Incentives are behavioral
motivations; they are pressures that push us to act certain
ways. Each incentive can be thought of
as a kind of invisible hand, pushing people to act certain ways. If you can make money doing something, you
will feel some sort of emotional pressure to do that thing, because you can use
the money to buy things that make your life better. The more money you can make, the stronger the incentives.
Part Five of this book goes into great detail about the different
incentives that can be parts of human societies. This issue is easier to explain if you understand a large number
of societies and can compare them. You
can see that some societies
have powerful incentives that push people to build, innovate, invent, create,
invest, manage risk, and do things that lead to the creation of value. Other societies weaker incentives to do
these same things. Some societies do
not have these incentives at all: there
are no natural rewards for activates that lead to progress and growth. Some societies actually punish people who do these things:
they work in ways that make the costs of improving greater than any potential
benefits to the decision makers. People
who try to improve the way the world works, or advance the state of human
knowledge, will find that they have to give up wealth and agree to accept a
lower quality of life and standard of living than they would have if they
didn’t do this.
This book uses the term ‘constructive incentives’ to refer to
incentives that push people to things that make the world a better place in
terms of the wealth or ‘things
of value’ it contains. Some societies
have constructive incentives. Some
societies do not have constructive incentives.
The Importance of Understanding the Difference between incentives that
push people to do things that harm the world and incentives that push them to
make the world better
If you take something with little or no value to humans and turn it
into something with enormous value, you have added value to he world and made
the world a better place.
If you take something with a lot of value and turn it into something
with little or no value, you have made the world a worse place.
Say that you start with clean, fresh air and run it through the engine
of a car. The air gets mixed with
fossil fuels that have been buried under the ground for billions of years and
are contaminated with dangerous heavy metals that were removed from the air by
the ‘fossil’ plants that degraded to make the fossil fuels. The oxygen and gasoline mixture is ignited
creating an explosion that alters the composition of the air many ways. The explosion pushes down a piston
generating energy; the piston then goes back up pushing the gaseous mixture
that is left out of the engine into the air.
The air coming out of the engine has many harmful products that were
not in the air when it went into the engine.
It has large amounts of carbon dioxide, a gas that insulates the
atmosphere holding in heat that warms the entire earth. It has carbon monoxide that is highly toxic
to humans and unburned bits of carbon that are corrosive and foul the air. The gasoline contains large amounts of
sulfur which burns with oxygen to create sulfur dioxide; this is a gas that
gets into the air where it gets sucked up into he clouds; the ultraviolet light
that hits the clouds turns this into sulfuric acid. When it rains, this acid gets everywhere. The acid concentration is low so it won’t
burn you immediately, but its effects are cumulative; you age and everything
that is susceptible to acid degrade faster.
The nitrogen that makes up 69% of the air has also been changed. Normally, nitrogen is safe, stable, and
inert. But the incredible pressures
that take place in the engine cause the nitrogen molecules to bond with oxygen
creating ‘oxides of nitrogen.’ These
pollutants are extremely powerful greenhouse gasses (more than 200 times as
dangerous as carbon dioxide) and stay in the atmosphere for years. Even when they degrade, they cause problems
because the degrade into nitric acid which is even more dangerous than sulfuric
acid.
Many scientists claim that the most dangerous toxins of all are the
heavy metals. All mammals are
incredibly sensitive to the many metals that are released when fossil fuels
burn. Mercury in the air make us all
stupider, literally: It interferes with
the way the brain processes information.
If you breathe air that contains mercury while pregnant, your child will
be stupider than if the mercury had not been there. There is a long list of heavy metals in all fossil fuels,
including lead, chromium cadmium, copper, and zinc. All are toxic to humans if ingested.
If people do things that start with clean, pure, healthy air, and turn
it into contemplated air, they take something with value and turn it into
something with less value. They reduce the amount of value in the world.
