John McCone : Philosophy For The Future

Philosophy For The Future

Economics

Gold: The Most Government-Proof Asset

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gold
Joe Belanger/shutterstock.com

Someone once told me about their parents’ experience in the Vietnamese revolution. The government seized their land and froze their bank accounts, but they had gold jewellery, so they bought a ticket out of the country and escaped the carnage.

I’ve previously stated that governments could create stable, prospering economies with a land-backed currency, but can private individuals prepare their asset portfolios against good governments going bad?

 

 

 

The Value Of Most Assets Depends on The Government

 

When you think about it, almost ALL assets – with very few exceptions – depend on the good will of governments. The value of all financial assets like stocks, bonds, copyright, patents, indeed licenses of all kind, depend on government-enforced obligations. CEOs only pay profits to shareholders because of the law. If a government told CEOs, “Don’t worry about those shareholders, keep all corporate profits for yourself!” do you think you’d still get dividends? The value of bonds arises from the legal obligation of debtors. If the government told debtors “Forget about those bondholders, you don’t have to pay them anymore!” then bonds would become worthless. Licenses, patents, copyright, etc. all depends on the government allowing the owners to produce an artwork, an invention, or perform an industrial process while preventing those without the license, patent or copyright from doing the same. Without enforcement, IP is worth zero.

Landownership also depends on government. Land owners differ from trespassers by being able to get police to evict trespassers. Yet if, after a revolution, police refused to evict trespassers from your land, your land holdings wouldn’t be worth the paper your title deed was printed on. Small cottage businesses without much fixed capital have some resistance to governments, but any business with large plants and machinery is a sitting duck during a revolt.

The key point is the government is the most powerful force within a nation’s territory. If a territory contained a more powerful force than the government it would, by definition, become the new de facto government. Short of revolution, disorganized private individuals cannot resist a government with force. Without protection from a major political movement, or foreign country, government officials, backed by the police and the army, can take any valuable assets you can’t hide.

What about hiding paper cash under your bed? Can cash be protected from government seizure? No. Like other financial assets, cash depends on legal fiat and is made of cheap materials whose value depends on laws against forgery. Governments can print all the cash they want and, through hyperinflation, can steal the cash from under your bed without touching the physical notes.

 

Government-Resistant Assets

 

The following are a list of government-resistant assets:

  • Skills/education
  • Black market business capital (valuable connections)
  • Compact Antiques, jewellery and other precious objects (Vintage wine? Rare stamps?)
  • Cryptocurrencies
  • Precious Metals

What’s in your brain, cannot be seized. However, education takes time as well as money. So if trouble is just a few months away, you cannot rapidly exchange vulnerable assets for skills. Valuable skills must be developed years, decades, in advance. Yet skills are one of the few government resistant assets that yield an income during tough times.

Even the most oppressive regimes have trouble seizing people’s underground business networks, connections, and reputation. Black market business capital is either intangible or compact; governments can always take the big stuff. Like skills, black market business capital is a government-resistant income-yielding asset. Like skills it is illiquid and cannot be purchased rapidly, but must slowly build up. Unlike skills, it is difficult remove from the country. Furthermore, while black market business capital is government resistant, it is not immune, and governments can break up operations and imprison participants. Even worse, participating in the black market when justice prevails can get you imprisoned or involved in gang warfare. I’ve referred to the costs of running a business outside the law here. When governance is good, business should be kept above board. Nevertheless, honest businessmen in politically unstable regions can explore strategies to go underground during political strife.

Finally, some compact valuables can be hidden and don’t depend on government enforced obligations. Precious metals and other compact precious items, such as antiques and cryptocurrencies, fall into this category. These assets don’t yield an income, but they can be rapidly purchased and readily moved.

 

Production Risk, Breakage Risk, Network Risk and Preference Volatility Risk

 

This first risk to any valuable asset is production risk, the risk that some new process will produce the asset in large quantities and devalue it. Unlike cash, governments can’t print diamonds. Nevertheless, diamonds are just a rare form of carbon. Industrial diamonds are routinely made. Though not yet identical to natural diamonds, that could change any time. Pearls are also vulnerable to production risk. Antiques, by definition, are no longer produced and thus invulnerable to production risk. Any one cryptocurrency can be made immune to production risk. For example, only a finite number of bitcoins can ever be made. However, an arbitrarily large number of cryptocurrencies with identical qualities to bitcoin can be produced. New mining techniques can extract precious metals from lower grade ores, but these increase the cost and energy of extraction and only a finite amount of precious metals can be extracted at a given grade of purity. So, while precious metals have an associated production risk, it is comparatively low and step changes in technology are unlikely to suddenly flood the precious metal market.

The second risk is breakage risk. Precious metals, valuables, such as diamonds or pearls, and cryptocurrencies are hard to break, but antiques are highly vulnerable. If an antique (such as a vintage bottle of wine) breaks while being transported, or a priceless stamp collection gets wet, its value is instantly destroyed.

Then there is network risk. Most compact items of value do not depend on networks, but cryptocurrencies do. Internet access mostly comes from large infrastructure such as mobile phone masts or optical fibres. Satellites might allow foreign governments to provide internet access against the will of a relatively poor country, yet many governments can successfully shutdown the internet and no internet: no cryptocurrency access. Despite Bill Clinton’s statement in 2000 that censoring the internet was like “trying to nail jello to the wall” the Chinese government has had increasing success in determining what can and can’t be transmitted and, if they wanted to, they could block crypto-payments.

Finally, there’s preference volatility risk. In principle, no asset is immune from preference volatility risk as an asset’s value is only what people are willing to pay for it. If everyone suddenly decides they don’t want something, it’s value will be zero – there’s no way around that. And yet, antiques and crypto-currencies are particularly vulnerable to preference volatility risk, due to the vast, practically limitless, array of different antique and cryptocurrency classes. Precious elemental metals and generic valuables (like diamonds), while undoubtedly volatile, are less volatile than antiques or cryptocurrencies due to the comparatively limited number of categories they can exist as.

Asset Risk
Summary for Government Resistant Asset Class Vulnerabilities

Gold: The Most Government-Proof Asset

 

While precious metals are vulnerable to production risk and preference volatility risk, their intrinsic vulnerability to risk is lower than other assets. Gold has a particular low vulnerability to preference volatility risk. Some say gold has little underlying use value, but this is not true. Gold is a highly useful medium for storing and exchanging value as it is intrinsically:

  • Portable
  • Durable
  • Homogenous
  • Divisible
  • Rare
  • Non-toxic
  • Cognizable
  • Comparatively Stable Value

The fact that gold’s main use is to exchange and store value is a strength rather than a weakness and serves to stabilize its value. More common materials, in high demand from industry, only have value while demand remains high and, since technology and industrial processes constantly change, industrial demand, and their corresponding price, could drop precipitously.

But so long as we need for money, materials ideally suited to function as money will have value. Lower industrial demand stabilizes value.

The biggest challenge to storing value is preference volatility risk. Many media can potentially store value, yet, when society switches its preference from one medium to another, those who stored their value in the first medium will lose it. To narrow down the vast array of options, let’s return to basics. The universe consists of elemental atoms; other value arises from their arrangement. The different ways to arrange elements into things of value is limitless so, to narrow down money candidates, we should only consider elemental substances.

