I have named the way wealth moves in our society as The Lottery Principle. In this system the poor create the rich: a tiny number of winners, with huge payoffs, are entirely funded by the slight impoverishment of the vast majority. This Lottery Principle is a useful summary of what happens with land wealth at the moment. The people who make the land in a good area more valuable, often end up not being able to enjoy the good area they are making: they are priced out, as the better-off cream off the benefits. The poor create the rich, and hand them the benefit of land price gain.
Land is the most amazing resource we have, it provides most of what we need for life, and along with human ingenuity it enables the good life to progress. Everyone should have a stake in it. Valuable land is valuable because everyone needs somewhere to live and to work. The more desirable the location of land for a home, or the more profitable the work that can be done from land in a particular location, the higher the demand for that land is – and so the greater the value of the land. The boom and bust of house prices is actually a boom and bust in land prices. The actual value of the unimproved house itself is slowly dropping in real terms, through deterioration.
But who actually gives land its value? How does the demand arise? It arises due to the many convenient facilities around – the road system, the shopping, the transport, the theatres, the offices and factories. Who makes these facilities work? Who makes them possible? The many people living or working around the location of the land create the value. The location is desirable because there is a good school nearby, well-kept roads or a nearby railway station. It may also be healthy and pleasant because there is a park nearby and because the neighbourhood is quiet. The location may give easy access to entertainment or sport.
However it is the people who run those schools, provide the local public services or funded the rail-links, who have increased the value of the land. The owner only adds a very small part as being part of that community. The Free Lunch that is land value is created by all: school teachers, entrepreneurs, café owners and workers within the nearby community.
If you are paying rent to live in your house or flat, then part of your rent pays for the building – fair enough – but part of the rent pays for the use of the land. This is a ‘free lunch’ for the landlord, hidden within the rent you pay. Likewise, if you are paying a mortgage, then part of the payment to the bank or building society can be seen as paying for the house or apartment, and part of it is giving the bank a ‘free lunch’ based on the value of the land.
It’s clear that the phrase: ‘there is no such thing as a free lunch’ is false when it comes to our planet. The Free Lunch is a way of talking about the riches of our planet and who gets them. Who are these riches really for? And how can we share them more fairly?
Free Lunches occur in two ways: those found lying around on our bountiful planet include land, minerals, radio waves and any other natural resources. The second type of Free Lunch is created by society, arising whenever a successful society occurs. They include credit or money creation and rights of way, and they are everyday things we all need.
Everyone needs a certain minimal amount of Free Lunch benefit for survival. For example we all need a bit of land to live on and build a home, and we all need credit to fund long-term projects. The governments need credit to build the roads and bridges; firms need it for supplying water, electricity and telecoms systems. A problem arises because Free Lunches are in high demand but the supply of them is limited. You cannot just create them anywhere, so that everyone has all the Free Lunches they need wherever they want them. So, due the usual normal human behaviour, powerful people accumulate a higher proportion of Free Lunches than weaker people.
It is fair to say that if you provide something – it is yours. If you provide your labour, if you work, you should keep the income earned, if you are creative, you should have full claim to the gain you make. You get something for something – quid pro quo. Fairness means you take reward for your effort. Unfairness happens when you work and someone else takes the reward. The community creates the value of land, so the community should use that value, a levy or tax on land values should pay for the things that give the land its value, to pay for the schools, the roads, the public services and the area’s general attractiveness.
Instead we charge people tax on their work (income tax) and on the things they make (value added tax or VAT), whilst allowing homeowners who gain from land value to keep all the gain. The net effect of this is that owners of large and valuable homes or landlords of flats in costly locations are actually living tax-free, whilst people who rent their home pay the ordinary taxes, but have no counterbalancing land value gain of the house price to cash in on, ever. The Free Lunch of land value should be used for tax purposes, and tax on work should be cut.
Credit Creation is the second Free Lunch – because it is the community itself which provides the peaceful backdrop for the amazing artificial resource of credit to be created. A successful society, where rights are respected and law upheld, is one where credit can be safely created, used and repaid. If you were in a war zone where society had broken down, you would have difficultly borrowing and normal life ceases. Normally, it is all of us who create the essential conditions for advances in technology to bring forward improvements and human comforts and to address the challenges of raw nature. But for this to work we need credit creation. The peaceful law-abiding society enables credit creation to work.
But does the government or the state-owned central bank, The Bank of England create this credit for us to use? The notes and coins we use are indeed produced by the Bank of England. This is about 3% of the money needs of the economy. The remaining 97% of money is created by the commercial high street banks. And they create it out of nothing. They create it out of minimal reserves – if any at all – and then reap the rewards when they receive the interest on the loan (the actual principle, when repaid, cancels itself out and disappears).
So modern banking has nothing to do with waiting for a deposit from A before lending that deposit to B. If someone wants a loan and they are a sound risk, then the loan will be provided out of thin air by the bank and the profit from that credit creation, interest will start to be charged. A new Free Lunch has been cooked up.
So we find ourselves with banking in the same situation as with land. The normal everyday working of all of us in the community going about our normal business, enables credit to be created out of nothing. But it is not us – the community – that takes the benefit from it, it is privately-owned commercial banks. The banks are, as the landowners are, taking something for nothing.
They did not create the conditions for creating credit – we did – we all did.
To repeat: Fairness means you take reward due from your effort, you get something for something – quid pro quo. Unfairness, is working and someone else taking the reward. The situation where banks are taking our reward as they create the credit is unfair. The reward needs to return to us. So how could this be? The government should create the credit needed and lend it wholesale to the banks at a lower rate of interest who will then retail it to us. Thus, most of the profit currently made by banks from their monopoly of credit creation – the interest – would flow to the government as they took democratic control of credit creation. This would help to cut taxes. But could we trust the Government? Can we trust the banks ever again…?
Anyone creating credit makes it out of thin air, whether it is a bank or the government. If the government makes it for roads and bridges and education it could be entirely debt-free. No student loans would be needed. No taxes would be needed to pay interest on loans to build motorways or railways. Now though we suffer the burden of debt as the banks are given this monopoly of creating credit and they use it to create the indebtedness of governments and thus the tax payers. Again, the poor create the rich.
Somewhere that has taken the Free Lunch concept even further is Alaska. Everyone is given a regular income provided by some of that state’s oil supply sales. It is unconditional. It is not means tested. See the internet: Alaska Permanent Fund. A payment is made to every Alaskan citizen: adults and children are each receiving about $1200 for the year 2011 just declared – about the same as last year. It has been as high as $2000 per head per year, so a family of 4 people this year will get about $5000. This a long-proven demonstration of sharing Free Lunches.
Any country could share the Free Lunch wealth in the same way from oil and gas wealth, from land value, from credit creation. A balance of investment needs and tax cuts could be democratically worked out and a citizen’s dividend be factored in too – The Citizen’s Royalty
As it stands we allows certain sections of the community such as landowners and bankers to cream off wealth that only arises from the work of all of us. We lose the shared Free Lunch ourselves and we have to fund though taxes the cost of society’s needs and the welfare needs of the poorest.
The state currently plans things for us. It should divert existing common wealth to pay for those common needs that it is best able to provide. Some common wealth should be diverted to each one of us, so that we are able to plan and act more for ourselves. I believe this is part of the search that is being started by the Occupy movement. This is not the socialism of Tony Blair and his Big Tent.
For me the little tents of Occupy London tell a story of the search for greater fairness – in the sharing of Free Lunches.
Charles Bazlinton is the author of the The Free Lunch – Fairness with Freedom, who can be found at: www.the-free-lunch.blogspot.com