Vanity Fair

The One Percent

THE 1 PERCENT’S PROBLEM

Why won’t America’s 1 percent—such as the six Walmart heirs, whose wealth equals that of the entire bottom 30 percent—be a bit more . . . selfish? As the widening financial divide cripples the U.S. economy, even those at the top will pay a steep price.

BY 

• JOSEPH E. STIGLITZ AND LINDA J. BILMES
• 
  
• ILLUSTRATIONS BY  

  • STEPHEN DOYLE

  
  

Let’s start by laying down the baseline premise: inequality in America has been widening for dec­ades. We’re all aware of the fact. Yes, there are some on the right who deny this reality, but serious analysts across the political spectrum take it for granted. I won’t run through all the evidence here, except to say that the gap between the 1 percent and the 99 percent is vast when looked at in terms of annual income, and even vaster when looked at in terms of wealth—that is, in terms of accumulated capital and other assets. Consider the Walton family: the six heirs to the Walmart empire possess a combined wealth of some $90 billion, which is equivalent to the wealth of the entire bottom 30 percent of U.S. society. (Many at the bottom have zero or negative net worth, especially after the housing debacle.) Warren Buffett put the matter correctly when he said, “There’s been class warfare going on for the last 20 years and my class has won.”

So, no: there’s little debate over the basic fact of widening inequality. The debate is over its meaning. From the right, you sometimes hear the argument made that inequality is basically a good thing: as the rich increasingly benefit, so does everyone else. This argument is false: while the rich have been growing richer, most Americans (and not just those at the bottom) have been unable to maintain their standard of living, let alone to keep pace. A typical full-time male worker receives the same income today he did a third of a century ago.

From the left, meanwhile, the widening inequality often elicits an appeal for simple justice: why should so few have so much when so many have so little? It’s not hard to see why, in a market-driven age where justice itself is a commodity to be bought and sold, some would dismiss that argument as the stuff of pious sentiment.

Put sentiment aside. There are good reasons why plutocrats should care about inequality anyway—even if they’re thinking only about themselves. The rich do not exist in a vacuum. They need a functioning society around them to sustain their position. Widely unequal societies do not function efficiently and their economies are neither stable nor sustainable. The evidence from history and from around the modern world is unequivocal: there comes a point when inequality spirals into economic dysfunction for the whole society, and when it does, even the rich pay a steep price.

Let me run through a few reasons why.

The Consumption Problem

When one interest group holds too much power, it succeeds in getting policies that help itself in the short term rather than help society as a whole over the long term. This is what has happened in America when it comes to tax policy, regulatory policy, and public investment. The consequence of channeling gains in income and wealth in one direction only is easy to see when it comes to ordinary household spending, which is one of the engines of the American economy.

It is no accident that the periods in which the broadest cross sections of Americans have reported higher net incomes—when inequality has been reduced, partly as a result of progressive taxation—have been the periods in which the U.S. economy has grown the fastest. It is likewise no accident that the current recession, like the Great Depression, was preceded by large increases in inequality. When too much money is concentrated at the top of society, spending by the average American is necessarily reduced—or at least it will be in the absence of some artificial prop. Moving money from the bottom to the top lowers consumption because higher-income individuals consume, as a fraction of their income, less than lower-income individuals do.

In our imaginations, it doesn’t always seem as if this is the case, because spending by the wealthy is so conspicuous. Just look at the color photographs in the back pages of the weekend Wall Street Journal of houses for sale. But the phenomenon makes sense when you do the math. Consider someone like Mitt Romney, whose income in 2010 was $21.7 million. Even if Romney chose to live a much more indulgent lifestyle, he would spend only a fraction of that sum in a typical year to support himself and his wife in their several homes. But take the same amount of money and divide it among 500 people—say, in the form of jobs paying $43,400 apiece—and you’ll find that almost all of the money gets spent.

The relationship is straightforward and ironclad: as more money becomes concentrated at the top, aggregate demand goes into a decline. Unless something else happens by way of intervention, total demand in the economy will be less than what the economy is capable of supplying—and that means that there will be growing unemployment, which will dampen demand even further. In the 1990s that “something else” was the tech bubble. In the first dec­ade of the 21st century, it was the housing bubble. Today, the only recourse, amid deep recession, is government spending—which is exactly what those at the top are now hoping to curb.

The “Rent Seeking” Problem

Here I need to resort to a bit of economic jargon. The word “rent” was originally used, and still is, to describe what someone received for the use of a piece of his land—it’s the return obtained by virtue of ownership, and not because of anything one actually does or produces. This stands in contrast to “wages,” for example, which connotes compensation for the labor that workers provide. The term “rent” was eventually extended to include monopoly profits—the income that one receives simply from the control of a monopoly. In time, the meaning was expanded still further to include the returns on other kinds of ownership claims. If the government gave a company the exclusive right to import a certain amount of a certain good, such as sugar, then the extra return was called a “quota rent.” The acquisition of rights to mine or drill produces a form of rent. So does preferential tax treatment for special interests. In a broad sense, “rent seeking” defines many of the ways by which our current political process helps the rich at the expense of everyone else, including transfers and subsidies from the government, laws that make the marketplace less competitive, laws that allow C.E.O.’s to take a disproportionate share of corporate revenue (though Dodd-Frank has made matters better by requiring a non-binding shareholder vote on compensation at least once every three years), and laws that permit corporations to make profits as they degrade the environment.

The magnitude of “rent seeking” in our economy, while hard to quantify, is clearly enormous. Individuals and corporations that excel at rent seeking are handsomely rewarded. The financial industry, which now largely functions as a market in speculation rather than a tool for promoting true economic productivity, is the rent-seeking sector par excellence. Rent seeking goes beyond speculation. The financial sector also gets rents out of its domination of the means of payment—the exorbitant credit- and debit-card fees and also the less well-known fees charged to merchants and passed on, eventually, to consumers. The money it siphons from poor and middle-class Americans through predatory lending practices can be thought of as rents. In recent years, the financial sector has accounted for some 40 percent of all corporate profits. This does not mean that its social contribution sneaks into the plus column, or comes even close. The crisis showed how it could wreak havoc on the economy. In a rent-seeking economy such as ours has become, private returns and social returns are badly out of whack.