Humans can do a lot of things that harm the world and people in
it. In some cases, people can make
money (or get other things of value) doing things that ‘turn things with a lot
of value into things with less value.’ All societies where this happens have
incentives this book calls ‘destructive incentives.’ We have tools we can use to measure value. In the societies we inherited, people use
money for this. A great many people do
research to determine the money value of damage people do from various activities,
including war, resource extraction, and pollution; since we also know how much
money people make when they do these things, we can use mathematical tools to
determine whether or not destructive incentives exist in different societies
(some do not have them) and, if they exist, their relative strength on
different societies we can study.
Note: This part of the book doesn’t go over any of
this math, I just want to understand that it is possible to use objective tools
to determine the strength of destructive incentives. Part Five goes over these tools and shows how to do the math, for
those who are interested. Here, we will
simply go over pretty obvious relationships that exist between ‘making money’
and ‘harming the world’ in one particular type of society, one built on the
principle of territorial sovereignty. I
want to show you that these societies clearly have destructive incentives and
we don’t have to know any math to understand that they are extremely
strong: people can make fantastic amounts
of money doing things that destroy immense amounts of value.
It is possible to take things with great value and turn them into
things of little or no value. This book uses the term ‘destructive incentives’
to refer to incentives that reward destruction of value.
It is possible to do the opposite.
We can turn things with little or no value to humans into things that
are extremely valuable and very useful.
A good example involves smart phones.
Smart phones are built on technology that takes advantage of the
chemical properties of the element ‘silicon.’
The manufactures get the silicon to make these phones from ordinary dirt
and sand: the most abundant material on
the part of the earth we can get to (the crust) is silicon dioxide. This is what mountains are made of and what
the first 50 miles of the earth’s surface is made of. It is also called ‘sand’ and ‘rocks.’ It is possible to process ordinary sand in ways that remove the
silicon and process it into crystals which can be cut into very thin
sheets. By stacking these sheets a
special way, and printing the sheets with aluminum ink that will act as wires,
the silicon can be turned into electronic circuits that can do many things. They can process data, emit light (with
light emitting diodes), control whether light passes through a surface (with
liquid crystal displays), detect light (the CCD that is used as a camera on
your phone is a very versatile light detector) sense motion, determine which
way is up, and do thousands of other things, all of which your smart phone can
do.
All of the parts of the smart phone are made out of extremely common
materials that existed from the time the earth existed. Over the course of the last few generations,
extremely intelligent people have worked hard to figure out how to remove these
materials and turn them into the things that we now take for granted, smart
phones. The most important components
of the phone are made, literally, from sand.
If you have a 4 ounce smart phone, you are literally holding 4 ounces of
sand that has been modified into a different form.
The phone is a lot more useful than the sand it was made out of. By turning the sand into the phone, the
manufacturers have added value to the world.
They didn’t add any mass or elements: all of the elements in the phone existed millions of years before
the first humans arrived on the world.
They changed these elements to put them into a from that had more value. The phone can be used to talk to people
around the world, to take movies and record data, to play games, to watch the
news, to determine your location if you are lost, to map a route to wherever
you want to go, and to light your way through a dark room. It is a very useful product.
Since we have tools to measure the relative values, we can determine
how much value is added. (If the raw
materials that went into the phone can be purchased for 3 cents, and the
finished phone can be sold for $1,000, the manufacturer added value of $999.97
to the world.) If people can make
money with this process, they have incentives to do these things.
Different societies have different ‘incentives profiles.’ They have different mixtures and patterns of
incentives. We have seen that natural
law societies do not have the incentives that push toward progress and growth;
in fact, their natural forces tend to push against it, preventing progress and
causing loss of advances that have been made in the future. If we understand the details, we can
determine which societies have constructive incentives. We can determine the strength of incentives,
when they exist, and compare societies based on the strength of the incentives.
Again,
this part of the book will not go over any more than the most basic of
mathematical analysis. I only want you
to know that it is possible to do this analysis. If we do, we will have tools that we can use to compare human
societies objectively and scientifically.
We can determine which societies will have progress and which wont. We can determine which of two societies that
do have progress and growth will grow faster.
We can determine which changes could be made in societies that would
alter the rate of progress and growth.
