On March 30, 2017, Rutger Bregmen writes on The Guardian:
This piece is about one of the biggest taboos of our times. About a truth that is seldom acknowledged, and yet – on reflection – cannot be denied. The truth that we are living in an inverse welfare state.
These days, politicians from the left to the right assume that most wealth is created at the top. By the visionaries, by the job creators, and by the people who have “made it”. By the go-getters oozing talent and entrepreneurialism that are helping to advance the whole world.
Now, we may disagree about the extent to which success deserves to be rewarded – the philosophy of the left is that the strongest shoulders should bear the heaviest burden, while the right fears high taxes will blunt enterprise – but across the spectrum virtually all agree that wealth is created primarily at the top.
So entrenched is this assumption that it’s even embedded in our language. When economists talk about “productivity”, what they really mean is the size of your paycheck. And when we use terms like “welfare state”, “redistribution” and “solidarity”, we’re implicitly subscribing to the view that there are two strata: the makers and the takers, the producers and the couch potatoes, the hardworking citizens – and everybody else.
In reality, it is precisely the other way around. In reality, it is the waste collectors, the nurses, and the cleaners whose shoulders are supporting the apex of the pyramid. They are the true mechanism of social solidarity. Meanwhile, a growing share of those we hail as “successful” and “innovative” are earning their wealth at the expense of others. The people getting the biggest handouts are not down around the bottom, but at the very top. Yet their perilous dependence on others goes unseen. Almost no one talks about it. Even for politicians on the left, it’s a non-issue.
To understand why, we need to recognise that there are two ways of making money. The first is what most of us do: work. That means tapping into our knowledge and know-how (our “human capital” in economic terms) to create something new, whether that’s a takeout app, a wedding cake, a stylish updo, or a perfectly poured pint. To work is to create. Ergo, to work is to create new wealth.
But there is also a second way to make money. That’s the rentier way: by leveraging control over something that already exists, such as land, knowledge, or money, to increase your wealth. You produce nothing, yet profit nonetheless. By definition, the rentier makes his living at others’ expense, using his power to claim economic benefit.
For those who know their history, the term “rentier” conjures associations with heirs to estates, such as the 19th century’s large class of useless rentiers, well-described by the French economist Thomas Piketty. These days, that class is making a comeback. (Ironically, however, conservative politicians adamantly defend the rentier’s right to lounge around, deeming inheritance tax to be the height of unfairness.) But there are also other ways of rent-seeking. From Wall Street to Silicon Valley, from big pharma to the lobby machines in Washington and Westminster, zoom in and you’ll see rentiers everywhere.
There is no longer a sharp dividing line between working and rentiering. In fact, the modern-day rentier often works damn hard. Countless people in the financial sector, for example, apply great ingenuity and effort to amass “rent” on their wealth. Even the big innovations of our age – businesses like Facebook and Uber – are interested mainly in expanding the rentier economy. The problem with most rich people therefore is not that they are coach potatoes. Many a CEO toils 80 hours a week to multiply his allowance. It’s hardly surprising, then, that they feel wholly entitled to their wealth.
It may take quite a mental leap to see our economy as a system that shows solidarity with the rich rather than the poor. So I’ll start with the clearest illustration of modern freeloaders at the top: bankers. Studies conducted by the International Monetary Fund and the Bank for International Settlements – not exactly leftist thinktanks – have revealed that much of the financial sector has become downright parasitic. How instead of creating wealth, they gobble it up whole.
Don’t get me wrong. Banks can help to gauge risks and get money where it is needed, both of which are vital to a well-functioning economy. But consider this: economists tell us that the optimum level of total private-sector debt is 100% of GDP. Based on this equation, if the financial sector only grows, it won’t equal more wealth, but less. So here’s the bad news. In the United Kingdom, private-sector debt is now at 157.5%. In the United States, the figure is 188.8%.
In other words, a big part of the modern banking sector is essentially a giant tapeworm gorging on a sick body. It’s not creating anything new, merely sucking others dry. Bankers have found a hundred and one ways to accomplish this. The basic mechanism, however, is always the same: offer loans like it’s going out of style, which in turn inflates the price of things like houses and shares, then earn a tidy percentage off those overblown prices (in the form of interest, commissions, brokerage fees, or what have you), and if the shit hits the fan, let Uncle Sam mop it up.
