutions like the World Bank and the International Monetary Fund, which are dominated by the rich countries;
- it would reduce the risk of repeated Third World debt crises; and
- it would recognise the shared status of all human beings as citizens of the world.
Growing numbers of people share a vision of a more people-centred and earth-centred society - less business-centred, state-centred and employer-centred than the society we have today. One of its features should be that everyone has the right to share in the value of the 'commons'. Another should be that, in exchange for that right, we accept greater responsibility for ourselves, for our families, neighbourhoods and society, and for the natural environment - locally, nationally and globally.
In practical terms this vision calls for a reconstruction of public finance and the monetary system. And one of the practical things we can do personally is to press our politicians, government officials and financial experts to respond to that call.
Note: This article, published in Resurgence in January/February 2001, was based on a shortened version of the author's Alternative Mansion House speech which was given on 15 June 2000 at an event organised by the New Economics Foundation. For the text of that speech, click here. The text of Creating New Money: A Monetary Reform for the Information Age can be downloaded from here.
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