If
a group of people are in a position to form any kind of society they want (as
is our group in Pastland), they can decide exactly how they want their finished
societies to work. They can then look
through the possibilities of societies that are organized in some logical way
(that is what Part Five does) to see which has the incentive profile that is
most consistent with their requirements.
Then they can build that society.
This
part of the book is only designed to lay out the relationships so you can
understand them within the context of one specific type of society, a society
built on the principle of territorial sovereignty. I want you to be able to understand why these societies (which
are the societies we inherited) work the way they do. These societies have both
constructive incentives and destructive incentives. They have ‘invisible hands’ pushing us to do things that add
value and destroy value. You could say
there s a tug of war going on all the time in these societies, with some forces
pushing us toward destruction and others pushing us toward progress. We need to understand what is happening here
in order to understand the societies described in Part For, which only have the
constructive incentives and do not have the destructive incentives.
If we understand the strength of constructive incentives in different
societies, and understand the way people react to incentives, we understand
some important realities of existence for the human race, and for other beings
that are in the same category that are in a position to determine what kinds of
societies to build.
Societies without
constructive incentives will tend to be stagnant and not grow at all. Societies with weak constructive incentives
will advance slowly. Societies with
stronger constructive incentives will advance more rapidly. Some societies have constructive incentives
that are so strong that they actually negatively affect the quality of
life: people will feel such pressure to
find new and better ways to create value, and work so hard to do this, that
they will ignore their family, ignore their health, and literally work
themselves to death in an attempt to create value.
The same is true for destructive incentives. Some societies have very powerful incentives that push toward
destruction of value of all kinds. They
provide enormous rewards for war, the most destructive act within the
capability of thinking beings with physical needs wherever they are. They work in ways that allow people to get
very rich if the do things that harm the world, even if this harm is totally
unnecessary.
We
can make electricity by paying people to dig up fossil fuels and then burning
these fuels in massively expensive power plants. We can also make electricity
by setting silicon based solar panels into the sun and letting them turn the
energy of the light into electricity.
The destruction is not necessary:
the electricity can be made without it.
(I make all of my own electricity with solar, including the electricity
used to power my car.)
It
may seem strange that it would be more profitable to produce electricity using
the obviously expensive system (pay people to dig up fossil fuels and burn them
in a massively-expensive power plant) than it would be to use the cheapest a
and most abundant material on the planet (silicon dioxide, the main component
of solar panels) which will then produce electricity at no cost whenever the
sun is shining. We will see that in most societies, the solar system will
always be preferred and always be far more profitable. But there are some societies that have
strange features that reverse the natural relationships to make destructive
systems more profitable than non-destructive alternatives. We happen to have been born into societies
with these strange features. If we want
to understand why these societies work as they do, we really need to understand
the flows of value that create these incentives.
The actual details are so complex that I have decided to devote an
entire book to them. Anatomy of
Destruction explains the realities of destruction in a specific type of
society (one built on the principle of territorial sovereignty) in great
detail, using examples from the world around us. This book, Possible
Societies, deals with a different topic, the comparison of different
societies and Part Three is only designed to help you understand the basic
realities of societies built on territorial sovereignty.
We live in societies that have both
destructive incentives and constructive incentives. You could think of an incentive as an invisible hand that is
trying to pull the system in a certain direction. You could think of the interplay between destructive incentives
and constructive incentives in territorial sovereignty societies as like the
game of tug of war. The destructive
incentives are trying to pull us over a cliff into our own extinction. The constructive incentives are trying to
pull us toward a better future.
If we can understand that this tug of war is happening, we can
understand a lot of things about the societies around us that can’t really be
understood otherwise. For example, these
societies are highly unstable, with things called booms and busts, expansions
and contractions, depressions and recessions, inflations and hyperinflations,
ages of wisdom and ‘dark ages’ that can last many centuries. Why do these things happen? If we understand the interplay between
incentives, we can get some idea.
Destructive Incentives
If the foundational structures of a society work in ways that allow pep
to get wealth (to get rich) doing things that destroy value, those societies
have destructive incentives.