In their simplest form, rents are nothing more than re-distributions from one part of society to the rent seekers. Much of the inequality in our economy has been the result of rent seeking, because, to a significant degree, rent seeking re-distributes money from those at the bottom to those at the top.

But there is a broader economic consequence: the fight to acquire rents is at best a zero-sum activity. Rent seeking makes nothing grow. Efforts are directed toward getting a larger share of the pie rather than increasing the size of the pie. But it’s worse than that: rent seeking distorts resource allocations and makes the economy weaker. It is a centripetal force: the rewards of rent seeking become so outsize that more and more energy is directed toward it, at the expense of everything else. Countries rich in natural resources are infamous for rent-seeking activities. It’s far easier to get rich in these places by getting access to resources at favorable terms than by producing goods or services that benefit people and increase productivity. That’s why these economies have done so badly, in spite of their seeming wealth. It’s easy to scoff and say: We’re not Nigeria, we’re not Congo. But the rent-seeking dynamic is the same.

The Fairness Problem

People are not machines. They have to be motivated to work hard. If they feel that they are being treated unfairly, it can be difficult to motivate them. This is one of the central tenets of modern labor economics, encapsulated in the so-called efficiency-wage theory, which argues that how firms treat their workers—including how much they pay them—affects productivity. It was, in fact, a theory elaborated nearly a century ago by the great economist Alfred Marshall, who observed that “highly paid labour is generally efficient and therefore not dear labour.” In truth, it’s wrong to think of this proposition as just a theory: it has been borne out by countless economic experiments.

While people will always disagree over the precise meaning of what constitutes “fair,” there is a growing sense in America that the current disparity in income, and the way wealth is allocated in general, is profoundly unfair. There’s no begrudging the wealth accrued by those who have transformed our economy—the inventors of the computer, the pioneers of biotechnology. But, for the most part, these are not the people at the top of our economic pyramid. Rather, to a too large extent, it’s people who have excelled at rent seeking in one form or another. And, to most Americans, that seems unfair.

People were surprised when the financial firm MF Global, headed by Jon Corzine, suddenly collapsed into bankruptcy last year, leaving victims by the thousands as a result of actions that may prove to have been criminal; but given Wall Street’s recent history, I’m not sure people were all that surprised to learn that several MF Global executives would still be getting their bonuses. When corporate C.E.O.’s argue that wages have to be reduced or that there must be layoffs in order for companies to compete—and simultaneously increase their own compensation—workers rightly consider what is happening to be unfair. This in turn affects their efforts on the job, their loyalty to the firm, and their willingness to invest in its future. The widespread sense by workers in the Soviet Union that they were being mistreated in exactly this way—exploited by managers who lived high on the hog—played a major role in the hollowing out of the Soviet economy, and in its ultimate collapse. As the old Soviet joke had it, “They pretend to pay us, and we pretend to work.”

In a society in which inequality is widening, fairness is not just about wages and income, or wealth. It’s a far more generalized perception. Do I seem to have a stake in the direction society is going, or not? Do I share in the benefits of collective action, or not? If the answer is a loud “no,” then brace for a decline in motivation whose repercussions will be felt economically and in all aspects of civic life.

For Americans, one key aspect of fairness is opportunity: everyone should have a fair shot at living the American Dream. Horatio Alger stories remain the mythic ideal, but the statistics paint a very different picture: in America, the chances of someone’s making it to the top, or even to the middle, from a place near the bottom are lower than in the countries of old Europe or in any other advanced industrial country. Those at the top can take comfort from knowing that their chances of becoming downwardly mobile are lower in America than they are elsewhere.

There are many costs to this lack of opportunity. A large number of Americans are not living up to their potential; we’re wasting our most valuable asset, our talent. As we slowly grasp what’s been happening, there will be an erosion of our sense of identity, in which America is seen as a fair country. This will have direct economic effects—but also indirect ones, fraying the bonds that hold us together as a nation.

The Mistrust Problem

One of the puzzles in modern political economy is why anyone bothers to vote. Very few elections actually turn on the ballot of a single individual. There is a cost to voting—no state has an explicit penalty for staying home, but it takes time and effort to get to the polls—and there is seemingly almost never a benefit. Modern political and economic theory assumes the existence of rational, self-interested actors. On that basis, why anyone would vote is a mystery.

The answer is that we’ve been inculcated with notions of “civic virtue.” It is our responsibility to vote. But civic virtue is fragile. If the belief takes hold that the political and economic systems are stacked, individuals will feel released from their civic obligations. When that social contract is abrogated—when trust between a government and its citizens fails—disillusionment, disengagement, or worse is sure to follow. In the United States today, and in many other democracies around the world, mistrust is on the ascendant.

It’s even built in. The head of Goldman Sachs, Lloyd Blankfein, made it perfectly clear: sophisticated investors don’t, or at least shouldn’t, rely on trust. Those who bought the products his bank sold were consenting adults who should have known better. They should have known that Goldman Sachs had the means, and the incentive, to design products that would fail; that they had the means and the incentive to create asymmetries of information—where they knew more about the products than the buyers did—and the means and the incentive to take advantage of those asymmetries. The people who fell victim to the investment banks were, for the most part, well-off investors. But deceptive credit-card practices and predatory lending have left Americans more broadly with a sense that banks are not to be trusted.

Economists often underestimate the role of trust in making our economy work. If every contract had to be enforced by one party taking the other to court, our economy would be in gridlock. Throughout history, the economies that have flourished are those where a handshake is a deal. Without trust, business arrangements based on an understanding that complex details will be worked out later are no longer feasible. Without trust, each participant looks around to see how and when those with whom he is dealing will betray him.

Widening inequality is corrosive of trust: in its economic impact, think of it as the universal solvent. It creates an economic world in which even the winners are wary. But the losers! In every transaction—in every encounter with a boss or business or bureaucrat—they see the hand of someone out to take advantage of them.