Elemental substances are also divisible. Divisible things can be bartered for items over a wide value range. You can exchange a little gold for a ham sandwich, or a lot of gold for a car. On the other hand, while you might exchange an antique tribal mask for a car you want, if all you have is one antique tribal mask and all you want is a ham sandwich, you have a problem…

Rarer money candidates generally have more value per unit mass (neglecting industrial demand and irrational preferences). Rarer elements make value easier to move, all else being equal. When the universe began, only hydrogen, helium, lithium and beryllium were formed. Nuclear fusion in large stars formed elements up to iron. But it takes a neutron star collision to make gold, so it would be an understatement to say gold is difficult to manufacture. Elements higher up the periodic table are generally rarer than those lower down and so are more favourable as value stores. But we don’t want radioactive money! The highest stable element is lead. Only Mercury, Thallium and Lead have more protons than gold. Mercury exists in an elemental form, but it’s liquid; it’s also highly toxic. Both Thallium and Lead are also toxic and so unsuitable to be passed from hand to hand. Platinum is inert and non-toxic, but it’s melting point is 1,768 degrees compared to the 1,064 of gold making it less divisible; it’s also heavily used by industry, which could be a source of demand volatility. The inert nature of gold’s elemental state also makes it cognizable, and for money to be money, it must be possible to distinguish what is money from what isn’t. Different compounds of elements have different macroscopic properties, so only elements that remain in a single, chemically recognizable form are suitable money candidates. The pure elemental form of gold has recognisable qualities like density and resistivity that distinguishes it from other yellow shiny things.

Finally, gold’s traditional use as a medium of exchange and store of value makes it the most government-proof asset around.

 

Rhodium: An Alternative to Gold?

 

One other candidate may be a more suitable value store than gold: Rhodium. Rhodium was only discovered in 1804, and its toxicity is still unknown. But it has one significant advantage over gold: despite being the same price, annual rhodium production is 100 times lower, so if Rhodium became a generally accepted store of value, since it’s 100 times rarer, you could potential stuff 100 times more value in your pocket by stuffing it with Rhodium rather than gold. Doing so may or may not have negative health consequences, but if future studies show that Rhodium is non-toxic it might be a better government-resistant asset than gold.

It’s important to remember that any government resistant asset must be safe to handle, carry and hide. When times are good, its more sensible to securely store precious metals in institutions like Gold Money. But when politics starts deteriorating, it is essential to withdraw that value and hold it directly in your hand.

This is why toxicity is important.

 

Gold/Rhodium Powder Wallets?

 

Technological trends towards smaller, more accurate measuring instruments will affect suitable money candidates. In the future, precious metal powder wallets will be docked together and instructed to transfer a precise, arbitrarily small quantity of metal powder from one wallet to another. Instrumentation in the recipient wallet will rapidly check the weight and purity of the transferred powder within a fraction of a second and trigger an alarm if the powder was sub-standard or if the donor and recipient wallets disagreed on the transferred amount. In such a situation, you could just as easily buy a ham sandwich or a packet of crisps with physical gold or rhodium as a car, a house, or a cruise ship.

Such payment methods could ensure no element was be too rare to serve as money.

 

Self-Provision: The Best Hedge Against Total Collapse

 

Precious metals are convenient for exchanging value, but the greatest actual value is access to food, clean-water and shelter. If civilization collapses, it will be critical to secure access to necessities – and defend them from aggressors. The problem is you need land to grow food and quite a large space to store, say, a 10 year food supply. States can seize large things, like houses and land, so the best strategy against totalitarianism is to store gold, while the best strategy against anarchy is to buy land – along with food and guns. Either way food cultivation, shelter maintenance and self-defence skills will be of high value. Since an acre of farmland, which can support one person, is only £10,000 and food is relatively cheap to procure, it makes sense, for those with financial resources, to buy a plot of land, large enough to survive on, (for fresh food) and a 5 year reserve of dried food (in case of failed harvests) as a hedge against anarchy while storing any surplus asset value as gold to hedge against the seizure of your land and food. Heavy-duty weapons are illegal in many countries, so it makes sense to store wealth as gold and only buy serious weapons at the start of collapse and lawlessness.

In either case, while it makes sense to secure sufficient resources to satiate your most basic requirements in a remote region, relatively safe from invasion (perhaps a small island), it is best to store excess asset value as gold.

 

John

 

Do You Have A Burning Desire To Make a Comment?

 

Have you found this article thought provoking? Is there some message you desperately want to communicate to future readers but can’t because my comment section automatically closes 28 days after my posts go live?

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The Persuasion Economy

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Alexander Oganezov/Shutterstock.com

What stands out about the newest multi-billion dollar, multi-national corporations, founded in the late 1990’s and early 2000’s (Google, Facebook and Amazon) is that two of them… hardly manufacture,  or sell, any physical products at all!!!

 

Something strange is afoot…

 

Though manufacturers are more productive than ever, they employ less workers and make less profit. They are victims of their own efficiency and are undercutting each other out of existence. So while the world is awash with cheap products and gadgets made by increasingly automated systems, most profits go elsewhere…but where?

 

To make secure profits, you have to ring fence some kind of monopoly. Broadly speaking, there are 5 modern monopolies:

  • Land
  • Attention/Trust
  • Information
  • Government Contracts
  • Legal Fiat ( IP rights, Brand Ownership, etc., etc., )

 

I’ve previously mentioned how the monopoly of land works and how fiscal policy, a form of legal fiat, is systematically skewed to give newly-printed money to rich people for free. Well-connected contractors can also lobby governments to get taxpayer’s money for virtually nothing in return – the Iraq War  being a good example. Modern IP laws resemble the royal charters that monarchs of old issued to favoured merchants and guild masters. All these are lucrative streams of profits which armies of financiers, realtors, lawyers and lobbyists hired by rival corporations, battle against each other to secure.

This article focuses on one particular monopoly. The monopoly  of attention-trust.

Let’s begin with this self-evident statement:

“The simplest way to make money is to persuade someone to give you their money.”

Con-men are good at persuading people to pay them money for nothing. Snake-oil salesmen are good at persuading people to pay high prices for cheap items.

Whenever lots of people do something, we tend to think it’s O.K., but when Coca Cola persuades us to pay 50p for a can of carbonated, sugary water… is this really distinguishable from selling snake oil? And if that’s bad, then what about selling bottled still water at a similar per gallon price to gasoline?

Every day, fewer people work to produce items of actual value, and more people work to persuade others to buy cheaply manufactured items at prices far above their production cost. Armies of advertisers, psychologists, marketing researchers, influencers, celebrities, telemarketers, website designers and data analysts, work tirelessly round the clock to sell cheap products at inflated prices.

As production gets cheaper, physical products become little more than tokens to legitimize the exchange of money. Naomi Klein’s book No Logo discusses how many profitable companies increasingly outsource production and focus on marketing, brand building and design. Perhaps advertisers and brand managers can persuade you that branding creates “real value”  – they are, after all, master persuaders – but any industry that persuades people to buy products that cost 5 times more than identical products elsewhere is clearly selling snake oil.

