Think, for example, about carbon. At present, our economic engine is emitting
far too much carbon dioxide into the atmosphere; this is destabilizing the
climate. We desperately need a valve that can crank the carbon flow down.
Let’s assume we can design and install such a valve. (I explained how
this can be done in my previous book, Who Owns the Sky? It involves selling
a limited quantity of “upstream” permits to companies that bring
fossil fuels into the economy.) The question then is, who should control
Unfettered markets can’t be given that responsibility; as we’ve
seen, they have no ability to limit polluting. So we’re left with two
options: government or trusts. Government is a political creature; its time
horizon is short, and future generations have no clout in it. Common property
trusts, by contrast, are fiduciary institutions. They have long time horizons
and a legal responsibility to future generations. Given the choice, I’d
designate a common property trust to be keeper of the carbon valve, based
on peer-reviewed advice from scientists. Its trustees could make hard decisions
without committing political suicide. They might be appointed by the president,
like governors of the Fed, but they wouldn’t be obedient to him the
way cabinet members are. Once appointed, they’d be legally accountable
to future generations.
Now imagine a goodly number of valves at the local, regional, and national
levels, not just for carbon (which requires only one national valve) but
for a variety of pollutants. Imagine also that the valve keepers are trusts
accountable to future generations. They’d have the power to reduce
some of the negative externalities — the illth — that corporations
shift to the commons. They’d also have the power to auction limited
pollution rights to the highest bidders, and to divide the resulting income
among commons owners. That’s something neither the Fed nor the EPA
These trusts would fundamentally change our economic operating system. What
are now unpriced externalities would become property rights under accountable
management. If a corporation wanted to pollute, it couldn’t just do
so; it would have to buy the rights from a commons trust. The price of pollution
would go up; corporate illth creation would go down. Ecosystems would be
protected for future generations. More income would flow to ordinary citizens.
Nonhuman species would flourish; human inequality would diminish. And government
wouldn’t be enlarged — our economic engine would do these things
on its own.
One final point about valves. It’s not too critical where we set them
initially. It’s far more important to install them in the right places,
and to put the right people in charge. Then they can adjust the settings.
“Let us suppose,” economist Ronald Coase wrote in 1960, “that
a farmer and a cattle-raiser are operating on neighboring properties.” He
went on to suppose further that the cattle-raiser’s animals wander
onto the farmer’s land and damage his crops. From this hypothetical
starting point Coase examined the problem of externalities and proposed a
solution — the creation of rights to pollute or not be polluted upon.
Today, pollution rights are used throughout the world. In effect, Coase conjured
into existence a class of property rights that didn’t exist before,
and his leap of imagination eventually reduced real pollution.
“Let us suppose” is a wonderful way for anyone, economists included,
to begin thinking. It lets us adjust old assumptions and see what might happen.
And it lets us imagine things that don’t exist but could, and sometimes,
because we imagined them, later do.
Coase supposed that a single polluter or his neighboring pollutee possessed
a right to pollute or not be polluted upon. He further supposed that the
transaction costs involved in negotiations between the two neighbors were
negligible. He made these suppositions half a century ago, at a time when
aggregate pollution wasn’t planet-threatening, as it now is. Given
today’s altered reality, it might be worth updating Coase’s suppositions
to make them relevant to this aggregate problem. Here, in my mind, are the
appropriate new suppositions:
- Instead of one polluter, there are many, and instead of one pollutee,
there are millions — including many not yet born.
- The pollutees (including future generations) are collectively represented
- The initial pollution rights are assigned by government to these
- In deciding how many pollution permits to sell, the trustees’ duty
isn’t to maximize revenue but to preserve an ecosystem for
future generations. The trusts therefore establish safe levels
of pollution and
the number of permits they sell until those levels are reached.
- Revenue from the sale of pollution permits is divided 50 percent
for per capita dividends (like the Alaska Permanent Fund) and
50 percent for public
goods such as education and ecological restoration.
If we make these suppositions, what then happens? We have, first of all,
an economic model with a second set of books. Not all, but many externalities
show up on these new ledgers. More importantly, we begin to imagine a world
in which nature and future generations are represented in real-time transactions,
corporations internalize previously externalized costs, prices of illth-causing
goods rise, and everyone receives some property income.
Here’s what such a world could look like:
- Degradation of key ecosystems is gradually reduced to sustainable
levels because the trustees who set commons usage levels are accountable
future generations, not living shareholders or voters. When they fail
their beneficiaries, they are sued.