Nowhere is trust more important than in politics and the public sphere. There, we have to act together. It’s easier to act together when most individuals are in similar situations—when most of us are, if not in the same boat, at least in boats within a range of like sizes. But growing inequality makes it clear that our fleet looks different—it’s a few mega-yachts surrounded by masses of people in dugout canoes, or clinging to flotsam—which helps explain our vastly differing views of what the government should do.

Today’s widening inequality extends to almost everything—police protection, the condition of local roads and utilities, access to decent health care, access to good public schools. As higher education becomes more important—not just for individuals but for the future of the whole U.S. economy—those at the top push for university budget cuts and tuition hikes, on the one hand, and cutbacks in guaranteed student loans, on the other. To the extent that they advocate student loans at all, it’s as another opportunity for rent seeking: loans to for-profit schools, without standards; loans that are non-dischargeable even in bankruptcy; loans designed as another way for those at the top to exploit those aspiring to get out of the bottom.

The “Be Selfish” Solution

Many, if not most, Americans possess a limited understanding of the nature of the inequality in our society. They know that something has gone wrong, but they underestimate the harm that inequality does even as they overestimate the cost of taking action. These mistaken beliefs, which have been reinforced by ideological rhetoric, are having a catastrophic effect on politics and economic policy.

There is no good reason why the 1 percent, with their good educations, their ranks of advisers, and their much-vaunted business acumen, should be so misinformed. The 1 percent in generations past often knew better. They knew that there would be no top of the pyramid if there wasn’t a solid base—that their own position was precarious if society itself was unsound. Henry Ford, not remembered as one of history’s softies, understood that the best thing he could do for himself and his company was to pay his workers a decent wage, because he wanted them to work hard and he wanted them to be able to buy his cars. Franklin D. Roosevelt, a purebred patrician, understood that the only way to save an essentially capitalist America was not only to spread the wealth, through taxation and social programs, but to put restraints on capitalism itself, through regulation. Roosevelt and the economist John Maynard Keynes, while reviled by the capitalists, succeeded in saving capitalism from the capitalists. Richard Nixon, known to this day as a manipulative cynic, concluded that social peace and economic stability could best be secured by investment—and invest he did, heavily, in Medicare, Head Start, Social Security, and efforts to clean up the environment. Nixon even floated the idea of a guaranteed annual income.

So, the advice I’d give to the 1 percent today is: Harden your hearts. When invited to consider proposals to reduce inequality—by raising taxes and investing in education, public works, health care, and science—put any latent notions of altruism aside and reduce the idea to one of unadulterated self-interest. Don’t embrace it because it helps other people. Just do it for yourself.

There is no good reason why the 1 percent, with their good educations, their ranks of advisers, and their much-vaunted business acumen, should be so misinformed. The 1 percent in generations past often knew better. They knew that there would be no top of the pyramid if there wasn’t a solid base—that their own position was precarious if society itself was unsound. Henry Ford, not remembered as one of history’s softies, understood that the best thing he could do for himself and his company was to pay his workers a decent wage, because he wanted them to work hard and he wanted them to be able to buy his cars. Franklin D. Roosevelt, a purebred patrician, understood that the only way to save an essentially capitalist America was not only to spread the wealth, through taxation and social programs, but to put restraints on capitalism itself, through regulation. Roosevelt and the economist John Maynard Keynes, while reviled by the capitalists, succeeded in saving capitalism from the capitalists. Richard Nixon, known to this day as a manipulative cynic, concluded that social peace and economic stability could best be secured by investment—and invest he did, heavily, in Medicare, Head Start, Social Security, and efforts to clean up the environment. Nixon even floated the idea of a guaranteed annual income.

So, the advice I’d give to the 1 percent today is: Harden your hearts. When invited to consider proposals to reduce inequality—by raising taxes and investing in education, public works, health care, and science—put any latent notions of altruism aside and reduce the idea to one of unadulterated self-interest. Don’t embrace it because it helps other people. Just do it for yourself.

Forbes

Entrepreneurs

Millionaire Grocery Clerks: The Amazing WinCo Foods Story

Mary Josephs ,  

 CONTRIBUTOR

I write about entrepreneurs' exit strategies, ESOPs and M&A.

Customers bag their own groceries at a WinCo Foods location (Credit: Joe Jaszewski/AP)

In Corvallis, Oregon, a couple miles north of the Oregon State University campus, sits a WinCo Foods discount supermarket and, unless you’re in need of groceries, you might drive by without noticing it. I assure you, however, it’s an extraordinary building, a laboratory of capitalism worthy of pilgrimages by the world’s great business schools.

Inside the store labor 130 employees of WinCo – grocery clerks, shelf stockers, display builders, bakery workers – and their combined retirement savings roughly comes to an astounding $100 million. And that figure is growing rapidly, such that in a few years the average wealth of these employees could easily exceed $1 million. Quite a few individual workers already have account balances above that level.

Outside of Wall Street and Silicon Valley, the WinCo store represents an unusually concentrated – and unlikely — grouping of millionaires. The secret to their wealth is employee ownership. Since 1985, WinCo, which operates 98 stores across eight states from its headquarters in Boise BZ +%, Idaho, has been employee owned, with anEmployee Stock Ownership Plan, or ESOP, as the vehicle for its workers’ main retirement savings. (WinCo also has a 401k and about 70% of workers participate.)

The company is by all indications well managed, grows steadily and provides its clientele of families on a budget a combination of low prices, wide selection and efficient and friendly service. Sales for fiscal 2015 are expected at about $6 billion. Same store sales growth and expansion into new markets have propelled WinCo’s profits and thus its ESOP stock past competitors and, indeed, past most growth stocks. The shares have risen at a compounded annual rate of about 20% since 1986. Purchased for $10 million from its former owners in 1985, company workers today hold shares valued at close to $3 billion.

The Corvallis store, with a long-tenured staff, leads all other WinCo stores in accumulated wealth. But it’s hardly an outlier: workers at a Lancaster, Calif., store have piled up more than $75 million; Redding, Calif., more than $65 million; Twin Falls, Idaho, more than $54 million; and those who work at the company’s distribution centers have combined ESOP accounts valued at more than $165 million.