The financial innovation concocted by all the math whizzes working in modern banking (instead of at universities or companies that contribute to real prosperity) basically boils down to maximising the total amount of debt. And debt, of course, is a means of earning rent. So for those who believe that pay ought to be proportionate to the value of work, the conclusion we have to draw is that many bankers should be earning a negative salary; a fine, if you will, for destroying more wealth than they create.
Bankers are the most obvious class of closet freeloaders, but they are certainly not alone. Many a lawyer and an accountant wields a similar revenue model. Take tax evasion. Untold hardworking, academically degreed professionals make a good living at the expense of the populations of other countries. Or take the tide of privatisations over the past three decades, which have been all but a carte blanche for rentiers. One of the richest people in the world, Carlos Slim, earned his millions by obtaining a monopoly of the Mexican telecom market and then hiking prices sky high. The same goes for the Russian oligarchs who rose after the Berlin Wall fell, who bought up valuable state-owned assets for song to live off the rent.
But here comes the rub. Most rentiers are not as easily identified as the greedy banker or manager. Many are disguised. On the face of it, they look like industrious folks, because for part of the time they really are doing something worthwhile. Precisely that makes us overlook their massive rent-seeking.
Take the pharmaceutical industry. Companies like GlaxoSmithKline and Pfizerregularly unveil new drugs, yet most real medical breakthroughs are made quietly at government-subsidised labs. Private companies mostly manufacture medications that resemble what we’ve already got. They get it patented and, with a hefty dose of marketing, a legion of lawyers, and a strong lobby, can live off the profits for years. In other words, the vast revenues of the pharmaceutical industry are the result of a tiny pinch of innovation and fistfuls of rent.
Even paragons of modern progress like Apple, Amazon, Google, Facebook, Uber and Airbnb are woven from the fabric of rentierism. Firstly, because they owe their existence to government discoveries and inventions (every sliver of fundamental technology in the iPhone, from the internet to batteries and from touchscreens to voice recognition, was invented by researchers on the government payroll). And second, because they tie themselves into knots to avoid paying taxes, retaining countless bankers, lawyers, and lobbyists for this very purpose.
Even more important, many of these companies function as “natural monopolies”, operating in a positive feedback loop of increasing growth and value as more and more people contribute free content to their platforms. Companies like this are incredibly difficult to compete with, because as they grow bigger, they only get stronger.
Aptly characterising this “platform capitalism” in an article, Tom Goodwin writes: “Uber, the world’s largest taxi company, owns no vehicles. Facebook, the world’s most popular media owner, creates no content. Alibaba, the most valuable retailer, has no inventory. And Airbnb, the world’s largest accommodation provider, owns no real estate.”
So what do these companies own? A platform. A platform that lots and lots of people want to use. Why? First and foremost, because they’re cool and they’re fun – and in that respect, they do offer something of value. However, the main reason why we’re all happy to hand over free content to Facebook is because all of our friends are on Facebook too, because their friends are on Facebook … because their friends are on Facebook.
Most of Mark Zuckerberg’s income is just rent collected off the millions of picture and video posts that we give away daily for free. And sure, we have fun doing it. But we also have no alternative – after all, everybody is on Facebook these days. Zuckerberg has a website that advertisers are clamouring to get onto, and that doesn’t come cheap. Don’t be fooled by endearing pilots with free internet in Zambia. Stripped down to essentials, it’s an ordinary ad agency. In fact, in 2015 Google and Facebook pocketed an astounding 64% of all online ad revenue in the US.
But don’t Google and Facebook make anything useful at all? Sure they do. The irony, however, is that their best innovations only make the rentier economy even bigger. They employ scores of programmers to create new algorithms so that we’ll all click on more and more ads. Uber has usurped the whole taxi sector just as Airbnb has upended the hotel industry and Amazon has overrun the book trade. The bigger such platforms grow the more powerful they become, enabling the lords of these digital feudalities to demand more and more rent.
Think back a minute to the definition of a rentier: someone who uses their control over something that already exists in order to increase their own wealth. The feudal lord of medieval times did that by building a tollgate along a road and making everybody who passed by pay. Today’s tech giants are doing basically the same thing, but transposed to the digital highway. Using technology funded by taxpayers, they build tollgates between you and other people’s free content and all the while pay almost no tax on their earnings.