The recent fascination of mainstream advertising with predatory religious cults is a red flag if ever there was one!!!

 

The Attention Economy

 

Broadly speaking:

Persuasion = Attention + Information

Persuasion + Overpriced Products = Profit

Facebook and Google lead the attention economy – by a mile. Of their 25 largest competitors  (not counting Chinese ones which don’t compete) all their revenues put together (except Amazon) are only 84% of what these two search and social giants make – and though Amazon has huge revenues, its profits compared to the Big Two are miniscule.

These companies’ business model is to capture our attention and information and charge sellers money to direct attention to their displays of products and services. They make large profits because attention is a monopoly – an hour gazing at one thing is an hour not gazing at something else. If everyone only looks at Google and Facebook all day, advertisers literally have nowhere else to go. In principle, these monopolies are not unbreakable, people can theoretically shift attention to something else at anytime. In practice, however, we are creatures of habit and the habitual use of something useful or rewarding, is hard to break. It is our habitual nature that gives Google and Facebook their monopoly over us and the virtuous (or perhaps vicious) cycle that content providers want viewers and viewers want content and both gravitate to where attention is, attracting yet more attention and yet more content.

In addition to attention, there is also a feedback loop in information. The more people use the Big Two,  the more data they get, relative to competitors, for market research and to train algorithms in order to create more user-friendly (or perhaps more captivating) products.

Facebook and Google provide many useful services. That’s why we use them. Nevertheless, there’s something unsettling about the idea that armies of psychologists, advertisers and analysts constantly monitor what we do, and influence what we see. As we spend more time gazing at our screens, a few powerful monopolies influence an ever larger share of our daily visual experience, harvest information about our digital activity and use it in sophisticated ways to sell us things.

Facebook and Google lie at the entrance to a much larger advertising funnel. Overall, the internet advertising industry, dwarfs even these behemoths. 4.1 million people in the U.S. currently work directly for the ad-supported internet industry which has had 20% annual growth since 2012. In the U.K.,  market research has grown by 62% and data analytics by 350% since 2012. All this sits on top of the emergence of hollow brands since the 1980’s.

 

PostCapitalism…Or Zombie Capitalism?

 

In 2015, Paul Mason’s book PostCapitalism predicted that the increasing economic importance of information would end capitalism. He argues that as the marginal cost of replicating and spreading information approaches zero and as information becomes the dominant economic commodity (i.e. when a solar powered 3D-printers and harvester robots can make most things from information) the marginal cost of everything would approach zero meeting all our needs in abundance. I’ve also written an optimistic article agreeing with this and a pessimistic one on how advanced weapons systems could also be manufactured in abundance.

Things take time and traditional drugs companies, car companies and retailers are still out there – becoming more productive, cheaper, and less profitable. However, looking at future trends, the newest big companies and the fastest growing sectors are not manufacturing, but the persuasion economy. Evermore people, psychologists, salesmen, internet marketers, website designers, celebrities, social media influencers, brand managers, search engine optimizers, analysts of all kinds and many more, are piling into the persuasion sector. An exponentially increasing flow of capital and labour is being invested into influencing – and perhaps eventually controlling – human behaviour.

And, unfortunately, this is something overlooked by PostCapitalism. While information is naturally abundant, attention will remain scarce and valuable so long as our brains remain unchanged. Furthermore, attention is something companies can ring fence, captivate and make a tidy profit from – more so than any other resource.

It’s certainly true that 3D-Printing, along with the miniaturization and generalization of manufacturing, erodes the underlying justification for economies of scale, and indeed the entire hierarchical capitalist mode of wealth production. Yet US and UK companies have never been more profitable. Arguably capitalism has never been stabler and more dominant and than it is today.

Why is this? How can obsolescence coincide with record strength?

The answer is that continuously falling costs of production have steadily transformed capitalism from a system of wealth production into a hollowed out, ever more naked, system of pure control. This is the irony : the less necessary capitalism is for production, the more surplus labour and resources it can devote to controlling and propagandizing the population.

The less capitalism is required, the more spare resources it has to perpetuate itself.

Once power structures are summoned into existence, they rarely retire gracefully.

…And this would not be the first time an originally useful system of organization transformed into a useless system of pure control…

The first civilizations developed in river valleys to collectively manage large scale irrigation ditch networks for watering crops. This required a centralized hierarchy and an army loyal to a despotic king to make sure each irrigation ditch digger pulled his weight. However, once a large army, loyal to one leader, was established, the political system spread far beyond regions that justified this mode of production. The river valley civilizations ignited an age of empires, and even those who weren’t conquered by river valley civilizations had to form hierarchical political systems in order to defend themselves.

Without intense conscious effort, an analogous fate could await us. The mythical honest, productive businessmen eager to turn a profit for himself while serving customers and making the world better – the flagship species of capitalism – is rapidly becoming endangered. They can still be spotted, huddling in rocks and crevices, but when you find one, far from prospering they are usually struggling to stay afloat. Most new money is accumulating in the system’s instruments of persuasion and coercion. The jobs of the future will be: defense contractors, surveillance companies, lawyers, accountants, tax officials, public notaries, financiers, traders, marketers, advertisers, psychologists, brands managers, politicians, regulators, social welfare officers, realtors, fund managers, economists, social media influencers, NLP coaches, self-help gurus, celebrities, website designers, search engine optimizers, telemarketers, marketing analysts, security guards…in an economy where less than 10% of workers produce goods in abundance for practically nothing but which perpetuates artificial scarcity with planning restrictions, IP  laws and sophisticated propaganda that convinces people, with increasing efficacy, to buy on credit excessive amounts of overpriced, disposable merchandise that soon becomes “unfashionable” or “obsolete”, attend over-hyped events and pay interest on their debts for the rest of their lives. Where a minefield of laws against copyright infringement, defamation of character and incitement of hatred, become so generalized that anyone with a large team of lawyers can sue anyone else for anything, where free speech dies the death of a thousand cuts and all political movements (that tell the establishment to take a one-way trip on ARC-B ) get litigated out of existence. Where all we need gets produced for nothing but where everyone has debt problems is stressed and constantly works their arses off at completely useless jobs as the high priests of economics shout in ever shriller tones that the sales price of a product IS its value to society. That if a sales team convinces customers to pay ten times an item’s production cost then BY DEFINITION they must have MADE the item TEN TIMES MORE VALUABLE and anyone who questions this logic is a HERETIC.

 

Is this really the future we want?

 

John

 

Do You Have a Burning Desire To Make A Comment?

 

Have you found this article thought provoking? Is there some message you desperately want to communicate to future readers but can’t because my comment section automatically closes 28 days after my posts go live?

If so, you might be interested to know that I reopen any comments section to members of my mailing on request as one of the perks of joining.

If you’d like to leave a comment, simply scroll to the bottom of the page, sign on to my mailing list and them email me with a request to reopen the comments section for this post.

Happy Commenting!