Cathy and her husband Kevin. Credit: Cathy)

In Corvallis, the story of Cathy Burch and of her twin sister, Deborah Cook, explains not only the WinCo miracle but also much about the retirement savings crisis in the U.S. On the same day 23 years ago, Cathy and Deborah, then aged 19, walked into the WinCo store and applied for jobs. Each of the women was already a young mother and they were looking for steady work to provide for their families. Retirement savings weren’t on their radar screens.

WinCo at the time had an anti-nepotism policy and could only hire one sister; Cathy scored slightly higher on an employment test and joined part-time, working two days a week, which she fit in around a 40-hour schedule at a fast food outlet. After a year flipping burgers, Cathy received a 5-cent hourly raise and was offended by the smallness of the sum. She quit and went full-time at WinCo. In the years since, Cathy has worked a variety of front-line jobs at WinCo, including checker, shelf stocker, inventory orderer and, when I spoke to her one recent morning at about 4:30 a.m., she was headed off to do “go-backs” for the day, restocking items that customers put into their carts but later choose not to buy.

These aren’t tasks we normally associate with robust retirement savings, and the Employee Benefit Research Institute would tell you that most Americans in Cathy’s situation have either no savings at all or an account such as a 401k containing less than $50,000.

Cathy tells me, while getting ready for work, “I have almost $1 million in stock.” She’s 42. “If I wanted to, I could retire right now,” she adds. Instead, she plans to work a good deal longer, perhaps another 15 years, to fund a comfortable retirement for herself and her husband, Kevin, and also to help their five children, ages 13 to 27, get a good start in life.

“This is the chance of a lifetime,” Cathy tells me. “The work is hard. But it’s consistent. I’m used to it. When people quit WinCo, I ask them, ‘Are you crazy?’ ”

Now let’s check back in with sister Deborah, who generously agreed to share her story with me. Deborah, too, has worked hard at jobs, moving north to Portland: three years at the regional telephone company; some time at a department store and at a pharmacy; finally at a doctor’s office for 17 years. By 2008, Deborah, quite typical for someone in her position, had about $30,000 in a retirement account, and it was mostly in stocks. The market collapse roughly cut that total in half, and that was a wake-up call. “Since then, I’ve been looking for another career,” Deborah tells me. “Even if I had to go to lower pay but better retirement, I’d do it.”

After three years of applying, she recently landed a job with a federal agency and figures, after working 25 years until age 67 she’ll have a decent pension: “I’m 42. I had to start over.” For working Americans, of course, a secure and adequate retirement income is increasingly rare and difficult to obtain.

WinCo is one of thousands of ESOP-owned U.S. companies employing millions of workers. And its industry includes many employee-owned chains, including Publix, the largest employee-owned company and another great example of capitalism played as a team sport.

WinCo has more than 400 front line employees with more than $1 million in their ESOP accounts and hundreds of retirees similarly well set. Each year, it sets aside an amount equal to about 20% of each employee’s pay, in the form of stock, and the value of the underlying shares has risen rapidly, too. Retirees can cash out their shares and in fiscal 2015, ending early next year, WinCo will have paid out approximately $200 million to retirees. Over the last seven years, it has paid out almost $1 billion to retirees. Retirees pay the usual federal and state income taxes on these payouts.

Operating as an S-Corporation for the past decade, WinCo doesn’t pay federal or most state income taxes. As a pass-through vehicle, the owners pay the full complement of income taxes when they retire or otherwise withdraw their shares. The tax benefit has allowed the company to expand by investing heavily in new stores.

WinCo competes directly with Wal-Mart (WMT) and other discount grocers, keeping its costs low. It doesn’t accept credit cards. Customers bag their own groceries. It scarcely advertises. And that efficient approach permeates the workplace, where, as at other ESOP-owned companies, there is a self-policing culture among workers that reduces waste and boosts productivity. “We work our tails off,” says Lance Hart, another Corvallis store employee with 28 years at WinCo. “We’re more of a team than just working for a typical company. There’s a carrot out there you’re working for, for the rest of your life.”

WinCo management was nice enough to confirm historical and financial facts in this article, but preferred to let front-line workers such as Cathy Burch and Lance Hart speak for their colleagues.

WinCo is an unusual workplace. But the power of employee ownership – to transform a company’s culture and to reward hard work with financial security – is available to most American companies. Together, the productivity advantage and the significant tax benefits make an ESOP an attractive exit strategy for most any owner, including private equity funds. One of the great bonuses of working around employee-owned companies, as I have for more than 25 years, is meeting people like Cathy Burch and Lance Hart, who’re enjoying well-deserved success.

Mary Josephs, former head of ESOP advisory at Bank of America, is founder and CEO of Verit Advisors, investment bankers specializing in ESOPs. You can reach her at CEO@verit.com.

EnMo Economics: An Article in Two Parts

EnMo Economics

EnMo economics is an economic theory that suggests the proper role of the state in the economy is to ensure that all its people have Enough of everything they need to live secure, comfortable and happy lives, whilst also ensuring that the private sector is able to supply more in terms of non-essential products and services.

A Stairway to Heaven (Part One)

by John Andrews / September 5th, 2016

And it’s whispered that soon if we all call the tune
Then the piper will lead us to reason
And a new day will dawn for those who stand long
And the forests will echo with laughter
— “Stairway to Heaven,” written by Robert Plant and Jimmy Page for Led Zeppelin’s fourth album (untitled) recorded in November, 1970, released in 1971.

The Mythology of Economics

Many people know that our great trusted rulers routinely lie to us and deceive us – always “in the national interest”, obviously. The clearest single proof of this that nearly everyone is familiar with is our rulers’ obsession with secrecy – the routine classification of government documents that prevents the public from knowing what their governments are really up to – at times when full disclosure of that information would be most useful. Those great heroes who try to reveal government secrets, at inopportune times, are brutally dealt with by our great trusted leaders – as Julian Assange, Chelsea Manning and Edward Snowden (to name but a few) could easily verify. But the maintenance of great secrecy is not the only hard proof of the deceit of those we trust to lead us.