Territorial sovereignty societies reward destructive acts several
ways. Perhaps the most destructive
activity within the capability of thinking beings is the one that we casually
call ‘war.’ In Territorial sovereignty
societies, the world is divided into independent entities that own everything
inside their borders. They own the
wealth the land creates now, the wealth it will add in the future,
This section under construction.
Constructive Incentives
Some societies work in ways that naturally reward activities that can
lead to progress in technology and understanding of the universe. Some tie the right to get money or other
forms of wealth to behaviors that cause the world to create more value over time (where ‘value’ is
anything that humans may want or need or that can make life better for
humans.) Some tie the right to get
money or other forms of wealth to invention, discovery, and investment in
facilities that turn items of little or no real value to humans (sand, for
example) into items of great value to humankind (smart phones, for
example).
This book uses the term ‘constructive incentives’ to refer to
incentives that encourage the ‘creation of value’ and that encourage people to
do things to make the world a better place for the human race.
We have seen that natural law societies don’t have any inherent
structures that naturally reward constructive behaviors with money or other
things of real material value. This
doesn’t mean that no one will ever do anything constructive in a natural law
society: people often do things for
reasons that are unrelated to the right to get money or things of material
value for themselves. However, it means
there are no organized, directed forces that push toward progress and growth in
a consistent and predictable way.
people in natural law societies may make progress, from time to time, in
some areas. But the basic structures of
natural law societies don’t cause the progress to become institutionalized and
form a new base which can support further progress. (In fact, as we saw in the last chapter, natural law societies
work in ways that often cause a ‘reversion to primitiveness,’ where even great
achievements can simply fade into history and become lost forever, due to a
lack of investment.)
Without consistent incentives pushing for progress and growth, we would
expect natural law societies to be stagnant.
They may remain extremely primitive for incredibly long periods of time.
Societies built on sovereign ownability, however, clearly do have
incentives that encourage advancement of technology, growth in production,
invention, discovery, investment, risk management, and other behaviors that can
lead to more value existing on the planet that has these societies.
Territorial sovereignty societies have both destructive incentives and constructive incentives. People can get rich by destroying the
world. We know this: many of the world’s rich got their wealth
through conquest, rape of the environment, construction of tools of murder an
death. But we also see a class of rich
that got their wealth inventing, discovering, investing, and building
facilities that lead to devices that make the world better for the people who
have access to these devices.
We live in an amazing world.
You may be reading this on a smart phone, a tiny device that can
download entire books in a fraction of a second and display them on a screen
that you can tailor to your vision; it provides its own light so you don’t need
to go into the sun or to find a candle and flame to read it; in fact, you can
still read if you are blind because you can push a button and it will speak the
words aloud. You may be reading this in
a car that goes faster than any animal on earth can travel, or a jet that
travels into the upper atmosphere so it can go even faster; you may even be on
an orbiting platform that travels more than 28 times the speed of sound. If you don’t like reading books, you can
watch movies, either on the tiny screen of a phone or on a massive screen that
is wider than your field of view, with a resolution that is higher than your
eyes can detect, with the ability to push a button to stop time so you can
study a scene, and sound that shakes you and creates a feeling that is more
real than reality.
If you get sick, you can go to a doctor, get treated, and walk away
from problems that would have killed you just a few generations ago. If you are foolish and do something that
tears your body to pieces, surgeons can put you back together, with medications
that prevent suffering while your body heals.
If you are hungry, you don’t have to worry about what the part of the
world around you can produce: you can
go on Amazon and have items from anywhere on earth delivered to your door
within a few hours; you can eat ice cream on the hottest days and have baked
Alaska in a comfy kitchen in the middle of a blizzard.
Dark no longer bothers us: a
switch turns on light that is better than natural light for seeing the things
around us. Cold is banished by furnaces
and heat pumps. If the air gets stuffy,
push a button and the air conditioner comes on. If you want ice, push a different button and it comes out of the
machine into your cup. You don’t have
to wash dishes by rubbing sand onto them or wash clothes by beating them against
rocks: machines do it all for us.