John

A Rights-Based Basic Income

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When the topic of basic income arises, people often ask me: “Why should we pay people to do nothing?” We generally think that hard word generates income, and that workers rightfully own that income. The idea of taxing hardworking people to pay those who (might) do nothing seems unjust. Should workers slave for money that mostly gets confiscated and given to others?

Yet not all income is paid to labour. A portion of income is used to rent assets of value. An owner of valuable assets can receive rent from others who wish to use them. This will provide him with an income for little to no work – possibly indefinitely. Some of the value of rentable assets was produced by labour, however a portion, perhaps a third to a half, was not.

I propose (as Henry George once did) that only the value created by labour can rightfully be privately owned. The only assets of value that can rightfully be purchased are assets created by labour, and if labour is only responsible for a portion of an asset’s value, then only that portion which labour produced should be owned privately.

There is no reason why one person should have a greater claim than another to value that is not produced by labour and, therefore, the rental income proceeding from the use of all natural value, by right, should be distributed evenly throughout society. The only way to own something is to produce it or purchase it from the rightful owner. This requires a voluntary exchange of ownership extending back to the original producers of the item of value. The purchaser of private ownership rights to natural value is like a buyer of stolen bicycles – as all private entitlements to natural value were originally stolen from the commons.

This article explores the revenues that a basic income based on equal rights, could generate. An income based on the principle that all people have:

  • An equal right to the unimproved value of land
  • An equal right to newly printed money
  • An equal right to inheritance
  • An equal right to benefit from bads whose quantity must be limited

 

The Portion of Land Value Not Produced By The Owner

 

Anything for which the demand at zero price exceeds the supply has monetary value. For some of these scarce, yet desirable, items (such as a piece of jewellery) the source of value  was the labour of a craftsman, in which case the value rightfully belongs to its creator. Yet in other cases, at least a portion of the value is naturally occurring (a lakeside view, for example). Usually, human labour must mix with natural value to produce the final item. However, some natural resources require less effort to extract value from than others. Consider two coal resources: one far below the surface branching into narrow seams, another deposited on the surface, extractable with open cast mining. The value of coal from both mines is equal, yet one requires far more labour to extract than the other. This will make the mineral rights of the easily mineable deposit more expensive than the rights for the deposit that requires more capital and labour to extract coal from. But when one mining company out bids the others and pays the higher sum for the right to mine these easily accessible deposits, to whom should the money be paid? Who was responsible for that coal deposit being closer to the surface? Who deserves to be paid for this service? No one! It is simply a fluke of nature. And if no one deserves the cash proceeds from selling the rights to this resource, then everyone is equally entitled to these proceeds.

Beyond that, there is value that arises from proximity to other people. It is valuable to live close to shops, restaurants, discos and workplaces from which to earn a living. Yet the land owner creates only a tiny portion of this value. If most people on a street paints their house, the location value of the street will rise even for those who don’t. If a shop or railway station opens up, nearby house prices will go up even if their inhabitants did not build the railway or work in the shop.

We can thus see that, while much of a location’s value does arise from human activity, the rental proceeds from location value are not paid to the creators of that value. Since it is impossible to identify who is responsible for each pound of increased location value, it is better to tax the rental value of location and distribute a per head payment to everyone.

How do we assess what portion of land value arises from its unimproved location value and what portion arises from improvements which the owner has made? The value of the improvements is the cost of producing the improvements. If a house in London costs £150,000 to build and sells for £750,000, then it’s unimproved land value is £600,000. The cash value of the yearly benefit that proceeds from the exclusive use of a location is the location rent (the site rent). The appropriate level to set land value tax (a sum payable to the government for the exclusive use of a location) in a neighbourhood, is therefore whatever level reduces the prices of houses traded in an area to the cost of producing all the improvements present at that location. Mark Wadsworth estimates that a tax on the full site rent of residential property in the U.K. would bring in around £200 billion. Existing business rates offer a conservative ballpark estimate for what a tax on the unimproved value of commercial land could raise – around £30 billion.

Natural resources and farm land would not significantly change these figures.

So an equal right to the rental proceeds arising from the unimproved value of land in the U.K. would split £230 billion per year among 50 million adults and yield a yearly basic income of £4,600 per person.

 

An Equal Right to Newly-Printed Money

 

Any civilization that permits usury must continually create new money to remain stable. The current way that central and private banks create and distribute new money is highly unjust. So who should receive the newly printed money? Newly created money is not produced by labour, we certainly don’t reward private individuals who labour to create money! Forgery, the production of money by private individuals, is a criminal offence. Money is an – albeit useful – artificial monopoly imposed by legal fiat. Because it is produced by legal fiat, rather than labour, all people have an equal claim to the value of newly printed money. In a previous article, I discussed the precise financial policy reforms required to stabilize our system. Suffice to say they involve paying £1,840 to every adult, every year.

 

An Equal Right To Inheritance

 

Imagine a think-tank asked you to summit a design proposal for an equitable welfare system that addresses poverty to a report they were writing. Imagine you proposed a system where the welfare each recipient received was proportional to the net worth of their parents at their time of death. The response of the editor would probably be: “That’s the dumbest, most arbitrary, welfare system I’ve ever heard! Come back when you have something better!”

Inheritance is welfare. It’s unearned wealth some people receive in exchange for no work.

Some people accumulate a great deal of wealth over the course of their lives, which doesn’t go away when they die. So what to do with that value? Since no living person produced it, no living person has earned it. As such, everyone should have an equal claim to the wealth left behind by the dead.

So how much money would an equal right to inheritance bring in?

Let’s neglect land (whose value would already be taxed away) and just include financial assets. The HMRC estimates the total value of financial assets in the UK to be £1.6 trillion. If we take the gap between generations to be 33 years, as Richard Murphy does, this would yield a yearly revenue of £53 billion to be redistributed. Let’s assume, for the sake of being conservative that half of this is avoided or evaded. This would leave ~£25 billion a year, or £500 per person per year.

 

An Equal Right To Bads Whose Production Is Restricted

 

It is impossible to quantify with any accuracy, how much income this would bring in as the extent to which bads are restricted, and how they are restricted, is a political one. A slight modification of David Fleming’s proposal of Tradeable Energy Quotas ( TEQs ) would distribute rights, to purchase CO2 emitting fossil fuels, equally throughout the population. Every time you buy coal in the shop, you would have to surrender a portion of your quota. Companies would not be issued with any carbon ration but would have to purchase it from private individuals who could sell their carbon rations on the market to companies instead of burning it.

An alternative would be to charge a fixed price per unit bad emitted. There is a case for spending this price on clean-up costs rather than giving it to the population in general.

Beyond that, companies must often be approved for a license to engage in potentially harmful activity. The quantity of this activity could be reduced by increasing the cost of the license (whether selling liquor or gambling). The money raised should be distributed evenly throughout the population.

Conservatively, I will add £500 per person per year as the proceeds of the redistribution of fees, duties, rations, licenses, etc., etc.

 

Getting Real About Basic Income

 

Adding it all together, a rights-based basic income, which makes no claim on the proceeds of other people’s productive labour, would amount to about £7,440 per person. That this is far below the average wage should not be surprising for, as Piketty has mentioned, capital accounts for 30% of income (and some of that capital is justly earned), while wages account for 70% of income.