Another well-known tool is the manipulation of the media. Once again many people know the mainstream media cannot be trusted to tell the truth. Fine books are available detailing the proof – Knightley’s First Casualty, for example, or Edwards and Cromwell’s Guardians of Power, or the classic Manufacturing Consent by Chomsky and Herman; and the website Media Lens is one of the very best in the world for their ongoing scrutiny of media deceit.

But these are not the only devices our great trusted leaders employ to keep us deceived and easy to lie to. By far the most insidious device, that facilitates meek acceptance of the other two, is much less well-understood. Generally known as education, it is in effect a carefully managed programme of brainwashing – a lifelong drip-feed of half-truths combined with blatantly fallacious propaganda strongly affirming the moral right of the ruling elite to rule us. The most obvious proof of this is the powerful role that religious education once played in most parts of the world – and still does to this day in far too many corners of the world.

Religion is not quite the force in the west that it once was as a tool for enforcing elitist control — a new belief system has largely replaced it for that purpose, a belief system that is almost indistinguishable from religion in terms of paucity of hard verifiable proof: economics.
Economics has only recently emerged as a self-contained entity. The subject of government finance used to form part of an area of knowledge called Political Economy. A mere hundred and fifty years ago a standard textbook on the subject by one of the world’s leading authorities, JS Mill, was titled “Principles of Political Economy”. Economics, as a distinct and separate subject, did not exist. This is not a trivial point.

The expression “political economy” rightly suggests an inseparable link between politics and economics. The linkage is an indisputable fact, and will always be so whilst human society exists, but that’s not how economics is taught. Today economics is taught as though it was a real science, based on hard, verifiable, empirical evidence, a real science where immeasurable subjective concepts from the political realm, such as justice, security, fairness and happiness are completely irrelevant. Today economics seeks to impress the unwary with impressive-looking mathematical formulae, creating the illusion that it’s a real science. But the truth is that economics is just another pseudo-science scarcely distinguishable, in terms of verifiable proof, from astrology, shamanism or any other religion. Real science has evolved from centuries of careful experimentation and fact-checking. Scientific formulae need to be so robust that they can withstand repeated experimentation at any time and place and still continue to produce the same results. Economic formulae, on the other hand, are based on no experimentation whatsoever – or so little experimentation, and in such tightly constrained circumstances that they cannot be said to truly reflect real-world conditions at all.
Galbraith has made this very point before:

The increasingly technical formulations [of mathematics in economics] and the debate over their validity and precision provided employment for many of the thousands of economists now needed for economics instruction in universities and colleges around the world…
Mathematical economics also gave to economics a professionally rewarding aspect of scientific certainty and precision, adding usefully to the prestige of academic economists in their university association with the other social sciences and the so-called hard sciences. One of the costs of these several services was, however, the removal of the subject several steps further from reality. Not all but a very large number of the mathematical exercises began (as they still do) with the words “We assume perfect competition.” In the real world perfect competition was by now leading an increasingly esoteric existence, if, indeed any existence at all, and mathematical theory was, in no slight measure, the highly sophisticated cover under which it managed to survive.¹

And economist Steve Keen is even more direct:

There is one striking fact about this whole literature [of economics], and that is that there is not one single empirical fact in it.²

This is not an issue that can be ignored or passed over. Understanding the legitimising service that economists provide for the plundering and looting that our great trusted leaders perpetrate, not only all around the world but upon their own people too, is vital. The economists of today fulfil a similar function to the priests of yesteryear, people who justify the monstrous crimes of rulers, demanding acceptance from the masses because “there is no alternative”.

In the days of yesteryear, the monstrous crimes of kings and emperors were shrugged off by the priests as being of “God’s will” — too mysterious but unquestionably right for any to question. Today the monstrous crimes of prime ministers and presidents are shrugged off by the economists as being attributable to “market forces” — too mysterious but unquestionably right for any to question.
Galbraith once again:

The market, it is said, sets wages, salaries, interest and prices for suppliers and the sovereign consumer. The market having this authority, neither the individual not the enterprise can be possessed of it. To the charge of misuse of power there is the simple, all-embracing answer: your quarrel is with the market. The paradox of power in the classical tradition is, once again, that while all agree that power exists in fact, it does not exist in principle.³

In other words, we’ve been conditioned to accept the mythology of economics in general, and capitalism in particular, as though it was some timeless natural law, like gravity, which we can do nothing to change or alter. Yet the truth is that the mythology of economics is an entirely human construction which we could, and should, mould to serve the best interests of all humanity – not just the narrow interests of the 1%, which is the present disastrous situation.

It’s bad enough that economics has assumed such a powerful and iniquitous role in our lives, but there’s a particular area of economics where the cynicism is so extreme that few can scarcely believe it when they first discover it: money.

Money

Here on planet Earth there’s surely no human invention that’s so widely used, yet so misunderstood, as money. It’s a bit like electricity (although electricity isn’t nearly so widely spread), in that those of us who can use it do so all the time, without ever understanding what it is. Unlike electricity, however, where there’s no real need to understand it, money could and should be clearly understood by most of those who use it.

Galbraith hints at why this might be so:

The study of money, above all other fields in economics, is the one in which complexity is used to disguise truth, or evade truth, not reveal it.⁴

The mystery of money is strongly enhanced by this complexity of disguise. Most of us are conditioned to value money very highly; to feel the importance of having it; to fear not having it; to desire having more and more of it no matter the cost in years of useless and often hateful toil, and often broken lives and relationships. Some people work until the day they die hoarding sizeable quantities of it, yet live lives of such Spartan austerity and hardship they are scarcely distinguishable from the poorest and most downcast members of society.