Smart Phones
I like to use smart phones as an example of ‘creation of value’ because
it illustrates the process of value creation very well: smart phones obviously have a great deal
more value than the raw materials they are made out of.
The main components of the phone are made of silicon dioxide and
aluminum. These are, coincidently, the
most common and abundant materials on the part of the earth we can get to, call
the ‘crust.’ The crust is 87% silicon
dioxide and 8.3% aluminum. If you want
to find small particles of the ‘crust’ of the earth, go to a beach: the action of the waves beats rocks against
other rocks, chipping off pieces and rubbing them against other pieces,
essentially ‘sandblasting’ them, making them smaller and smaller. This has been happening for billions of
years. They end up a sand. This is the starting material for a smart
phone.
The glass is made directly out of sand. You can make glass yourself out of sand, by heating it to a very
high temperature. It turns into liquid
and this liquid hardens into glass. Of
course, modern glass makers have refined this process a great deal and the
glass they make is of much higher quality than the glass you can make yourself,
but the basic idea is the same.
The electronic parts are made of silicon, which comes from silicon
dioxide. Sand is 87% silicon
dioxide. The processor, touch censors,
the CCD camera and other light sensors, and the LED lighting system that
illuminates the phone are made of silicon.
The glass is made of silicon dioxide.
The other parts, including the case and wiring, are mostly
aluminum. Sand is 8.3% aluminum. This means that if you are holding a smart phone in your hand, you are basically
holding a handful of sand that has been processed.
Various people figured out how to take sand and turn it into extra-hard
glass, processors, CCD sensors, touch sensors and casing materials, aluminum
‘ink’ to print onto a board that acts as a wiring harness to hook it all
together. These parts went to assembly
lines and were put together. At the end
of this process, the hardware of the phones is complete but it is not yet
‘smart.’ To make it smart, it has to be
hooked up to a computer that will install the software and run diagnostic
tests. It is now a ‘smart’ phone. You can then put in a ‘sim card’ and start
using it anywhere in the world. You can
take or watch a video, check the weather, check your email, buy things and have
them delivered to you, book a flight to China, use its GPS and compass to
determine exactly where you are, play games, find instruction manuals for just
about anything you own, and even make a phone calls.
My phone was made by Apple, a company formed by Steve Jobs, Steve
Wozniak, and Ronald Wayne. The company
didn’t create the matter that
the phone is made of. The matter (the
silicon, aluminum, and other elements) existed long before Apple corporation
was formed. Apple basically organized
and built systems that took things that already existed but were in a form
without any significant value to humans (mostly sand), then processed these raw
materials, turned them into parts, assembled the parts into usable devices, and
employed thousands of programmers around the world creating software to make
the phones more useful.
Although a ‘company’ made the phone, real flesh and blood humans were
behind everything the company did.
The three men listed above went to government agencies in countries all
around the world and filed documents to create
the corporation. The corporation was
then a kind of artificial person, an entity that could make deals, sign
contracts, buy and own land, and enter into business arrangements as if it were
a real human being. The creators then
arranged to get financing to cover the cost of doing research about how to
actually build the devices they wanted to build. They hired thousands of people to design and engineer factories
that would take ordinary raw materials that are all around us and turn them
into parts that could then be put together to make computing devices, including
smart phones. They bought land in
hundreds of locations all around the world for the facilities they would need
to build the parts, assemble them, design and install the software, test the
products, package them, and get them to consumers. They hired attorneys to help them get the permissions from local
authorities to build these facilities.
They began construction on many different kinds of facilities, each of
which had a different function, with plans for it all to come together to
create the finished products and make them available to consumers all around
the world.
This was a mammoth undertaking.
Some of the factories required hundreds of millions of dollars in
materials and required millions of man-hours to build. They had experts coordinating
everything. Many of these people worked
so hard on the project that they didn’t have time for their families, for
enjoyment of nature, or for anything other than their work.