We need to be realistic about basic income. The purpose of basic income is not to enable people to live comfortably without working, rather it is to enable people to live without working in the labour market. If instead of using basic income as something to buy meals and pay rent, you think of it as money that enables you to purchase building materials, gardening and maintenance tools, and fertilizer to which you apply your labour to set up and run a homestead, then an unconditional payment of £7,440 a year could go a long way to enabling a sufficiently industrious person to establish quite a high quality of life for himself without selling his labour to others.

And since no customers or employers are required to give people permission to provide for their own needs, anyone could access this lifestyle. While not everyone would choose it, a universally accessible option of self-provision would greatly strengthen the negotiating position of workers with their employers and increase both wages and employment.

So a modest basic income could go a long way.

My article Basic Income, Self-Provision and Full Employment discussed the higher credit value of basic income as well as it effect on wages and employment in greater detail.

 

John

 

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Let’s Stabilize The Business Cycle – Once And For All!

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Victor Moussa/Shutterstock.com

Any civilization that permits usury must continually create new money to remain stable.   Since the industrial revolution, loans at interest have become an indispensable means of financing important infrastructure to greatly improve living standards. Yet there is a price pay for this practice: the economic busts that have plagued the 19th, 20th and 21st centuries are the bitter fruits of usury.

It is not a coincidence that the Bank of England, founded in 1694, arose before the industrial revolution got into full swing. Without it, economic busts would have destroyed finance and torn apart the embryonic industrial economy. Central banks enable our financial system to survive economic busts – devastating though they are. Ever since their founding, central banks have covertly created new money out of thin air and lent it to banks; sometimes a nominal store of gold (of far less value than the money issued) “backs it up”, other times money is simply created by legal fiat.

As time has gone by, central banks have been getting better at using newly printed money to stabilize the finance system. The 2008 recession was pretty bad, but it was nothing like the  1930’s. However, the policies which central banks currently deploy to stabilize finance are causing inequality to skyrocket.

Central banks don’t give out newly printed money. They lend it. All money was originally loaned into existence. If all loans were paid back, all money would disappear. To stop this, central and private banks constantly lend out new money so new loans can be used to repay old loans. Thus, the total amount of money loaned out exponentially increases, yet if this exponential is sufficiently gentle, it can, in principle, sustain a steady, moderate rate of inflation indefinitely.

Since the loaned out money can never be repaid without societal collapse, the exponential increase in loans, that the central bank supports, is really just a money printing operation.

 

Fiscal Policy and Skyrocketing Inequality

 

So who gets all this newly printed money?

The answer: People who can raise credit at low interest rates. The activity of continually printing new money inflates asset prices. If you can raise a loan with newly printed money at an interest rate below inflation and use it to purchase assets, then the value of your asset portfolio, purchased from money loaned to you out of thin air, will almost certainly go up – at least with inflation  – leading to yearly capital gains that exceed the interest originally used to buy that capital.

Such people, using low interest loans to make capital gains, essentially receive newly printed money for free.

This effect is exponential: as the assets purchased with new loans appreciate at the inflation rate, our investor’s net worth will increase yearly roughly by the inflation rate minus any interest owed on his loans. This increase in net worth can serve as leverage for yet more loans which can purchase yet more assets whose value in turn appreciates.

The problem is that not everyone can access credit at interest rates below inflation. People who already have valuable assets can leverage up at very low interest (some brokerages charge less than 1% interest on money loaned out to buy stocks) but people with insecure jobs and no assets, cannot get 1% interest and usually pay over 10% on their loans.

This interest rate apartheid, between people whose net worth is positive and those whose net worth is negative, divides the population into 2 distinct groups: Those in the black who – if they are financially savvy – receive free newly printed money from central and private banks and those in the red (and less savvy ones in the black) who get no newly printed money.

The current policy of the world’s central banks is effectively to continually print new money and hand it out to rich people for free (through facilitating leverage to inflate financial assets). Theoretically this can put off another sudden, disastrous crash for quite some time (which is why, despite many cries of wolf, there has been no “next great recession”) – although a change in fiscal policy (such as Ending The Fed or raising interest rates) could cause a sudden catastrophic collapse. However, this strategy can only stave off collapse by continually increasing the relative share of the world that the wealthy own. So although central banks can stave off the next crash by handing free money out to rich people (assuming no revolution), since the super rich cannot own more than 100% of the world’s total wealth, this policy cannot continue forever.

Yet if we don’t continually release new money into the system – it will collapse!

 

Stabilizing Finance Without Increasing Inequality

 

The question is…if we are going to print money out of thin air, which we have to unless we intend to ban usury (and it’s a little late in the game to ban usury!)…who should we give this new money to?

The answer is simple: since no one has earned the newly printed money, everyone has an equal claim to it. Newly printed money should be divided evenly among the population.

How much money should be printed every year?

If we look at the formula for price:

MV = PT

Where

M = Money supply

V = Money Velocity

P = Price

and

T is the number of goods transacted

Then making P the subject of the formula yields:

P=(M/T)V

If we assume a real economic growth rate of 2%, a constant money velocity and an inflation target of 2%, then that would imply that the money supply should be increased by 4% per year. Taking the UK’s M2 money supply of 2.3 trillion as M would imply that, in order to achieve a target inflation rate of 2%, £92 billion pounds of new money should be distributed evenly throughout the population per year, which would give each U.K. adult  £1,840 of newly printed money per year.

This is only a ballpark figure, and may be an overestimate, since the velocity of money in the hands of poorer people is faster than its velocity in the hands of the super rich, so the payment might be somewhat less. Furthermore, it would oscillate to correct for changes in the money velocity.

But the important point is that such a payment of newly printed money to everyone could simultaneously stabilize our financial system and prevent the super-rich from acquiring an ever larger share of the world’s wealth.

 

Growth and Inflation

 

Rawpixel.com/Shutterstock.com

You may have noticed that the amount of new money required to stabilize the system  roughly equals the inflation target plus real economic growth.

Economists often say we need real economic growth to stop systemic collapse. This is not true. Nominal economic growth plus steady inflation, arising from new money, is adequate to stabilize the system. What is true is that real economic growth allows central banks to pass free money under the table to rich people without anyone else noticing. Our financial system is rigged to ensure the rich get the lion’s share of all newly created wealth but, since everyone ends up with more, no one complains too much.

Distributing an appropriate amount of newly-printed money to everyone would let capitalism exist in steady-state with modest inflation. Don’t believe anyone who says otherwise. It’s just the rich couldn’t get richer without genuine innovation that outperforms the market.

 

National Central Banks Should Hold All Deposits

 

At the moment, private banks create most (97%) new money. This must stop if central banks are to hand everyone new money. Otherwise the fractional reserve system would multiply the new money – perhaps 30 fold – and cause hyperinflation.

Stopping this is relatively straightforward. All that is needed is for central banks to hold all deposits. The national central bank would then manage all ATM machines and give everyone a central bank debit card for cash transactions. In other words, the central bank would provide personal banking services to everyone. Since the central bank can, in principle, print an infinite amount of currency out of thin air, there would be no fear of runs on the bank as it could always print enough cash to pay depositors.