This is the so-called innovation that has Silicon Valley gurus in raptures: ever bigger platforms that claim ever bigger handouts. So why do we accept this? Why does most of the population work itself to the bone to support these rentiers?
I think there are two answers. Firstly, the modern rentier knows to keep a low profile. There was a time when everybody knew who was freeloading. The king, the church, and the aristocrats controlled almost all the land and made peasants pay dearly to farm it. But in the modern economy, making rentierism work is a great deal more complicated. How many people can explain a credit default swap, or a collateralised debt obligation? Or the revenue model behind those cute Google Doodles? And don’t the folks on Wall Street and in Silicon Valley work themselves to the bone, too? Well then, they must be doing something useful, right?
Maybe not. The typical workday of Goldman Sachs’ CEO may be worlds away from that of King Louis XIV, but their revenue models both essentially revolve around obtaining the biggest possible handouts. “The world’s most powerful investment bank,” wrote the journalist Matt Taibbi about Goldman Sachs, “is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”
But far from squids and vampires, the average rich freeloader manages to masquerade quite successfully as a decent hard worker. He goes to great lengths to present himself as a “job creator” and an “investor” who “earns” his income by virtue of his high “productivity”. Most economists, journalists, and politicians from left to right are quite happy to swallow this story. Time and again language is twisted around to cloak funneling and exploitation as creation and generation.
However, it would be wrong to think that all this is part of some ingenious conspiracy. Many modern rentiers have convinced even themselves that they are bona fide value creators. When current Goldman Sachs CEO Lloyd Blankfein was asked about the purpose of his job, his straight-faced answer was that he is “doing God’s work”. The Sun King would have approved.
The second thing that keeps rentiers safe is even more insidious. We’re all wannabe rentiers. They have made millions of people complicit in their revenue model. Consider this: What are our financial sector’s two biggest cash cows? Answer: the housing market and pensions. Both are markets in which many of us are deeply invested.
Recent decades have seen more and more people contract debts to buy a home, and naturally it’s in their interest if house prices continue to scale new heights(read: burst bubble upon bubble). The same goes for pensions. Over the past few decades we’ve all scrimped and saved up a mountainous pension piggy bank. Now pension funds are under immense pressure to ally with the biggest exploiters in order to ensure they pay out enough to please their investors.
The fact of the matter is that feudalism has been democratised. To a lesser or greater extent, we are all depending on handouts. En masse, we have been made complicit in this exploitation by the rentier elite, resulting in a political covenant between the rich rent-seekers and the homeowners and retirees.
Don’t get me wrong, most homeowners and retirees are not benefiting from this situation. On the contrary, the banks are bleeding them far beyond the extent to which they themselves profit from their houses and pensions. Still, it’s hard to point fingers at a kleptomaniac when you have sticky fingers too.
So why is this happening? The answer can be summed up in three little words: Because it can.
Rentierism is, in essence, a question of power. That the Sun King Louis XIV was able to exploit millions was purely because he had the biggest army in Europe. It’s no different for the modern rentier. He’s got the law, politicians and journalists squarely in his court. That’s why bankers get fined peanuts for preposterous fraud, while a mother on government assistance gets penalised within an inch of her life if she checks the wrong box.
The biggest tragedy of all, however, is that the rentier economy is gobbling up society’s best and brightest. Where once upon a time Ivy League graduates chose careers in science, public service or education, these days they are more likely to opt for banks, law firms, or trumped up ad agencies like Google and Facebook. When you think about it, it’s insane. We are forking over billions in taxes to help our brightest minds on and up the corporate ladder so they can learn how to score ever more outrageous handouts.
One thing is certain: countries where rentiers gain the upper hand gradually fall into decline. Just look at the Roman Empire. Or Venice in the 15th century. Look at the Dutch Republic in the 18th century. Like a parasite stunts a child’s growth, so the rentier drains a country of its vitality.
What innovation remains in a rentier economy is mostly just concerned with further bolstering that very same economy. This may explain why the big dreams of the 1970s, like flying cars, curing cancer, and colonising Mars, have yet to be realised, while bankers and ad-makers have at their fingertips technologies a thousand times more powerful.