The first facilities they built worked well, but not as well as they
wanted them to work. They hired experts
to go over every single detail so they could find improvements; they then made
these improvements, often being forced to abandon facilities that didn’t work
well enough to suit them. In the end,
they wound up with a network of buildings that basically worked like this: at one end, loaders poured sand, rocks, and
other basic items of the earth that contained the required raw materials into
hoppers.
The materials through networks of machines, factories, and other
facilities until, at the other end of the process, finished, programmed,
ready-to-use smart phones in attractive packages came off the line, complete
with everything needed to make them work.
Most of the work was done by machines and the people involved in the
process are trying hard to eliminate any need for human hardship or toil on the
way. If they had their way, they would
have a single switch that they could flip that would cause automated machines
to start gathering sand and other materials in places where these materials
were fantastically abundant; the machines would then process them into packaged
and programmed smart phones which would come out of the network of machines
with no human effort needed for anything that happened.
A great many people worked very, very hard for many years to make all
this work. They took great risks: no one even knew if the first devices Apple
made (computers) were going to work at all:
It had never been tried. Still,
the founders used their own money and worked tirelessly, month after month, to
go through every detail. Early
investors poured hundreds of millions of dollars into the company, all without
knowing for certain that the devices would work or that, if they did, people
would be interested in using them enough to pay for them. They poured wealth, time, skill, talent,
effort into the project.
Why did people do these things?
You don’t have to think very long to answer
this question:
They did it for money.
The people who did these things went from
being ordinary people to being the world’s super rich. Their wealth brought them great power that
included the power to control the destiny of millions of people. As of the summer 2022, the company they
built is worth roughly $2,626,640,000,000,000 ($2.62 trillion).
How much is this?
The largest country in the world, Russia,
has a GDP of $1.774 trillion. This
means that if you bought everything produced in Russia, including all food,
fuel; if you rented all buildings, offices, and homes; if you purchased all
electricity at market prices, if you hired everyone who works to wash cars,
repair washing machines, and made jewelry, cut hair, and did anything whatever,
paying them the same amount they made in 2021, you would have to spend $1.774
trillion. The people who own the Apple
company could easily afford this. In
fact, after paying for everything produced in the largest country on earth in
an entire year, they would have enough money left over to buy all farmland in
the country often referred to as the ‘breadbasket of the world,’ the
Ukraine.
The
average price for farmland in Ukraine in the summer of 2022 $1,300 per hectare;
the country contains 42,000,000 hectare of farmland, so you would need $546
billion to buy it all. If you owned
the Apple company, you could sell it, use some of the money to buy these
things, and have more than a trillion dollars left over.
And, even after all that, you would have
enough left over to fully fund the following governments for a year: New Zealand, Colombia, Malaysia, Bangladesh,
Hungary, Vietnam, and Iran,
The people who did all of the things to make
these devices were very well compensated.
They got fantastic amounts of money for the things they did.
Before they even started planning, they knew
it was possible for people to incredible fortunes doing the things they wanted
to do. They could read about the vast
fortunes made in the history books.
Henry Ford came up with a new way of manufacturing cars and built the
massive Ford Motor Company; when he died, his estate was worth $188 billion in
2022 dollars. Ford built the first
affordable cars and showed that cars weren’t just luxuries for the very
rich: even working class people could
afford them. Andrew Carnegie built
massive steel plants. People had been
making steel for thousands of years, but it had been made in tiny backyard
facilities that could only produce small amounts; because everything was done
by hand, costs were very high. Because
of Carnegie, steel became so cheap that Ford could afford to make cars out of
it and sell them profitably at a price of only $260 each (this was the price of
his early model T cars). When Carnegie
sold his steel company in 1901, he got the $310 billion in 2022 dollars. John D. Rockefeller cornered the market on
oil. He bought entire fields and then
built transport facilities and refineries to turn it into useful fuels; he sold
the fuels through networks of service stations all over the world. When he died, his estate was worth more
than $400 billion in 2022 dollars.
George Westinghouse and Thomas Edison created our electric
infrastructure. Bell created the
telephone system. Marconi created
broadcast systems all around the world.
Watt created the steam engine.
The Wright Brothers made the first practical aircraft.