Few people have done more in recent times to reveal the truth about money than American writer and champion of the Public Banking Institute, Ellen Brown. Her first book on the subject, Web of Debt, is an excellent place to begin understanding this bizarre human invention. Her writing is easy to read and comprehend, and encourages the reader to find out more. Finding out more about money is like learning how an illusionist’s trick is done: glad at first that an apparently inexplicable mystery is so simply revealed and then, in the case of money, angered at the brazen confidence-trickery of it, and the unimaginable global suffering its controllers have caused ever since the day of its invention.
In 2014 the Bank of England published a quite remarkable article. In the space of just two short sentences it told the truth about modern money in words anyone can understand:

The reality of how money is created today differs from the description found in some economics textbooks:
Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.
In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits.⁵ (5)

The importance of these few words cannot be over-emphasised. As the quotation implies in the first two lines, the general understanding about where money comes from – deposits and household savings, or “multiplied up” by the central bank – is wrong.

In just four words the magic trick of money is exposed: “bank lending creates deposits.” Money is “created”, quite literally out of thin air.

The enormity of this concept is breathtaking. Unlike every other important thing we need in order to live – food, water, clothing – which all have real material substance and must be found or made from other material substances, most money has no material substance whatsoever: it’s an artificial fabrication of a bank. Some of it may take a material shape in the form of metal coins or pieces of paper, but much of it – most, in fact – doesn’t even do that; it’s invisible, mere computer records.
Given this fact about money – that it has no finite substance, like food and water – that it can simply be made out of nothing by someone working in a bank, why is it so difficult to come by for so many people? Why is there massive global poverty? And why, on the other hand, are tiny handfuls of individuals able to have vast quantities of it? Why do some individuals have more personal wealth than entire countries?

The answer, like many other things that effect our daily lives, is due to how we are ruled.
Those who rule us have, since the beginning of modern history, seen to it that they tightly control the creation and supply of money. If these people always acted selflessly and in the best interests of the societies they rule that would not necessarily be a bad thing – as money must be managed by someone. But history shows that selflessness is not a typical quality of rulers, and always acting in the best interests of others is all but unheard of. This is proven time and again in almost every society by the fact that rulers nearly always supply themselves and their closest supporters with vast wealth, whilst the ordinary masses of those they rule are often left to fight for survival or starve to death in conditions of the most abject poverty.

It is not the purpose of this essay to prove this claim. Most thinking people already know it’s true. Nor is it my intention to write another study on the origins and nature of money: plenty of those can be found elsewhere. The purpose of this essay is to add to the growing demand for a revolution in the way money is managed, such that the grotesque inequalities which have nearly always existed, exist still, and which are worsening by the day, will be swiftly brought to an end, and that the full benefits of real economic justice can finally be turned to the benefit of all humanity and our desperately suffering planet.

Our starting point should be this: money is literally nothing, a human construction made from absolutely nothing. Unlike real natural resources such as air or water – which are finite in quantity – modern money is infinite its quantity, the amount of which is determined by human whim.
This is not necessarily a bad thing, because the bottom line is it works: money made in this way can be and is used to lubricate the wheels of commerce. The real issue is around the human beings whose whims decide how much money is created, and how it is used. In other words, it’s as much a political issue as an economic one.

The rulers of the western world, the so-called “first world”, claim that the so-called democracies upon which their political systems are based are the state of the art. There is nothing better and could be nothing better, they would say, than western democracy. Indeed, they like to fight wars in other people’s countries, ruining the lives of tens of millions, to impress upon them the boundless benefits of western democracy. But when we examine those wonderful democracies – and we do not need to look very closely – what we actually find is a vast open sewer of corruption and dystopian horror.
There’s no need to prove this. Many thinking people already know it. The relevance to this essay lies in the fact that the supposedly wonderful democracies of the “first world” are not democracies at all. Our fine western governments, who control not just us but most of the planet too, are not in any sense controlled by we the people, the supposed caretakers and beneficiaries of these democracies; they’re controlled by tiny cabals of all-powerful super-rich people who hide their existence and purpose behind a screen of lies and disinformation. Most western “first world” governments are very far from being beacons of democracy. They’re simply the tools of a secretive world of unelected, unaccountable, anonymous corporations and investment banks. The proof of this is provided in every general election where these same organisations provide the funding for those wishing to be elected, and then afterwards (no matter who wins the election) when these same organisations become instrumental in the daily business of government decision-making as reward for their election funding and generous campaign donations, through a revolving door between secretive corporate boardrooms and the corridors of government. Most of the so-called democracies of the western world are not controlled by we the people, they’re directly controlled by big business.

Given the central importance of money to the smooth operation of the economy, this mechanism also directly controls how money is managed.

At the heart of this issue – the proper management of money – lies a very simple ideological question: should money be managed in such a way that it benefits the long-term interests of the planet in general, and human society in particular; or should it be managed so that it serves the immediate interests of those empowered to manage it?

Most of the history of economics suggests the latter belief is invariably preferred, as Galbraith has pointed out before:

[Money] should be kept scarce and valuable, as those already possessing it had every reason to wish.⁶

Putting an end to this situation will not be easy – not so much because of any serious problems in alternative solutions, but because of the vested interests of those powerful individuals who like things very much as they are.

Nevertheless, good alternative methods of money-management exist; and the more well-known and talked-about they become the closer society will be to resolving this problem.

Central to the best-known alternatives is the notion that money is far too important to be left in the hands of just a tiny handful of individuals to control – individuals who have never shown any good reason why they should be so entrusted. Monetary reformers believe instead that money must be democratised, managed by the state, which must itself be managed by we the people. We need and must have a state-owned public bank. Money should be seen as a human right with government ensuring that all people have enough of it to live secure and comfortable lives. Given that money, unlike any other vital resource, is made by human beings from nothing at all, this should not be a difficult thing to achieve.

Not only is another world possible, she is on her way… On a quiet day, if I listen very carefully, I can hear her breathing.⁷

1. A History of Economics: The Past as the Present, JK Galbraith, p. 259 []
2. Debunking Economics by Steve Keen, p. 67 []
3. A History of Economics: The Past as the Present, JK Galbraith, p. 286 []
4. Money: Whence it came, where it went, by JK Galbraith, p. 5 []
5. []
6. A History of Economics: The Past as the Present, JK Galbraith, p. 145 []
7. War Talk by Arundhati Roy. p. 75 []

John Andrews is a writer and political activist based in England. Check out John's books: Fiction: The Road to Emily Bay; Non Fiction: The School of Kindness; The People’s Constitution. Read other articles by John.