The central bank would then loan money to private banks at low interest who would then loan the money out to people and firms at a higher interest rate – the spread in interest being the private banks’ source of profit.

In our current system, when private banks lend out money, they credit the money to a deposit account held in the same private bank which can then be used as collateral for yet more loans, leading to uncontrolled money creation.

In the system I propose, when private banks lend money out to customers, they credit the customers’ central bank deposits. This enables the central bank to tightly control the amount of new money and credit created. And every personal account held by the central bank would, from time to time, be credited with basic income that roughly annualizes to £1,840 – more if the economy grew faster than 2% per annum.

Financial crises happen when too many borrowers fail to pay back their loans and cause depositors to lose their money. If these depositors either have loans themselves, or pay wages to people with loans, then this loss of deposits causes more debt defaults which wipe out yet more deposits…and on…and on… and on, in a disastrous cascade.

Securely protecting deposits could make financial contagion and crises a thing of the past. And if the central bank held all deposits, they would be fully protected, as any entity that can infinitely print money can pay all depositors in cash – even simultaneously. Thus, if the central bank held all deposits, there would be no more financial crises.

If the central bank held all deposits, no private bank would be too big to fail. There would be no difference between a large bank and large car company going bust.

A central bank holding all deposits is consistent with the libertarian ideal of the nightwatchmen state that solely protects private property. After all, your deposit account is your property, so should the state not protect it from irresponsible lending institutions?

It would be fairly simple to transition to this system without an economic collapse. The central bank could offer depositors convenient personal banking services along with a central bank debit card (an perhaps a sign up bonus). Then, whenever someone transfers a deposit out of a private bank and into the central bank, the central bank would lend the private bank a sum exactly equal to the deposit that was transferred out. This way, the central bank could transition to holding all private deposits without drying up the supply of loans.

Simple!

The recent announcement by the Chinese central bank that they will launch a digital currency may be the first step to a future where individuals and businesses can access the affordability and convenience of a current account without running the risk that the private bank holding the account might go bankrupt. If China can properly implement such a system, it will make its economy completely immune to recession. If the rest of the world’s central banks fail to catch up, digitize their currencies and recession-proof their economies, then, in the wake of the next recession, we may all end up using Chinese digital Yuan.

 

A Land-Backed Currency

 

Without gold, what is the real basis of a currency’s value? A currency backed by genuine value inspires more confidence than one whose value floats on thin air and good will, yet backing up a currency with real value is a straightforward matter and can be accomplished with the stroke of a pen.

A tax on the site rent of all the nation’s land, payable only in national currency would – at the stroke of a pen – create a land-backed currency. Such a land value tax would effectively use the total asset value of the nation’s territory to back its currency.

Since:

  • Total global land value far exceeds total global gold value
  • Land cannot be covertly stolen
  • Land is the natural asset of every nation
  • Land is of far greater use than gold

It is far more sensible back up a currency’s value with land rather than gold.

By adopting all of these measures, we can end the devastation that financial instability causes once and for all and transition to a stable, secure and prosperous future!

 

John

 

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Basic Income, Self-Provision and Full Employment

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Basic income is a hot topic these days.

Recognized advantages include: removing the bureaucracy; the forms; the interrogations; the mandatory courses, job applications, job interviews, penalties for non-compliance, and the accompanying fear of getting cut off. A Reliable provision of income to everyone eliminates the decision-making process over who to pay and the accompanying risk, from the point of view of recipients, that the decision-maker will cut them off.

Basic income’s main disadvantage is that it is not targeted at those in need. A given tax revenue paid evenly to everyone will give the needy less than one paid solely to them. The UK’s welfare budget can afford to pay everyone about £4,000 per year without tax hikes. That’s not much.

Here, a case in favour of basic income is built from three points:

  • Basic income has a higher credit value than means-tested benefits
  • Basic Income should not be compared to a living wage. Paid work depletes time. Basic income does not. This leaves recipients time for cash-saving activities.
  • Job-seekers allowance and working tax credits push people into the labour market. Increasing the supply of labour reduces its price (i.e. wages). The provision of basic income does not push people into the labour market, and so supports wage levels.

 

Credit Value of Basic Income

 

When bank managers decide whether to lend someone money, they look at their assets, their income and, finally, the reliability of that income. Applicants with unreliable incomes are either charged more interest or turned down.

Two defining features of our age are record low interest rates, set by central banks, and an increasingly precarious job market. Together, these two factors are driving wealth inequality to levels not seen since World War 2. Record low interest rates enable asset owners to access cheap credit with which to buy yet more assets. Many asset owners all using cheap loans to buy assets inflate asset prices which can then be used as collateral for yet more loans. Meanwhile those with insecure jobs must pay interest rates that are 5 to 10 times higher on any money they borrow. This interest rate apartheid between asset owners and precarious workers is the root driver of inequality today.

The provision of income through means-tested benefits is precarious. It starts and stops, it gets revised up and down based on increased hours, changes in savings, missed appointments, changes in government policy and a myriad of other factors. This means someone on means-tested benefits, applying for a loan, will either be charged very high interest or refused.

Even a relatively small uncertainty in an income source drastically affects the interest rate (especially when central banks set rates low), and correspondingly the principal which that income can service.

For example, if there is a 10% chance per year that a benefit recipient will get cut off, the bank must charge 10% interest to compensate for the default risk. A fiscally responsible person receiving a fully secure basic income, on the other hand, would probably get charged a mortgage-like interest rate of 3%.

Thus, £4,000 of precarious income could at most service a £40,000 loan at 10% interest.

While the fully secure £4,000 basic income could service a £133,000 loan at 3% interest.

Basic income provides far more credit bang per benefit buck than means-tested benefits. Pilot studies in India confirm that even a low basic income significantly helps poor people to access to credit at lower interest rates.

This point is crucial: the cheaper credit, that basic income facilitates, lets people purchase capital today to save expenses tomorrow. The front-ended purchase of cost-saving capital produces a higher quality life from less money. Basic income provides more benefit from less payment. It’s a much more efficient way to pay out benefits.

 

Basic Income and Self-Provision

 

Due to its high credit value, a relatively modest basic income (of perhaps, £4,000 a year) in a low interest rate environment could enable its recipient to raise a significant amount of capital (perhaps £100,000+).

This creates many opportunities for buying capital today to save expenses tomorrow.

A key point to remember, when comparing basic income to a living wage, is those who work 40 hours a week to earn a living wage have depleted their time. Those with an unconditional basic income, however, still have those 40 hours to add value with their labour to any capital they have purchased with their income. This surplus time enables someone on an unconditional basic income to live a far better life than someone who earns a similar wage.

For example, it is much cheaper to buy raw materials to construct a house as opposed to buying the finished house. Indeed Open Source Ecology is working on a turnkey design, combined with instruction videos that will enable anyone to build a house and a hydroponic greenhouse from starting materials costing just £25,000. This way, you can produce the same final house by expending far less money but far more time and effort – yet if you’ve got nothing better to do with your time, applying it to build a house is no loss and a big gain. Consider cooking (or otherwise preparing) a meal verses buying one in a restaurant, consider purchasing fertilizer, gardening tools and a greenhouse as opposed to buying food in a supermarket. Supermarket food may seem cheap, but, remember, land costs less in the countryside than in the city, so growing food in your back garden, not only saves the cost of buying the food, but also the cost of living near, or travelling to, a supermarket. Bicycling as opposed to driving is another example of trading time and effort for money to achieve the same result.

