10 Chapter Unsustainable Societies 2

 

As we proceed on our journey, we move to societies where the human race, acting as landlords of the world, get less and less income from the land. While this happens, we have more and more need for funding, because we have more and more problems. At some point, we will not have enough money to deal with our problems and we will have no choice but to start taking money away from people as taxes.

 

 

It may appear that we could easily deal with this issue by simply moving to a leasehold ownership system with a higher leasehold payment percentage. This is true. But we are moving to societies with ever lower leasehold payment percentages and explaining how they work. In systems with very low leasehold payment percentages (if we have decided that we won’t move to higher percentages, for some reason) the only way to increase the public income is with taxes.

The taxes take away some of the rewards for improvements, so they reduce the strength of constructive incentives. As we go through the range that needs taxes, the strength of constructive incentives will fall.

People will still be able to make money improving the world, but they won’t be able to make as much as before. They will still work to find ways to create value and drive up the free cash flows of properties, but they won’t work as hard as they were working before on these things. Rates of progress and growth will fall.

Factors That Reduce The Strength Of Constructive Incentives

Taxes are only one of several factors that reduce the strength of constructive incentives as we go through the next rage.

Increasing Instability

In the earlier systems, demand for items that were produced was pretty consistent, because the people who needed to buy things got the money they needed to buy them. In this example, which deals with Pastland during the time when it had a rice-based economy and the only property was the Pastland Farm, total production was $3.15 million a year. In the natural law society, $750,000 of this went to people who worked in production, leaving $2.4 million to go to the members of the human race. Everyone got an equal share of this $2.4 million, either in cash or in the form of services that benefited everyone. (We all voted in the elections so we decided how much we wanted in cash and how much in services.)

As we go downward through the range, the income shifts: the people who have saved money get more (as risk-free returns on their wealth) and people who don’t have savings get less. People with greater savings will get higher incomes than people with lesser savings, and people with the greatest amount of starting money will get enormous incomes, while people with no savings at all will get ever smaller incomes, and eventually zero incomes (unless they work).

Only a very few people are in a position to save an enormous amount of money, so only a few people will be rich and get the fabulous incomes that go to the rich. The great majority of the people will wind up with lower and lower incomes as we go through the destructive range.  Here is the problem:

People without money can’t buy the things they need. In order for the economy to work, there must be buyers to match with each seller. Often, very rich people simply can’t spend any more money than they are already spending, no matter what. You can only eat so much food. If you are already eating so much that you are morbidly obese, diabetic, and sick all the time from overeating, increases in your income are not going to cause you to eat more.

At some point, people without savings won’t be able to afford enough to keep them from starving to death unless they take jobs. At this point, they will have to work or die. Unfortunately, more need for jobs (to get income to avoid death) doesn’t translate to a higher need for labor in production. If the world is bountiful, only a small amount of labor is needed to collect its wealth. (This was the definition of bounty the book started with.)

The only way the people who now need jobs (but didn’t in the earlier societies) can get jobs is to take jobs away from people who already have them. They have to do this by offering to work longer and harder for the same money, do the same work for less money, or some combination of working longer and harder with lower wages. The people who already have jobs can’t afford to lose them in these lower societies: they will starve to death. They have no choice but to offer to work even longer and harder than the others, and for still lower wages, or they will die.

As we go through the destructive range, wages will fall very rapidly.

Wages started out in the natural law society at rates that allowed people to be fully paid for the unpleasantness, effort, risk, and other requirements of the job. For example, cleaning sewers of clogs is very unpleasant work, so sewer-cleaners got paid a lot, or they wouldn’t do the work. As wages fall, people with no skills will not be in a position to be picky. The wages for the most unpleasant jobs, which are generally those requiring the least skills, will plummet. They will get so low that, often, people with these jobs won’t be able to make enough money to keep them and their families out of poverty, no matter how many hours each day they work. The poor will start to get poorer, over the course of time.

As the rich get richer and poor get poorer, this system will be increasingly out of balance. The rich simply won’t be able to spend all of their money. The poor won’t have money to spend. Spending will collapse. At this point, people who have hired others to help in production won’t be able to afford to pay them and will have to lay them off. This reduces spending for three reasons:

First, people without jobs (and without enough of the free income from the land to survive on) can’t spend as much as they did before, no matter how much they need food and other things. They have no choice. They can only spend money they have.

Second, many people will not be able to afford enough to keep them and their families alive. They will start dying of poverty related ailments, like opportunistic diseases, hypothermia (because they can’t afford fuel or clothing to keep them warm), and starvation. As they die, their spending will fall to zero. (Dead people don’t spend any money.)

Third, people with enough money to get by will panic. They will see people starving to death around them and think that, if they spend as usual, they will run out of money faster and join the dead. As they panic, they will cut back their spending to create a larger buffer.

The lower spending leads to something that mathematicians call a ‘self reinforcing loop.’ Each reduction in spending leads to more unemployment, more poverty, more fear, and still lower spending. The system can continue to collapse until a very large percentage of the population has starved to death.