This article was posted on Monday, September 5th, 2016 at 6:26pm and is filed under Banks/Banking, Economy/Economics, Media, Money supply, Narrative. 

A Stairway to Heaven (Part Two of Two)

EnMo Economics

by John Andrews / September 5th, 2016

EnMo economics is an economic theory that suggests the proper role of the state in the economy is to ensure that all its people have Enough of everything they need to live secure, comfortable and happy lives, whilst also ensuring that the private sector is able to supply more in terms of non-essential products and services. This is a very important but quite simple distinction to make — although there would always be some unimportant blurring at the edge where essential meets non-essential.

This principle applies to money supply too. The proper role of the state is to take the view that money is a human right, and therefore that it would ensure that citizens have enough of it to keep themselves supplied with Enough essential goods and services. The private sector would be free to operate a private banking system, within the laws of the state, to provide alternative types of money for citizens to use to purchase More in the way of non-essentials. Different types of money circulating in the economy is not an original idea. It was quite normal for banks to produce and manage their own currencies in the early days of imperial expansion in the United States, and the principle is still used today in Britain where Bristol, for example, produces its own currency, as does Lewes.

The role of private sector banks in the economy is not of much importance to this essay. It would be a similar role to the one they have today but much smaller and much better policed by the state. This essay is mainly about the public banking system in an EnMo economy.

EnMo doesn’t exist anywhere. It could, but it doesn’t. Therefore in order to explain it further it’s necessary to imagine a very different world from the one we have. This serves two purposes. Firstly, it makes it easier to explain the system of EnMo, and, secondly, it provides an idea for a very different economic model to the one that currently controls our planet.

The State

The role of the state is central to EnMo, and the state is wholly managed by a well-informed citizenry through direct democracy. Although political parties are permitted there’s little need for them given that the state is operated by direct democracy rather than representational democracy. Private funding of election campaigns is forbidden, and the state pays for and manages all elections.

The Work Ethic

The state pays for all public services using an interest-free currency it creates and manages through a system of public banks. The currency is recognised as legal tender throughout the country, and is based on work.

Each year the state bank produces a volume of currency roughly equivalent to the amount needed to pay public servants to produce the essential goods and services the state needs for that year. There is no unemployment, except for those who choose not to work, or who cannot work for one reason or another, or who are in full time education or retired. The state always has good and useful work available for those who want it providing and maintaining public services.

The state’s role in the economy is confined to providing essential goods and services. To this end it has its own farms, factories, transport and storage systems, engineering facilities… etc. It owns and manages essential utilities such as water supply, communications and electricity; and it owns and maintains core public services such as schools, hospitals, justice, parks and recreation, public transport… etc. All of these public services need human beings to work in them, and the quantity of money produced each year by the state bank is always enough to ensure they are all adequately paid.
Every citizen is encouraged to work in public service at least some of the time. Every young person, on leaving full-time education, is required to register for work with the Public Works department, a government agency with responsibility for managing human resources across the public services, and for ensuring full employment. Once registered the young citizen must do at least twenty hours work a week, for two years, performing a variety of duties working in public service. All new immigrants are required to do the same. Although citizens are not compelled to work for the state, all are encouraged to continue doing so throughout their working lives.

In return the citizen wants for nothing. Every necessity of life is provided by the state, from food and water to comfortable clothing; from education to health care; from public transport to comfortable and secure housing…etc. The citizen can have all of these things because other citizens are doing the work that provides those services, and given that the state is highly mechanised and computerised, public servants seldom need to work more than twenty hours a week – but can do so if they choose.
The twenty hour rule means that citizens have plenty of free time to do whatever they like. They can do more than twenty hours a week in public service if they wish to, or they can work in the private sector, or they can continue their education, or they can just relax with family and friends.

Proper management of human labour, for the benefit of the whole society, is the key to the success of the EnMo model. No one is ever out of work unless they choose to be, or cannot work for some reason. There is always work to do maintaining public services, and the state can always pay for this work because it can always produce whatever money it needs to do so.

Inflation

Because the state is continually producing new money to maintain public services, a mechanism is needed to ensure that an excess of money in the economy is avoided. Excess money is undesirable as it reduces the nominal value of it.

This problem has been averted in the past by using taxation. But taxation is complicated and difficult to administer fairly. EnMo uses a different and much simpler mechanism – demurrage.

The main use of money in an EnMo economy is to help facilitate continual trade in goods and services. In other words, it isn’t meant to be saved, it’s meant to be spent. Given that the state produces brand new money every year, money produced in previous years is simply withdrawn from circulation and slowly destroyed at a steady fixed rate. Money produced this year, for example, would lose twenty per cent of its face value, say, each year for the next five years until it no longer exists, and is no longer recognised as legal tender.

Taxation is currently used, not so much to pay for public services, but to withdraw money from circulation so that money inflation is controlled. However, taxation is difficult to manage and administer, and it has never successfully prevented hoarding of currency by the super-rich – which prevents money from serving its primary function: facilitating trade. Demurrage removes these problems. The fact that money would decay in value to zero, at a known fixed rate, and that brand new money is continually being produced, makes it pointless to hoard. Small quantities of it could be saved for short periods of time, but it would be utterly useless as a long-term investment. Given that the state produces brand new currency every year, to provide whatever public services are needed, the fact that old money is continually expiring is largely irrelevant: there is still plenty of money circulating in the economy, doing what it’s supposed to do. It therefore goes without saying that taxation, of EnMo currency – would be completely unnecessary.

EnMo currency would be useless as a long-term investment, because savings are not the point it’s intended to serve. EnMo currency is for facilitating trade, not for long-term saving. Those who wish to acquire long-term savings would need to use other instruments to do so – which is pretty much what a lot of people do now: buy things which are hoped will increase in value, such as property, precious metals, classic cars, art works, stocks and shares… etc. Whilst money in the form of long-term savings is pleasant and useful, the vast majority of people today have too little of it to save for any length of time and must continually spend the little they get in order to survive. Consistent with the core principle of EnMo – that the state provides Enough of everything people need to have secure, comfortable and happy lives – the state would ensure people have enough money too; if they want More they will need to turn to the private sector to supply it.