Yet it doesn’t have to be this way. Tollgates can be torn down, financial products can be banned, tax havens dismantled, lobbies tamed, and patents rejected. Higher taxes on the ultra-rich can make rentierism less attractive, precisely because society’s biggest freeloaders are at the very top of the pyramid. And we can more fairly distribute our earnings on land, oil, and innovation through a system of, say, employee shares, or a universal basic income.
But such a revolution will require a wholly different narrative about the origins of our wealth. It will require ditching the old-fashioned faith in “solidarity” with a miserable underclass that deserves to be borne aloft on the market-level salaried shoulders of society’s strongest. All we need to do is to give real hard-working people what they deserve.
And, yes, by that I mean the waste collectors, the nurses, the cleaners – theirs are the shoulders that carry us all.
Bregmen is among others who have recently wrote about “unearned income.” Unfortunately they view the economic world and thus their approach to solutions with one-factor eyes (labor creating wealth).
Bregmen’s description of rent seeking is essentially “unearned income.” It is people and companies who make money by doing zero work and risk little or none of their own assets.
Because they think that wealth creation is ONLY the product of human labor and not that of the non-human factor “capital,” they exclude land as also a non-human factor or “non-human capital” in their understanding of economics. But, in reality, economic value is created through human and non-human contributions. You can dice the contributions into many components but it all boils down to independent human and non-human contributions: humans (labor workers who contribute manual, intellectual, creative and entrepreneurial work) and non-human capital (land; structures; infrastructure; tools; machines; robotics; computer processing; certain intangibles that have the characteristics of property, such as patents and trade or firm names; and the like which are owned by people individually or in association with others).
The real problem is monopoly ownership of the non-human factor of production. Such privileged ownership has been designed into the system, and our financial institutions are structured to continually enhance the capital wealth accumulation of the few, because the system does not free economic growth from the slavery of past savings.
Economic rent should not be confused with producer surplus, or normal profit, both of which involve productive human action or productive contribution.
In the case of financial services, banks and institutions tied to buying and selling securities on behalf of individuals and institutions representing groups of individuals serve as a mediator between those selling and those buying. Their income is essentially a transaction fee. And yes it is true that they do not create wealth. Nor does a doctor, a lawyer, an owner of a independent shop who leases a property to set up a retail operation. People in the economy earn fees or profits, or in the case of employees of a company, incorporated or not, wages and wage salaries.
In the case of land, virtually all the land is owned by individuals or associations of individuals, or State owned. With land being fixed and population growing, the land owners are able to contract at higher and higher rates for the use of their land when they seek to lease its use to others. This applies to housing as well, which is meant for consumption (providing shelter for people). Any multi-family housing, not offered as individual units for sale (e.g. condominiums), is rental housing. Again depending on the supply, with a relativity fixed supply and growing demand for housing, the owners can command rents in accordance with demand and ability to pay.
In the case of Facebook, Alibaba, and Airbnb, they provide a service platform, in which they either generate revenue through advertising or service fees.
But these examples are not what I would term rent seeking. And yet it is true that no physical productive capital wealth has been created other than the actual initial building of the structures and rental housing that occupants live in or use to conduct their business in. Actual housing built to provide a structure for living consumption for their owners or buildings erected to conduct business in for their owners are examples of created wealth. The business structures and the land under them (whether outright owned or leased) are part of the capital assets of the owners of the business.
In all cases, whether rental housing or business structures, these are capital assets owned by individuals or associations of individuals. Housing purchased for consumption is a consumer item, until the time it is sold for gain or loss measured against the original purchase price.
Ownership is the invisible structure of the economy based on millions of contractual agreements and property rights.
No where in Bregmen’s article does he ever use the words “capital ownership” or define what “capital ownership” means. And this is why, without this understanding, he cannot conceive of solutions.
What Bregmen needs to understand is that fundamentally, economic value is created through human and non-human contributions. Some people will contribute services while others will contribute to the actual production of goods and products by providing land resources and all manner of non-human means. Increasingly, people, due to tectonic shifts in the technologies of production and globalized shifts to low-cost and less regulated off-shore opportunities, are facing job insecurity and loss, as the production of goods, products services no longer is solely dependent on human labor, or labor exclusive to our country to produce competitively.