- Thanks to per capita dividends, income is recycled from overusers
of key ecosystems to underusers, creating both incentives to conserve
- Clean energy and organic farming are competitive because prices
of fossil fuels and agricultural chemicals are appropriately high.
- Investment in new technologies soars and new domestic jobs are
created because higher fuel and waste disposal prices boost
demand for clean
energy and waste
- Public goods are enhanced by permit revenue.
What has happened here? We’ve gone from a realistic set of assumptions
about how the world is — multiple polluters and pollutees, zero cost
of pollution, dangerous cumulative levels of pollution — to a reasonable
set of expectations about how the world could be if certain kinds of property
rights are introduced. These property rights go beyond Coase’s, but
are entirely compatible with market principles. The results of this thought
experiment show that the introduction of common property trusts can produce
a significant and long-lasting shift in economic outcomes without further
government intervention. ...
It shouldn’t be thought that the commons is, or ought to be, a money-free
zone. In fact, an important subject for economists (and the rest of us) to
understand is commons rent.
By this I don’t mean the monthly check you send to a landlord. In
economics, rent has a more precise meaning: it’s money paid because
of scarcity. If you’re not an economist, that may sound puzzling, but
consider this. A city has available a million apartments. In absolute terms,
that means apartments aren’t scarce. But the city is confined geographically
and demand for apartments is intense. In this economic sense, apartments
are scarce. Now think back to that check you pay your landlord, or the mortgage
you pay the bank. Part of it represents the landlord’s operating costs
or the bank’s cost of money, but part of it is pure rent — that
is, money paid for scarcity. That’s why New Yorkers and San Franciscans
write such large checks to landlords and banks, while people in Nebraska
Rent rises when an increase in demand bumps into a limit in supply. Rent
due to such bumping isn’t good or bad; it just is.We can (and should)
debate the distribution of that rent, but the rent itself arises automatically.
And it’s important that it does so, because this helps the larger economy
allocate scarce resources efficiently. Other methods of allocation are possible.
We can distribute scarce things on a first come, first served basis, or by
lottery, political power, seniority, or race. Experience has shown, though,
that selling scarce resources in open markets is usually the best approach,
and such selling inevitably creates rent.
Rent was of great interest to the early economists — Adam Smith, David
Ricardo, and John Stuart Mill, among others — because it constituted
most of the money earned by landowners, and land was then a major cost of
production. The supply of land, these economists noted, is limited, but demand
for it steadily increases. So, therefore, does its rent. Thus, landowners
benefit from what Mill called the unearned increment — the rise in
land value attributable not to any effort of the owner, but purely to a socially
created increase in demand bumping into a limited supply of good land.
The underappreciated American economist Henry George went further. Seeing
both the riches and the miseries of the Gilded Age, he asked a logical question:
Why does poverty persist despite economic growth? The answer, he believed,
was the appropriation of rent by landowners. Even as the economy grew, the
property rights system and the scarcity of land diverted almost all the gains
to a landowning minority. Whereas competition limited the gains of working
people, nothing kept down the landowners’ gains. As Mill had noted,
the value of their land just kept rising. To fix the problem, George advocated
a steep tax on land and the abolition of other taxes. His bestselling book
Progress and Poverty catapulted him to fame in the 1880s, but mainstream
economists never took him seriously.
By the twentieth century, economists had largely lost interest in rent;
it seemed a trivial factor in wealth production compared to capital and labor.
But the twenty-first century ecological crisis brings rent back to center-stage.
Now it’s not just land that’s scarce, but clean water, undisturbed
habitat, biological diversity, waste absorption capacity, and entire ecosystems.
This brings us back to common property rights. The definition and allocation
of property rights are the primary factors in determining who pays whom for
what. If, in the case of pollution rights, pollution rights are given free
to past polluters, the rent from the polluted ecosystem will also go to them.
That’s because prices for pollution-laden products will rise as pollution
is limited (remember, if demand is constant, a reduction in supply causes
prices to go up), and those higher prices will flow to producers (which is
to say, polluters).
By contrast, if pollution rights are assigned to trusts representing pollutees
and future generations, and if these trusts then sell these rights to polluters,
the trusts rather than the polluters will capture the commons rent. If the
trusts split this money between per capita dividends and expenditures on
public goods, everyone benefits.