Many means-tested benefits are calculated on the basis of personal expenses, especially rent in the case of housing benefit. This perversely incentivizes benefit recipients to increase their expenses. A fixed income, on the other hand, encourages people to seek creative ways to reduce expenses and cash in the surplus. The most obvious way to save money is to move to a cheap area. This option is unavailable to those who work in an expensive location and indeed, as this graph shows, average after-rent wages are identical up and down the country. This implies that landlords collect most of the surplus produced in wealthy cities. Thus, by freeing people from expensive locations and freeing up time for self-provision (as oppose to filling out endless job applications, as Job Seekers Allowance requires), surprisingly little money could facilitate a decent standard of living.

Uniquely as an economic activity, self-provision doesn’t require anyone’s permission. Those who work for themselves with tools and raw materials purchased with basic income do not need employers to hire them or customers to purchase their goods, they can just get on with it – no permission, or CV, required. This means the economic activity of self-provision on a modest basic income can automatically fully absorb an arbitrarily large unemployed population. Many critics of basic income would prefer to supply everyone with guaranteed work. However, a basic income set at an affordable level is, to all intents and purposes, a guaranteed job. The provision of basic income is an indirect provision of employment. No one on £4,000 a year would sit around doing nothing – they couldn’t afford to, or at least wouldn’t want to – as their quality of life would be very low. Instead, anyone on £4,000 a year would spend their time working industriously to extract the maximum value from every penny they got.

Furthermore, unlike make-work guaranteed job schemes, those employing themselves in the activity of self-provision requires no supervision at all. Since people providing for themselves reap the benefit of their own industry, there is no way to skive off and game the system. This simultaneously raises productivity and eliminates the need for supervisors that peer over the backs of guaranteed workers to make sure they perform their make-work jobs.

 

Higher Wages, Wealth Creation and The Benefits of Full Employment

 

If we quit our jobs, we lose money and gain time. The extra available time can be devoted to working at a job that pays more, and people often quit their jobs when offered a higher paying job elsewhere. One could also use the extra time acquired from quitting a job to run a business. This would make sense if the hourly profit generated by that business exceeds your old salary.

Other than working at your own business, or a higher paying job, you could work to provide value for yourself (such as building a house, growing food, brewing beer, etc.). This is a key point: Unlike other activities, which may not be available, self-provision is always an available option for healthy people. If the benefit from a given amount of time spent providing for your own needs exceeds the benefit of your salary at work, then it makes sense to quit your job and provide for yourself instead. And because self-provision is available to everyone, then if there are enough rational people to set the price of labour…

…the benefit that someone providing for themselves can extract from a given period of time and industry will set the wage floor everywhere.

In 1879, Henry George eloquently expressed this principle in his landmark book Progress and Poverty in the chapter, Wages And The Law of Wages

Henry George, author of Progress and Poverty

“…what, in conditions of freedom, will be the terms at which one man can hire others to work for him? Evidently, they will be fixed by what the men could make if labouring for themselves. The principle which will prevent him from having to give anything above this, except what is necessary to induce the change, will also prevent them from taking anything less. Did they demand more, the competition of others would prevent them from getting employment. Did he offer less, none would accept the terms, as they could obtain greater results by working for themselves.”

 

 

 

 

 

However, the wealth that someone can produce working for themselves depends on available tools and raw materials. Without an initial supply of tools or raw materials, the value of our time is low indeed – and tools and raw materials cost money.

Wealth is created by applying labour to capital. If someone wishes to mow the lawn, they will be far more productive with a lawn mower than a pair of scissors, conversely a regularly used lawn mower will be more productive compared to one left idle in a garden shed. Hence:

Capital amplifies the productivity of each hour of labour, while labour amplifies the productivity of each unit of capital.

This means a basic income that enable recipients to access more capital will raise the value of the time they spend providing for themselves and hence baseline wages across the board. Since labour and capital have a multiplicative effect on each other, basic income will raise wages to many times the value of the income itself. If labour amplifies the value of capital (tools and raw materials) by a factor of 5, then a basic income of just £4,000 a year could raise wages everywhere to £16,000!!!

Henry George’s Law of Wages can also be used to infer that a basic income will create new wealth. According to this law, the aggregate benefit produced by basic income recipients applying their labour to capital exactly equals the salary forgone by not spending that time working for someone else. If a £4,000 basic income raised the wage floor to £16,000 then someone who chose to provide for themselves as opposed to getting a job for £12,000 actually produces an additional £4,000 of wealth compared to a situation without basic income where they were forced to labour for less. By more efficiently capitalizing the poorest members of society, even a modest basic income would increase the productivity of their labour.

And if we agree that labouring industriously to provide for yourself is a productive, wealth-producing use of time, then universal basic income will give rise to full employment along with all its corresponding benefits!

Basic income can buffer a flexible, non-exploitative labour market. Today we shudder at the term “flexible labour market” due to the implication that one moment you have an income, the next moment you’re left high and dry. But once people can use basic income to set up a homestead with the tools they need to provide for themselves, flexible labour markets become less ominous. For those working from a foundation of self-provision, flexible labour markets will merely be a source of pocket money.

 

An Integrated Strategy

 

For universal basic income to truly benefit society, two other things must accompany it:

  • A program to provide cheap credit to poorer people who wish to become self-sufficient
  • A government funded information resource, that informs people how to provide the best possible livelihood with their income. Including the best skills to develop and the best tools to work with.

Bank managers will effectively serve as gatekeepers to prevent wasteful people without a plan from front-loading their income as a capital loan. Conversely, it is also vital that responsible people who are poor can access cheap credit to front-load their income. Means-tested default subsidies are a possible solution. If the government refunded, say, 50% of the money that banks lost as debt defaults from low interest self-sufficiency loans issued to those on low incomes, then banks would not lend out to really dodgy customers, as they would still lose 50% of the defaulted sum, but if only low interest loans to those with low incomes qualified for the subsidy, then interest rates could be held down.

 

Phasing It In

 

In my book, The Countryside Living Allowance, I discuss how to phase in a basic income so as to minimize the costs (along with costing estimates) and maximize the positive impact. Basic income will have the biggest impact where the cost of living is lowest. Therefore, initially limiting basic income to regions with a low cost of living would reduce its budget while still raising wages everywhere, as those on lower incomes would move to where they could collect the allowance. Furthermore, the allowance could be linked to a Land value covenant, so that the government could raise more revenue as more people moved into regions that qualified for the benefit.

If this article is of interest, and you want to learn more, read The Countryside Living Allowance to get the details.

 

John

 

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The Problem With Prohibition

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How Protests Against Mining Operations Can Subsidize Oppression

 

Are attempts by some deep ecologists to prohibit mineral extraction as misguided as the temperance movement’s alcohol ban in the 1920s?                                                                       (Everett Historical/Shutterstock.com)

Violence is dangerous and risky. While some self-destructive individuals commit violence for no gain, sophisticated organized violence needs profit to compensate members of gangs and other organizations for the risk of the violent acts they commit.

