Saturday, January 14, 2012

Give Modern Moral Capitalism a Chance Part Two – The Land and the Corporation

Since the issue of land reform has been taken over by extremists, the topic has been expunged from the list of admissible conversations in polite economics discourse. And we have to be clear that extremists seem to have dominated the discussion forever: think of the Gracchi revolt in Rome and the pheasant revolts all throughout the Middle Ages—not only in Europe, but in Japan and China and Latin America as well—up to the present day; it ought to be sufficient to mention the simple name of Karl Marx to prove the point in a definitive way. And those who have not advocated outright national confiscation and redistribution of the land, starting with the Apostles of Jesus Christ and continuing to today with the efforts to organize kibbutzim in Israel and Base Catholic Communities throughout the world, have in a more gentle voice clamored to put the land in “common” ownership.
This is a request to which that supreme realist, St. Thomas Aquinas, gave a definitive answer in the 13th Century: things held in common are not managed efficiently. (Yet, it must be noted that St. Thomas Aquinas never advocated the closure of the commons, but that is another story.)
So, these are the terms in which the discussion about land policy has traditionally been held. It seems foolhardy to even try to enter the discussion. And yet, the issue is so basic, so important that we must find a way to balance the various issues involved in land policy in a way to discover what is the proper balance, the moral compass, to guide us.
Land used to be conceived as a common good. In a theocratic society such as organized under Mosaic Law, this conception was accepted as axiomatically true and therefore indisputable. Nor was this simply an abstract conception; rather, it was rendered quite useful and practical through the institution of the Jubilee. Any plot of land that might have been sold by the original steward for any reason whatsoever, on the fiftieth year was returned—at no cost—to the original steward. Notice that, except for this prescription, the steward of the land enjoyed all the benefits that today are associated with private ownership of the land.
This policy prevented the accumulation of large tracts of land in a few hands. The policy prevented the hoarding of the land. The policy also prevented a split between ownership and management; hence, it assured a smooth running of the economy as a whole.
The Roman law and any system of law thereafter lost sight of this basic policy. The ownership of large tracts of land was accumulated in a few hands. And poverty was born. Accumulations of vast tracts of land in a few hands were called latifundia. Latifundia are still with us today to plague us: there is not one sound moral, or economic, reason to keep them still in existence—except that their owners have inordinate political power which keeps even the discussion of the topic off the table.
And then there is another fundamental reason that keeps this discussion off the table. To dismantle the latifundia would be an immoral and ultimately an economically ineffective act. The arguments against the dismemberment of the latifundia stand as tall as those against projects of redistribution of wealth in general. Some of the unanswered and unanswerable questions faced by the redistributionist are these: from whom, to whom, how much, how often.
Excluding government confiscation and forced redistribution, what is left then? As Brandeis would say, the best is left. We can control the latifundia through a fiscal policy that is just and efficient.
We have to tax land values.
Why? Let me count the reasons. It is just to tax land tax values, because the value of the land is composed of two entities: the natural value of the land and the communal value of the land. A rock in Arizona is valueless; a rock in Manhattan in worth zillions. The value to the rock in Manhattan is given by the system of roads surrounding it, the public transit system, the Metropolitan Museum, the cluster of universities. Yes, even the New York Times.
It is proper to tax the land, because the community recovers part of the value it contributed to making the land as valuable as it is.
The second major reason for taxing land values is this. Every year, the amount to be raised by taxation is fixed. If landowners do not contribute their fair share, other people will have to meet the slack. In simpler terms, amounts not paid by landowners are amounts stolen from other taxpayers.
The issue of the amounts to be raised is important, but beside the point. We will take it up at a more opportune moment.
Another reason for taxing land values resides in the simple arithmetic that the more is raised from the land, the less can be raised from incomes and other improvements on the land. We do not want to penalize activity and enterprise, do we?
By taxing the land, landowners will be free to choose between paying the taxes and selling a part of their landholdings. Thus would a policy of disaggregation of the latifundia be set in place—gradual and organic disaggregation of the latifundia.
The following three are for me the most important reasons for taxing land values: hoarding of the land will be curbed; poverty will be abated though a program of economic development combined with spreading the ownership base of the country; and an organic urban development will ensue.
Remember that the most dangerous forms of land hoarding are not those that occur in the midst of the wilderness. The most deleterious effects arise from land horded in small parcels in the downtown of our cities and towns. The next set of nefarious effects occurs because of land hoarded in large concentric swats away from center city.
It is to skip over these bands of land hoarded that people, in search of lower land prices, create housing and commercial developments away from the downtown.
Then public transportation collapses; costly utility provisions and safety demands dominate our municipal expenditures; lines of communication and transportation are overstretched; nerves are frayed; latest research shows links between vehicle exhaust, brain-cell damage, and increasing rates of autism. Ultimately, unless we change our policies of urban development our goals of energy independence will always be unattainable.  
Who owns the land? Who is responsible for paying taxes on land values? Precise numbers are hard to come by but it can be safely assumed that, all over the world, corporations today are the owners of much land and perhaps most latifundia. That is the first level at which corporations come into the search for moral capitalism. Let them pay taxes on the values of the lands they own and much of the inordinate power which they irresponsibly enjoy today will be cut at its root. Let us simply remember that the technical definition of land includes not only what lies under the surface of the earth, but also what lies above the earth up to the stratosphere. Thus the oil companies, the information companies, and most of the media companies are enjoined to pay their fair share of taxes on the natural resources that they use.