These people put together incredible
networks of facilities that make the wonderful things that make life easy and
comfortable for us today. Because of
them, the world can produce enough food and get it to the right places to feed
8 billion people. They all had
incentives to do the things they did:
they got rich doing them.
The people who created the smart phone knew
it was possible. It had been done.
The people who formed Apple created the
network of facilities that invented new products and organized everything. They got paid for this two different ways:
First, they got something called
‘dividends.’ The company pays out about
$1 per share on each of its 16.86 billion shares, so it pays out about $16.86
billion a year to shareholders.
Second, they got something called ‘capital
gains.’ They paid a certain amount for
the ownership interest they have in the company. If the company can make more things of value to the human race,
and sell them, the value of their ownership interest goes up. The amount they make from this depends on
the exact time they bought in. People
who ‘bought in’ at the very beginning (including those who formed the company)
and held their ownership interests for long periods of time made billions. Collectively, the owners made trillions of
dollars.
They created a network of facilities that
made things that made life better for humans.
They had powerful incentives to do this. They made so much money from their venture that money became meaningless
to them. They earned their way into a
kind of freedom that most people can only dream of.
Where Does the Money Come From?
The people who created this network of facilities got paid two
different ways.
First, they got something called ‘dividends’ of their stock. If a company is making money (selling items
for more than it pays in costs) the shareholders may vote (through their
elected ‘directors’) to pay out money to them to pass some of this money on to
the owners. These payments are called ‘dividends.’
Second, the market value of the shares they own can go up. If a company is growing and expanding its capability to make money, people will
pay more money for the stock in the company.
If you had bought a billion shares of Apple when it was still a fairly
small company with small revenues (say in 2015, when the split adjusted shares
were selling for $20 each), and held it until January of 2022 (when shares were
selling for $180 each) you would have made $160 billion.
Of the two benefits, the greatest, by far, is the benefit people can
get from buying low (or creating
a company, meaning buying for nothing at all) and selling high. In the same period, the company paid out a
total of $5.60 in dividends. If you
owned 1 billion shares, you would have gotten $5.6 billion in dividends and
made $160 billion, or more than 30 times more money, on the increase in the
value of ownership of the company.
Later, we will examine the amounts of money people can make by buying
and owning rights to things that we may call the ‘means of production’ in
different societies. Obviously, people
can’t make anything buying and owning these things in natural law societies,
because at least one thing that is necessary for all production, land, is not
ownable.
However, societies that don’t accept any ownability of the means of production are extreme societies (just as are
societies that accept all rights are ownable).
It doesn’t have to be all or nothing.
It is possible for a group of people in a position to form any kind of
society they want to decide they want certain specific rights to use the world
to be buyable and ownable. For example,
a group in such a position may decided they want to find a kind of ownership
that will allow the wealth that flows from the land that has nothing to do with
improvements or changes made by the current owner to NOT be ownable, but will
allow people to buy and sell rights to streams of value that don’t exist yet,
but which could exist if improvements were made.
The
people buying Apple between 2014 and 2022 were paying mostly for things they
expected to happen in the future. If
Apple had been an old and mature company with no real growth progress, its
earnings would have justified a price of perhaps $2 per share. You could say that about 1/10th
of the share price reflected the ownership of the ‘rights to the money that the
company was already making.’ The
majority of the price reflected the value of owning the rights to create and
implement new strategies and build and sell new devices and services that
rested on Apples existing platform.
What if there was some way to use markets to ‘subtract out’ the rights
to benefit from future innovation, invention, and discovery? A group of people in a position to form any
kind of system they wanted may decide to make the rights to future growth ownable, but not make
the rights to free cash flows that already existed when the people involved
(say the buyers of stock) became involved.
These people would buy and own the right to all benefits of their own
innovation and invention. But the
rights to get the ‘basic’ flows of cash the world generates would not be owned
or ownable.