At this moment, based on pollution rights allocated so far, polluting corporations
are getting most of the commons rent. But the case for trusts getting the
rent in the future is compelling. If this is done, consumers will pay commons
rent not to corporations or government, but to themselves as beneficiaries
of commons trusts. Each citizen’s dividend will be the same, but his
payments will depend on his purchases of pollution-laden products. The more
he pollutes, the more rent he’ll pay. High polluters will get back
less than they put in, while low polluters will get back more. The microeconomic
incentives, in other words, will be perfect. (See figure 6.1.)
What’s equally significant, though less obvious, is that the macroeconomic
incentives will be perfect too. That is, it will be in everyone’s
interest to reduce the total level of pollution. Remember how rent
for scarce things
works: the lower the supply, the higher the rent. Now, imagine you’re
a trustee of an ecosystem, and leaving aside (for the sake of argument)
your responsibility to preserve the asset for future generations,
you want to
increase dividends. Do you raise the number of pollution permits
you sell, or lower it? The correct, if counterintuitive answer is:
of permits. ... read
the whole chapter
Dividends from Common Assets
A cushion of reliable income is a wonderful thing. It can be saved for rainy
days or used to pursue happiness on sunny days. It can encourage people to
take risks, care for friends and relatives, or volunteer for community service.
For low-income families, it can pay for basic necessities.
Conversely, the absence of reliable income is a terrible thing. It heightens
anxiety and fear. It diminishes our ability to cope with crises and transitions.
It traps many families on the knife’s edge of poverty, and makes it
harder for the poor to rise.
So why don’t we, as Monopoly does, pay everyone some regular income — not
through redistribution of income, but through predistribution of common property?
One state — Alaska — already does this. As noted earlier, the
Alaska Permanent Fund uses revenue from state oil leases to invest in stocks,
bonds, and similar assets, and from those investments pays yearly dividends
to every resident. Alaska’s model can be extended to any state or nation,
whether or not they have oil. We could, for instance, have an American Permanent
Fund that pays equal dividends to long-term residents of all 50 states. The
reason is, we jointly own many valuable assets.
Recall our discussion about common property trusts. These trusts could crank
down pollution and earn money from selling ever-scarcer pollution permits.
The scarcer the permits get, the higher their prices would go. Less pollution
would equal more revenue. Over time, trillions of dollars could flow into
an American Permanent Fund.
What could we do with that common income? In Alaska the deal with oil revenue
is 75 percent to government and 25 percent to citizens. For an American Permanent
Fund, I’d favor a 50/50 split, because paying dividends to citizens
is so important. Also, when scarce ecosystems are priced above zero, the
cost of living will go up and people will need compensation; this wasn’t,
and isn’t, the case in Alaska. I’d also favor earmarking the
government’s dollars for specific public goods, rather than tossing
them into the general treasury. This not only ensures identifiable public
benefits; it also creates constituencies who’ll defend the revenue
Waste absorption isn’t the only common resource an American Permanent
Fund could tap. Consider also, the substantial contribution society makes
to stock market values. As noted earlier, private corporations can inflate
their value dramatically by selling shares on a regulated stock exchange.
The extra value derives from the enlarged market of investors who can now
buy the corporation’s shares. Given a total stock market valuation
of about $15 trillion, this socially created liquidity premium is worth roughly
At the moment, this $5 trillion gift flows mostly to the 5 percent of the
population that own more than half the private wealth. But if we wanted to,
we could spread it around. We could do that by charging corporations for
using the public trading system, just as investment bankers do. (For those
of you who haven’t been involved in a public stock offering, investment
bankers are like fancy doormen to a free palace. While the public charges
almost nothing to use the capital markets, investment bankers exact hefty
The public’s fee could be in cash or stock. Let’s say we required
publicly traded companies to deposit 1 percent of their shares each year
in the American Permanent Fund for ten years — reaching a total of
10 percent of their shares. This would be our price not just for using a
regulated stock exchange, but also for all the other privileges (limited
liability, perpetual life, copyrights and patents, and so on) that we currently
bestow on private corporations for free.
In due time, the American Permanent Fund would have a diversified portfolio
worth several trillion dollars. Like its Alaskan counterpart, it would pay
equal yearly dividends to everyone. As the stock market rose and fell, so
would everyone’s dividend checks. A rising tide would lift all boats.
America would truly be an “ownership society.” ... read
the whole chapter