Paper money and metal coins would still be used for small cash transactions. Each year a new print for the paper money would be designed, and it too would lose its face-value at twenty per cent a year until it is worthless, except for trade between money collectors – pretty much as numismatologists have always done. Coins, being of very small monetary worth, permanently maintain their face-value, and are recycled only when damaged.

The Private Sector

Although the EnMo system is essentially a socialist economic model, it strongly encourages the existence of a free market economy too, for the purposes of supplying and trading in non-essential goods and services, the More part of the EnMo system. The need for More, and different, although unnecessary is a natural human desire, therefore it should be provided for (within the law), and not suppressed.

The state is primarily concerned with only providing essentials, and does so without any frills. It provides abundant secure and comfortable accommodation, for example, but it does not build luxurious housing with more and larger rooms than one person or small families ever need; it provides comfortable and practical clothing and footwear, it does not provide customised designer products; it supplies plentiful and nutritious vegan food, and potable drinking water through a national waterworks, it does not supply animal products or bottled water; it provides free expert legal services, it does not supply overpaid lawyers; it provides environmentally-friendly vehicles, it does not supply gas-guzzling automobiles; it provides good and free healthcare and schools, it does not provide “alternative” healthcare and education services… and so on.

In other words there’s plenty of scope for providing the goods and services the state does not consider to be essential, and those who wish to labour at supplying such non-essentials are free to do so – within the law of the land.

The private sector is also free to operate private banks, and trade in different currencies – within the law of the land.

No private sector operation, including banks, is guaranteed or underwritten by the state: it succeeds or fails by itself.

The Bigger Picture

The long-term success of an EnMo economy is dependent on its adoption by a reformed United Nations. At the moment the UN is considerably hampered in all of its operations and undertakings by being financially dependent on the United States. If the UN created a new bank to serve a similar function as a public bank serves in a country, but on a global scale, it would free itself of its existing financial dependence and therefore be able to serve a more effective role on the global stage, and the long term success of EnMo would be more likely.

This new global bank would, like any state-owned public bank using the EnMo model, be empowered to produce and manage its own currency. But this currency would be a new reserve currency – a currency which every country that adopts EnMo would have an automatic supply of, and which could be used for trading with other countries.

The power of a global reserve currency is very considerable, and it’s no coincidence that controllers of the global currency also control the most powerful military machines. But times change. For the first time in history a concept of international law is slowly developing. Although it’s still in its infancy, the notion that powerful nations cannot be allowed to continue ruling by force alone is slowly gaining traction. There’s still a long way to go, but brute force is slowly but surely being more widely rejected as acceptable or allowable behaviour, no matter how powerful a nation may be. The day that rule of law assumes more authority than force of arms is creeping slowly nearer; and when it does arrive human beings everywhere, and the planet in general, will be able to breathe a huge sigh of relief. If the United Nations created its own bank, to operate a global EnMo model, a great leap forward towards that day of final liberation would be taken.

The UN is effectively powerless because it largely depends on the US for its financing. Therefore it’s effectively just another agency serving the interests of the US Empire. If it was able to finance itself, through its own bank, the huge potential of the UN as a force for global freedom, peace and prosperity, and protector of the long-term interests of our planet could finally be unlocked and realised.

Transition

Moving from where we are today to where we need to be, in an EnMo world, would not be easy – not through any intrinsic difficulties with the EnMo model, but because of the powerful vested interests of those who profit very handsomely from the globalised chaos which has always been the modus operandi of empires, vested interests who will fight tooth and claw to keep what they have. It’s not enough to know that we have to rid ourselves of these people and the global power system they control; we also need to know what will replace them. The solution has two different but related components – a political element and an economic one. I’ve dealt in detail elsewhere with the political component, in the People’s Constitution, which provides for a largely decentralised system of government, controlled by direct democracy where a WELL-INFORMED citizenry makes all the decisions of government. This essay has focussed on the economic element. The gulf between where we are today and where we need to be is massive, and those who would stop at nothing to prevent us reaching our destination are incredibly powerful, but as Shelley said: “We are many, they are few” ¹, and having a clear idea of what our destination is is a fine place to start.

Every new development has to start somewhere, and few new developments are perfectly formed from the very beginning. EnMo is not a wholly new idea. It’s a variation of socialism. Its essential difference lies in a fairly well-defined separation of the economic roles of the state and private sector: the state provides essentials (Enough), the private sector provides non-essentials (More). The state has no interest in controlling all goods and services, and the private sector is not permitted to control any essential goods and services. There is, of course, some overlap at the margins, but conflicting interests could easily be resolved by citizen tribunals.

Moving from where we are to where we need to be – transition – needs widespread re-education as its starting point. A sizeable number of people already know that what we have must go, but there is less certainty about what will replace it. The People’s Constitution and EnMo economics are not perfect, but they’re much better than what we have, and they contain the all-important requirement of flexibility – mechanisms whereby they could be continually adjusted to suit the changing needs of society and our planet. It’s not enough to rail against the system, we also need a clear idea of the changes we’ll make. This was a weakness of the otherwise wonderful Occupy Movement. Occupy perfectly identified the problem, but had no commonly agreed solution. Re-education could put that right. We have already started the journey. Masses of people are wandering vaguely in the right direction. A new star in the sky is ready and waiting to help guide their footsteps. It has no human form, it’s a young binary star full of energy and long-term promise: the People’s Constitution and EnMo Economics.

1. “Mask of Anarchy” by Percy Shelley, 1819 []

John Andrews is a writer and political activist based in England. Check out John's books: Fiction: The Road to Emily Bay; Non Fiction: The School of Kindness; The People’s Constitution. Read other articles by John.

This article was posted on Monday, September 5th, 2016 at 7:45pm and is filed under Banks/Banking, Economy/Economics, EnMo Economics, General, Money supply, People's Constitution.