With millions of citizens not woking for a corporation, and constantly being threatened with underemployment and unemployment due to advancing technological invention and innovation, some have called for reviving unions as presently represented — bargaining for higher wages for the same or less work — but that is not a viable solution. To effectively work, the labor union movement should transform to a producers’ ownership union movement, representing workers employed by companies as well as all citizens seeking to become capital owners. Unfortunately, at the present time the movement is built on one-factor economics, as is Bregmen’s thinking — the labor worker. The insufficiency of labor worker earnings to purchase increasingly physical capital-produced products and services gave rise to labor laws and labor unions designed to coerce higher and higher prices for the same or reduced labor input. With government assistance, unions have gradually converted productive enterprises in the private and public sectors into welfare institutions.
Also calling for intensified education, as many one-factor thinkers do, is not the solution to empowering EVERY citizen to become productive. Given the current invisible structure of the economy, except for a relative few, the majority of the population, no matter how well educated, will not be able to find a job that pays sufficient wages or salaries to support a family or prevent a lifestyle, which is gradually being crippled by near poverty or poverty earnings. Thus, education is not the panacea, though it is critical for our future societal development. And younger, as well as older people, will increasingly find it harder and harder to secure a well-paying job — for most, their ONLY source of income — and will find themselves dependent on taxpayer-supported government welfare, open or disguised.
Nor will more investment in “public goods” such as infrastructure, which is absolutely needed make EVERY citizen a productive contributor to the economy. This needs to be pursued but let the contractual requirement be that those companies seeking tax-payer-funded government contracts are employee-owned, and not just pursue a repeat of the past where tax-payers have made already wealthy owners more wealthy.
What we do need are far stronger anti-trust and anti-discrimination laws.
We need to reform and better regulate the financial system by requiring the Federal Reserve to be owned by each citizen residing in each of the 12 Regional Districts. The Federal Reserve should provide interest-free capital credit loans via local banks specifically for investment in qualified, responsible and ethical corporations growing the economy, thereby broadening and creating new capital owners who will then contribute productively to new wealth creation and earn a new source of income (a second income if they are employed as well). The capital credit would be repayable out of the future earnings of the investment, with no requirement of past savings (denial of consumption). The the loan recipient’s promissory note can be offset to the government’s central Federal Reserve Bank in return for the cash equivalent of the amount of the loan, less a local bank administrative fee. The only cost to the direct lending bank in making a loan would be the administrative fee, or about 2 percent of the loan’s principal and then another 2 percent for capital credit insurance, with an additional quarter of a percent paid to the Federal Reserve Bank to monetize the loan and give the lender the same cash as it would have had if it had actually loaned money to a corporation that receives the investment. Also the loans should be insured against failure to perform, using commercial capital credit insurance or a government re-insurance agency (aka the Federal Housing Administration concept). National capital credit insurance would replace the requirement for past savings to pledge security. Fixed loan amounts could be established annual based on projected economic growth and new capital formation, and an equal loan amount made available to EVERY American child, woman and man, to be strictly for new capital asset investment, in which the loan is paid off exclusively with the earnings of the investments.
Capital formation investments are made by companies annually based on projections a number of years out (at least 5 to 10 years) with the expectation that the investment will pay for itself as a result of sustainable growth and consumer demand within a reasonable time (typically 3 to 7 years). Thus, the concept embraces the idea that capital formation is self-financing. The question is who pledges the security and takes the risk of failure to return the expected yield from which to repay the loan. This is the critical role of capital credit insurance that is necessary to broaden capital ownership whereby EVERY child, woman, and man can become a capital owner.
Conventionally, most people do not have the right to acquire productive capital with the self-financing earnings of capital; they are left to acquire, as best as they can, with their earnings as labor workers and the pledge of past savings. This is fundamentally hard to do and limiting. Thus, the most important economic right Americans need and should demand is the effective right to acquire capital with the earnings of capital. Note, though, millions of Americans own diluted stock value through the “stock market exchanges,” purchased with their earnings as labor workers, their stock holdings are relatively minuscule, as are their dividend payments compared to the top 10 percent of capital owners.