We will see that there are many forms of ownership. It is possible to use a form of ownership
called ‘leasehold ownership’ (which already exists and is being used in many
places) to create a mix of ‘rights that are ownable’ and ‘rights that are not
ownable. We will see that we can adjust
a single variable to change the ratio by infinitely tiny increments, creating a
system that has the exact mix of ‘rights that are ownable’ and ‘rights that are
not ownable’ to bring the incentives we want.
The system discussed in Part Three is built on a very specific form of
leasehold which, as we will see, is already used in many places and already
extremely well understood. This system
transfers ownership of all rights due to the improvements, innovation,
invention, or other creative behaviors of the people who own these rights (own
something called a ‘leasehold title’ to the property or corporation) to the
owners, while leaving all of the rest of the value the world creates to be
unowned and unownable (in the same way all
value created by nature is unowned and unownable in natural law
societies.) This will lead to an intermediate system; it is not a natural law
society (because it allows ownability of rights to nature and the means of
production) and it is not a sovereignty based society either (because it does
not allow ownability of sovereign rights by any entity). It is somewhere between a natural law and a
sovereignty based society.
After
we look at this one system, we will understand three societies; two extreme
systems and one intermediate system. We
can then ‘fill in the gaps’ and come to understand the other intermediate
systems. This will allow us to compare
them all by comparing the different incentives created by the different
systems.
We
will see that there are only two things that can change about societies of
thinking beings with physical needs:
1. The way they interact with the physical
world that provides their needs, and
2. They way they interact with other members of
their own species.
Total
ownership (sovereign ownership) is a ‘way of interacting with the world: we can divide it into territories and fight
over who owns everything. Total
non-ownership is also a way to interact with the world: People in natural law societies interacted
with the world this way. Each different
partial ownership system is built on a specific way of interacting with the world.
Since the world provides all our food and everything else we need to
keep us alive, the system we choose for a ‘way to interact with the world’
determines what people have to do to meet their physical needs. This means it determines the incentives that are part of
societies.
After we have decided how we, the members of the human race, will
interact with the planet we live on, we have built the foundation for a society.
We may then decide what we want to build on that foundation and work out
the other variables. Obviously, if we
are building on a specific foundation (say a system that divides the world into
territories that fight over sovereignty for each square inch of the world) we
have different options for social
variables than if we have a system that has an entirely different relationship
with the world (say a system where no one owns any part of the world).
Social variables are the details
of society. The relationship with the
world is the foundation that
these variables will rest on. We can’t
really start building the social variables until we know what kind of
foundation we want to start with. (For
example, if we decide we want the world divided into territories that fight
over total rights to land, we are limited to societies that have governments
capable of fighting wars; these become the foundational social variables. Other societies, that don’t have these
powerful forces pushing for well-organized, well-funded, all out battles to
doom, have options for social variables that sovereignty based societies do not
have.)
If we want to understand the incentives that are inherent in different
societies, we need to understand flows of value. To make this easier, this book represents all flows of value with
flows of money. They all use money and,
in each system, one unit of money will be called a ‘dollar’ and will represent
the ability to buy one pound of rice.
The people who bought Apple shares in 2014 and sold them in 2022 wound
up with billions of dollars. Imagine
you had done what was suggested above, and made $160 billion from the
transaction. This money spends exactly
the same as money that people made working for $1 per hour on rice farms in
Indonesia, China, and India. These farm
workers made a total of $16,000 from eight years of work, eight hours a day, 50
weeks a year. You made $160 billion, or
10 million times the amount the workers made, without lifting a hand.
It is easy to see where their
money comes from: rice was sold for a
high price and they were paid out of the proceeds.
But where did your
money come from? If we want to
understand how societies work, we have to understand these things.
Unfortunately, the societies we inherited (territorial sovereignty
societies) are the incredibly complex. They have mind-boggling complexity and it
clearly doesn’t make sense to start an explanation of a complex topic (like
‘what determines the market values of the means of production like the Pastland
Farm and the Apple company?) in the context of the most complex society possible.
Starting with the next chapter, we will examine a society that is a
little more complicated than a natural law society, but far, far, simpler than
the societies we inherited. This will
allow you to see how this process works in a system that is simple enough to
understand how it works.
