12 Chapter 12 Quartile ownership
You have hired a consultant to help you figure out what to do with the land owned by the land-holding company you inherited. She has been telling you want NOT to do: do NOT simply rent the farm out without selling any rights at all, do NOT sell simply miniscule rights, do NOT sell all rights, do NOT sell almost all rights. Let’s say that you are tired of hearing the things she thinks you should NOT do.
You just want to cut to the chase. There are companies in the world that use partial ownability systems. They have done the research. They know what to do. You don’t want to know about the systems they have tried and rejected. You want to know about the systems they have tried and that have worked. You want to know about the systems they use.
The consultant tells you that these companies use a system that sets rents according to a formula. Normally, an appraiser is involved and the appraiser determines the rents according to a written formula which is used in every case that rents are set. This formula will require the appraiser to determine the amount of operating profits of the farm first. The appraiser will then determine the fair market value of the time and effort required to operate the farm. (If the quartile owner hires a professional to do these things, the cost of the professional; if she does them herself, the amount she would have to pay if she hired someone.) Subtract the costs of this work to get the free cash flow. Once the appraiser has the free cash flow, she multiplies this by 75% to get the rents.
The buyer of this ‘package of rights’ will own certain rights.
The farm has a certain basic productive capability.
In its condition at the time of the sale, it can produce a certain amount of ‘excess value’ or ‘surplus’ or ‘free cash flow.’ I need a term to refer to ‘the amount of wealth the land is able to produce due to its pre-existing productive capability at the time it is offered for sale.’ This book will use the term ‘basic productivity’ to refer to the excess wealth that is added to the world due to this basic (pre-existing) capacity to produce wealth.
The basic productivity of a property is not money; however, its value can be measured in money. In the case of this farm (which is the same as the Pastland Farm), the basic productivity is 2.4 million pounds of rice a year. The farm produces a lot more wealth than this of course: it produces 3.15 million pounds. But part of this wealth must be put back into production or used to pay people who gave up their time, materials, or supplies for the operation. The net wealth added to the world is the total wealth that comes to exist minus any wealth that must be put back into production or used to compensate people who gave up something of value in production. The net wealth added to the world is 2.4 million pounds of rice a year.
This is the basic productivity of the land.
The quartile owner will not own the right to ¾ of the basic productivity. She will have to operate the farm, collect its wealth and sell it for money, then turn over enough money to buy ¾ of the basic productivity of the land to your company.
Your descendents will get this.
The people who control the property can get incredibly rich by doing things that improve the land and increase its wealth production, then selling the rights they own for more than they paid for them. Each time the property rights are sold, the rents are reset by the same formula used to generate them in the first place (to ¾ of the basic productivity of the property). The improvements will benefit the improvers of course: they will get very rich making them (we will look at examples shortly). But the greatest benefits of the improvements will go to your descendants. As the land produces more, more goes to them.
I need a term to refer to this kind of property control so I can discuss it. I will call it ‘quartile ownership.’ The person who buys the quartile ownership rights will be called the ‘quartile owner.’ The quartile owner will pay rents that work out to be enough money to buy ¾ of the basic productivity of the land around them. The entity that gets these rents will essentially be getting ¾ of the bounty of the parts of the world that are controlled with quartile ownership.
In this example, you are the one who gets ¾ of the bounty of the world. You get it because you live in a system where all rights to the world are ownable and someone who came before you formed a land holding company which was passed down to you through inheritance. You have a large family in this example and want to take care of your people forever. This land will take care of them if it is kept healthy; the quartile ownership system gives them powerful incentives to work hard to keep this land healthy and productive. If they (the quartile owners) act in their own interests and do their best to make money, the land will remain healthy and productive forever.
You want your descendants to get a very large income from the land. You could take 100% of the basic productivity of the land (all of the free cash flow) but you know that, if you do, you will have the same basic incentives as exist in natural law societies: production will be stagnant, inefficient, and there will be great risks; production may not grow for thousands of years. Your people’s population will grow, however. If the same production split among a very large number of people, eventually the land won’t take care of them all because it won’t produce enough to do this.
You want to create incentives for the people who make day to day decisions on the land to work hard, be efficient, do the best jobs they can do, prevent anything that they can prevent from going wrong and fix any problems they can’t prevent as rapidly as possible, and improve whenever it is cost effective to improve. Over the short run, you might get a little extra money by not selling any rights. But over the long run, your people will get infinitely greater amounts of wealth of all kinds (as we will see later) by letting them buy and own some rights.
Later in this book, we will go back to Pastland and look at our situation as the moratorium ends. For twenty years we have had a natural law society. It has advantages but it also has some serious problems. Its advantages come from our ability to share in the bounty of the land around us. Its disadvantages include risk, stagnation, lack of progress, incredible poverty (the population grows but production doesn’t), stifling of creativity and innovation, and a primitive lifestyle that will be as likely to go backward technologically than go forward.
We are in a position to decide what to do. It is a unique position with a window of opportunity that is rapidly closing. (In 20 years a lot of our complex tools and technological devices are not working anymore and we don’t have any way to make parts needed to build new ones or replace the ones we have.) But if we act fairly quickly, we can take full advantage of our position. We have all the tools and technology we need to create partial ownability system now that will have all of the advantages of a full ownability (sovereign ownability) system, but will cause the great bulk of the river of wealth that flows to us from the land to continue to flow to us, and will immediately create vast opportunities for private individuals to profit by doing things that drive the ability of the land to create wealth higher and higher each day that passes.
We don’t have to choose between 0% ownability and 100% ownability, natural law societies or territorial sovereignty societies, destruction or primitiveness. If we understand that ownership is not a concept, handed down by God, but is a process that works like a machine and a tool that we can use, we can make our world work to our advantage.