So where does the money to pay gang members to intimidate, attack and kill those who interfere with an organization come from?

Sometimes, it’s plain theft – burglary or intimidating businesses for “protection money”.

The more interesting case, which I’ll focus on here, is where criminal gangs run a profitable business (other than outright thievery), whose profits they can use to pay off heavies and hit men to commit violent acts on behalf of the gang.

But what about business competition? If violence is costly, then surely a peaceful business that can produce the same goods with less overheads for violence will be able to undercut violent competitors on price and drive them out of business.

 

 

Thus:

Provided law enforcement effectively prevents robbery (including shoplifting), ransoming and racketeering, businesses will adopt models that fund ever less violence.

 

So, what allows violent gangs that profit from businesses other than outright theivery to exist?

 

The answer: they can only exist if no nonviolent business model is available. This will be the case if the activity they profit from is illegal and customers are willing to pay a price that exceeds the cost of non-compliance. Every business needs to enforce contracts, whether with customers, employees or suppliers. Legal businesses can sue transgressors in court, but illegal businesses must use thugs and hit-men to punish those who break their word. Furthermore, much of a gang’s valuable “property” (such as drugs, arms, smuggled goods, etc.) is illegal contraband, so gangs cannot report the theft of their valuables to the police. Thus, an initial opportunity to profit from illegal activities creates a situation where rival gangs can steal each other’s contraband without police intervention leading to increased violence and gang war.

 

For this cycle of violence to initiate, there first must be:

  • A profitable business model requiring violence (i.e. no viable non-violent version)
  • Sufficient market demand to raise prices high enough to cover the overhead of non-compliance and violence
  • No available legal substitute at a price lower than the production price (including all overheads) of the illegal good or service

 

Using legal violence to suppress a good’s supply will thus raise prices and give rise to illegal violence to supply that good – regardless of the law.

Prohibitions enforced by violence will often give rise to violent reactions.

A ban on regulated brothels funds street-hookers and sex slavery; a ban on drugs funds drug gangs; a ban on weapons funds gun runners; tariffs of all kinds fund smuggling rings; migration restrictions fund people-trafficking and on…and on… and on…

 

Hardcore libertarians conclude from this: “don’t prohibit anything.” One may adopt this position, but even if one doesn’t, goods or services should probably not be prohibited without at least estimating the consumer response. Will consumers pay a higher price to purchase the prohibited service illegally, or will they substitute it with a legal good or service instead? Without estimating the consumer response, a prohibition may have disastrous consequences – in extreme instances, the proliferation of crime may resemble a low-key insurrection.

Another problem with shadow industries is the lack of reporting. If someone gets their house burgled, their child kidnapped or their business held to ransom, they will likely report it. However, shadow industries can turn a healthy profit while satisfying the interests of most participants. A shadow industry can exist without creating wronged, indignant individuals who report misdeeds to police. And those who are wronged (e.g. beaten up over drug debts), usually participate in the industry, can be blackmailed and are reluctant to report, even serious wrongs, to the police (seen as the “enemy”).

Some things like child prostitution should be prohibited. But governments must choose their battles wisely and prepare legal, socially accepted avenues for demand substitution – or design campaigns to reduce demand. Prohibiting supply without also drastically reducing demand is a recipe for organized crime.

 

Mining and The “Resource Curse”

 

So, what does this all have to do with mining?

 

Environmentalists campaign against mining companies the whole world over. Their strategies typically involve mobilising grassroots mass-opposition against mining projects and supporting infrastructure (such as Canada’s keystone pipeline), lobbying for laws that raise the cost of mining and filing court case after court case against mining projects.

However, all these strategies rely heavily on a democratically enfranchised population and the rule of law. In countries with a centralized elite, a disenfranchised population, high levels of corruption, and a de facto absence of law, campaigns against mining companies often end with key environmental campaigners sadly being assassinated.

So our understanding of “the resource curse”, the theory that mineral resources produce corruption, may need revision. Resources are everywhere, but NIMBYs in well-governed democratic countries with a strong judiciary, block access to local resources and challenge new mining projects in municipal government and in court. The net result of this comprehensive campaigning against all mining projects in the developed world is:

  • A reduction in the supply of minerals
  • That raises the price
  • With windfall profits for governments that crush grass roots opposition against local mining projects.

 

Thus, just as prohibition funds violent crime, grassroots democratic and legal opposition to mining projects funds despotism, opacity and corruption.

 

Violent actions give rise to violent reactions.

Violent grassroots opposition gives rise to the violent suppression of that opposition – if not in the same country, then in a different one.

 

Environmentalists don’t just resist mining projects everywhere. They also support expanding resource intensive industries like renewable energy and lithium ion batteries. Where will the minerals for the batteries and wind turbines come from? The magic metal tree?

A contradiction lies at the heart of environmentalism. Its campaigns increase global demand for mined goods, by advocating rapidly rolling out renewables, battery-powered cars and a HVDC super grid, yet at every opportunity it fights to reduce supply. Something has to give – and that something is democracy. The two-pronged effort to increase global demand for commodities and reduce their supply will produce massive cash transfers to dictators that crush locals who oppose mining projects.

The blanket, global, grassroots opposition that mining companies face against new projects everywhere has a similar effect to alcohol prohibition – times 100. We’ve waged a futile war against the supply of minerals while ignoring the demand, with disastrous humanitarian costs. If we want to stop funding dictatorships with blood diamonds and oil money, then environmental groups need to establish a league table of mining companies and projects all over the world and work with companies to promote projects with a comparatively low environmental impact and campaign in support of them to help assuage local opposition.

 

Only then can the resource curse be lifted.

 

A Peaceful Place to Mine

 

Underwater mining could supply the global demand for commodities without destroying indigenous people’s livelihood. So why do many environmental groups oppose it? (Photograph provided courtesy of Nautilus Minerals)

The rapid maturation of underwater mining technology and the exploration of underwater mineral resources could greatly curb the violations of indigenous land rights. Mining the oceans could end the battle between mining companies and locals with the accompanying corruption, bribery and militant suppression. Finally, minerals could be extracted from a region in no one’s back yard. Yet, despite the potential of underwater mining to reduce global corruption, promote democracy and protect human rights, environmentalists oppose it in a vague knee-jerk fashion to “save the tube worms.”

It’s time to grow up. If we truly support renewable energy, it’s time to decide where to mine the minerals we need to build that infrastructure.

 

John

 

Disclosure: I own a few shares in the underwater mining company, Nautilus Minerals.

 

Do You Have a Burning Desire to Leave a Comment?

 

Have you found this article thought provoking? Is there some message you desperately want to communicate to future readers but can’t because my comment section automatically closes 28 days after my posts go live?

If so, you might be interested to know that I reopen any comments section to members of my mailing on request as one of the perks of joining.

If you’d like to leave a comment, simply scroll to the bottom of the page, sign on to my mailing list and them email me with a request to reopen the comments section for this post.

Happy Commenting!

John