But if the beginning of the search for obligations that will make corporations full participants of moral capitalism starts with their responsibility to pay their fair share of tax on land values, the search does not end there. The entry points into the discussion are legion, and they mostly spring from the short term need of the corporation to show a profitable bottom line. Thus too many corporations foster what I am compelled to call “Termite Capitalism”. Let us chew all the goodness out of the land as fast as we can. And let us move onto the next profitable line of activity. Let “the community” fix all the damage we leave behind. The easiest targets of rapacious corporations are common goods such as land, money, water, and air—as in airwaves. These are common goods that have been under attack for the last five hundred years or so. Common goods are never properly defended by naturally disorganized and mostly unaware communities.
Corporations. Theory of markets. One cannot talk of one without the other. Corporations live in markets. Indeed they try to control markets, they try to achieve monopolistic control of the market because they want to take autonomous decisions—although for a large variety of reasons they will never be able to achieve this aim; at least, not for long. Apart from weak and ineffectual rules and regulations against monopolies, corporations are free to repeat this nat1ural mistake over and over again, no matter the havoc they leave in their wake. It is due to the inner logic of markets that corporations—or even individual entrepreneurs, for that matter—become victims of the herd instinct, the bulls, you know (or are subject to peer pressure, if you prefer). They have to do what other corporations do. They have to show at least similar bottom line results. It is not a question of greed; it is not even a question of rationality—or even irrationality. However cleverly couched and elegantly expressed the theories of the behavior of corporations in markets, and we have heard some doozies lately, such as efficient-market hypothesis, the reality of the competitive pressure of the markets makes the behavior of corporations less than perfect.
No. It is not greed and not even rationality or irrationality that controls the behavior of corporations. It is survival. If they do not do what the herd does, they will be left in the dust. Surely there always are a few contrarians, and they might even thrive over long periods of time if they do understand markets and are flexible enough to change their decisions in a timely fashion. The rule is fixed. The rule is survival.
Which means that corporations generally become too big for their own good—and, lately, it has been discovered that some financial and industrial corporations become too-big-to-fail. If society wants to avoid the horrible problems created by such corporations, rules have to be imposed on them to prevent them from becoming too big. The rules have to be preventive. Once corporations have become too big, they will have automatically acquired so much political—and cultural—power to resist any force that will try to make them stop just in time to avoid societal collapse.
This is the solution that I have designed after many years of intensive study of the issue. The rule is based on a fundamental understanding of the behavior of corporations. The rule is based on a fundamental distinction between internal organic growth and external growth-by-purchase. The first method should be left as free as possible; the latter should be prohibited in no uncertain terms. Nothing good ever comes out of this type of growth in the long run: some corporations are so wise as to change course in mid-stream and disentangle the tangles they have put together; but most of them do not. The shortest way for me to indicate that growth-by-purchase yields only negative effects is to characterize it as industrial murder. Growth-by-purchase means the annihilation of the entity that has been purchased.
The fair way to put this prohibition in place is to apply it for a year or so to the first 100 largest corporations, check whether the expected beneficial effects do indeed materialize, and then enlarge the range of application of the prohibition by applying it to the next batch of corporations, until one reaches the level of, let us say, intrastate affairs. The purpose of this prohibition is not only to avoid the too-large-to-fail set of problems, but even to free the corporations themselves from untoward peer pressure. Can you imagine how much good work can the heads of these large corporation do if they are freed of the need to look over their shoulders to see who is gaining up on them? By putting this prohibition firmly in place we will free the corporation to be a responsible member of society.
Through wise preventive regulations, let us develop a new generation of corporations, corporations that do not pursue Pac-Man games, the way of mergers and acquisitions that can more formally be grouped to form what might be called the “agglomeration process”. Who ever gains short term benefits from these games besides investment bankers, lawyers, and PR professionals?
But the community loses and loses badly. Oh, yes. Even the rich people lose in these games. Are not the rich going through a rough patch these days? Even the Wall Street Journal ran a headline recently by the title “The Wild Ride of the 1%”.
Corporations that ought to be sternly prohibited from pursuing Pac-Man games are corporations that grow internally and organically as large as they can, corporations that are owned by responsible stockholders.
So far we have looked at the bottom and the top of the living space occupied by corporations. What happens within that space? Through Employee Stock Ownership Plans (ESOPs), cooperatives, and individual entrepreneurship, I look forward to the day in which corporations will recognize and accept the benefits of economic democracy, respecting people as people and not only as valued consumers and disposable producers. I look forward to the day in which, as Emerson said, "Every man is a consumer, and ought to be a producer. He fails to make his place good in the world, unless he not only pays his debts, but also adds something to the common wealth."  I look forward to the day in which local business people, artists and inventors, who are long in ideas and short of cash, will be properly funded.
I look forward to the day in which, through Louis Kelso’s Consumer Stock Ownership Plans (CSOPs), buyers will not only receive products of high quality, but also a share of the profits they have permitted the corporations to earn. Do you see the day in which, young and old alike, we can all piece together a decent income, not only through the jobs we hold and the stocks we own, but also a share of the year-end profits that are distributed in accordance with a share of the value of our purchases at McDonalds, Target, and Neiman Marcus? If customers are included in year-end distribution of profits, the problem of gouging consumers is mostly eliminated. Even the vexing problem of monopoly is mostly resolved.
As it is written at, “Corporations are needed; unethical behavior and corruption aren't needed.”
To fight “The System”, to fight “The Corporation” is a losing proposition. After intensive struggles we might win 10% of what we need, while The Corporation wins 90% and in the long run it wins 100%. The struggle is to control The Corporation to benefit all its stakeholders; the struggle is to make The Corporation a tool of freedom and justice for all. The present outline should be taken only as a superficial description of a long-awaited new world.

(c) 2012. Carmine Gorga, PhD, is president of The Somist Institute and author of numerous publications, including The Economic Process (2010).

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