What historically empowered America’s original capitalists was conventional savings-based finance and the pledging or mortgaging of assets, with access to further ownership of new productive capital available only to those who were already well capitalized. As has been the case, credit to purchase capital is made available by financial institutions ONLY to people who already own capital and other forms of equity, such as the equity in their home that can be pledged as loan security — those who meet the universal requirement for collateral. Lenders will only extend credit to people who already have assets. Thus, the rich are made ever richer through their continuous accumulation of capital asset ownership, while the poor (people without a viable capital estate) remain poor and dependent on their labor to produce income. Thus, the system is restrictive and capital ownership is clinically denied to those who need it.
The resulting impact of our current approaches has been plutocratic government and concentration of capital ownership, which denies every citizen his or her pursuit of economic happiness (property). Market-sourced income (through concentrated capital ownership) has concentrated in individuals and families who will not recycle it back through the market as payment for consumer products and services. They already have most of what they want and need so they invest their excess in new productive power, making them richer and richer through greater capital ownership. This is the source of the distributional bottleneck that makes the private property, market economy ever more dysfunctional. The symptoms of dysfunction are capital ownership concentration and inadequate consumer demand, the effects of which translate into poverty and economic insecurity for the 99 percent majority of people who depend entirely on wages from their labor or welfare and cannot survive more than a week or two without a paycheck. The production side of the economy is under-nourished and hobbled as a result.
We need to tax corporations heavily with the caveat that dividend payouts to their owners are tax deductible, thus eliminating the corporate tax and shifting the tax burden to the owners at personal income tax rates.
Also, as a substitute for inheritance and gift taxes, a transfer tax would be imposed on the recipients whose holdings exceeded $1 million, thus encouraging the super-rich to spread out their monopoly-sized estates to all members of their family, friends, servants and workers who helped create their fortunes, teachers, health workers, police, other public servants, military veterans, artists, the poor and the disabled.
As my colleague Norman Kurland states: Under the proposed Capital Homestead Act, advanced technologies and new viable businesses would be backed by new “money” used by every citizen under their annual capital credit allotments for the purchase of new full dividend payout shares issued by manufacturers of advanced technologies. The projections of future pretax profits from all of the productive capital assets needed to produce the advanced technologies for sales throughout the world would determine the feasibility of interest-free commercial bank loans needed to finance the productive capital assets needed to produce such advanced technologies such as the kind shown in the video. The regional Federal Reserve Bank serving the commercial bank has the power under Section 13(2) of the Federal Reserve Act to create new asset-backed currency for commercial banks that approve “bills of exchange” from the manufacturer of the advanced technology.
When the advanced technology is sold by the manufacturer or the business flourishes, future profits from sales or revenues will pay off the loan and begin to generate dividend-incomes for all citizens who purchased the shares from their annual allotments of capital credit. This reverses (i.e., demonetizes) the asset-backed money process.
Bregmen is ripe for expanding his “solutions” understanding by learning about the system reform solutions advocated by the Center for Economic and Social Justice (www.cesj.org), based on binary economist Louis Kelso’s “eureka” analyses and conceptual solutions.
Broadening future productive, wealth-creating, income-producing capital assets simultaneously with the growth of the economy, and propelling that growth to realize a future economy that can support general affluence and leisure for EVERY citizen by creating “customers with money” who are self-sufficient and able to meet their own consumption needs is the agenda of the JUST Third Way (note: not the neoliberal Third Way) and the various solutions it advocates. This includes monetary reform and enacting the Capital Homestead Act. The end result is that citizens would become empowered as owners to meet their own consumption needs and government would become more dependent on economically independent citizens, thus reversing current global trends where all citizens will eventually become dependent for their economic well-being on the State and whatever elite controls the coercive powers of government.
I am not going to elaborate further, as I have already written extensively, here and in other writings, about solutions that create universally equal opportunity for EVERY child, woman, and man be become a capital owner and put our nation on the path to inclusive prosperity, inclusive opportunity, and inclusive economic justice.
Support the Agenda of The Just Third Way Movement at http://foreconomicjustice.org/?p=5797, http://www.cesj.org/resources/articles-index/the-just-third-way-basic-principles-of-economic-and-social-justice-by-norman-g-kurland/, http://www.cesj.org/wp-content/uploads/2014/02/jtw-graphicoverview-2013.pdf and http://www.cesj.org/resources/articles-index/the-just-third-way-a-new-vision-for-providing-hope-justice-and-economic-empowerment/.