Book One went over the history of the world and showed that many of these total collapses have taken place. After the wars of conquest by the Roman Empire ended (because Rome had conquered all land geographically accessible), the Roman economy collapsed, and remained in a collapsed state until the renaissance, which occurred roughly 1,100 years later. (As we saw, the recovery was due to new war technology, in the form of gunpowder; if not for the need to compete in war, we may still be in the ‘dark ages,’ the name given to the collapse.)

Another collapse occurred in 1929 when the financial market collapsed. This collapse lasted until the final major county that held out for peace, the United States, entered the war and the war became the Second World War. Although the war killed more people than any other event in the recorded history of sovereign law societies, it was considered to be a success because the war, combined with the nuclear escalation that started in 1945, was able to pull the world out of this collapse, and get the systems functioning again. There have also been a great many minor collapses. These didn’t totally destroy the economies, but caused collapses in production, high unemployment and massive starvation among the lower classes.

The extreme instability of societies low in the range of possibilities prevents people from making improvements that they would otherwise make. If you can improve a part of the world to turn something with relatively low value (say dirt, which contains an average of 5.8% iron) into steel (which is roughly 98% iron), you have to make sure you can sell the steel before you can justify the expense of improvement. If people can’t afford cars, they can’t afford skyscrapers, can’t afford trains, planes, tools, or appliances that would be made out of steel, people who may consider investing in facilities to turn dirt into steel will probably not build them. In fact, even if people can afford things made out of steel at this time, people considering building facilities will hesitate to build if they think there is a good chance the economy will collapse before the facility has repaid their investment. The mere risk of instability reduces incentives to improve the world

 

War

 

At some point, the differential between the incomes of the wealthy and the incomes of the workers will become so great that the workers will rebel. They will try to overthrow the system. The system must be kept in place by force. The wealthy must get together into groups and set up a system to defend them from the poor. Each group will form its own ‘government,’ to administer that area.

The people in the governments will realize that they will have more power if they control greater areas. They will work together with the rich (who will become the owners of the conquered land) to conquer land that belongs tomother groups, when this land is not very well defended. Once they have armies, they will want to find ways to train these armies in situations that are as close to actual combat conditions as possible. They will find they can do this by engaging in ‘skirmishes’ with their ‘enemies,’ in something that we may think of ‘practice wars.’ These wars, like the United States wars in Korea and Vietnam and the Soviet war Afghanistan, are not intended to conquer territory. They are intended to stimulate demand for weapons, to make sure there will be plenty of weapons-making facilities available when ‘real’ war comes, and to keep the combat troops familiar with the mental states needed to win real wars, when they come.

The best situation, for a large nation, will be perpetual war, war that never ends. This will make sure the infrastructure needed for any supply of weapons that may be needed is always there, it will create the jobs needed to provide income to the non-rich, and it will destroy a large part of production, to help bring the enormous supply of goods close to the amounts the people can afford.

Here is the problem: Wars are risky. They increase the risk level of improvements. The people who improve never know for sure that their country may be ‘taken over’ and the conquering government may simply take their land away. They never know for sure if the war may increase demand for labor and drive wages up to levels that are so high the can’t afford to operate their facilities. Wars may also end and this frequently leads to very high unemployment rates (as both soldiers and arms workers lose their jobs) which may drive the economy into an unemployment-related recession.

If risks are higher, people need higher rewards to justify investing in improvements. An improvement that would have worked out (provided returns that justified the risks) during a time when the land that will hold the intended improvement is not in a war zone will probably not provided the necessary returns to justify the risk if the area is in a war zone. The risks associated with wars provide another reason that constructive incentives are weaker in societies that are lower in the range of possibilities.

 

Taxes

 

People have incentives to improve if the income they get to keep from an improvement is higher than the cost of the improvement. Remember that societies high in the range do not need taxes because the systems are set up so that the free cash flows the system naturally produce flow to the landlords of the Earth, the members of the human race. Nothing has to be taken away from people who have earned it, because nature is so incredibly bountiful and produces gifts. If this free wealth flows to the human race, acting as landlords of the Earth, they have no need to take anything away from anyone who works for it or does anything to deserve it.

In systems lower in the range, more of this free money flows to the wealthy, and less to the human race. At some point, we won’t have enough income to deal with the problems and will have to tax. It is, of course, possible to construct a tax system that will take only unearned wealth. But such a system is not practical in societies lower in the range, because the people who get the unearned wealth, the rich, are in positions of power and control. They control the governments that will take the taxes. They know they are better off if they are allowed to keep the unearned wealth, and make the workers and others who earn money pay the taxes. They can set up tax systems that make this a reality.

In our 21st century world, people whose income comes from unearned risk-free free cash flow can easily eliminate all tax liability, provided they are rich enough to afford a tax attorney. Although there are many ways to do this, one common option involves moving all of their wealth to a ‘tax haven country.’ (About half of nations on Earth are tax havens: they only tax earned incomes and don’t have any taxes on dividends, capital gains, interest, or other returns on wealth at all.) They can take a vacation to the ‘tax haven’ country and apply for and get a green card, meaning an official residency card. (Rich people automatically get green cards; in the United States, anyone with more than $1 million has to apply and it is always approved. Poor people have to go though a long procedure and most of them are not approved.)

Now they are a legal resident of a foreign country. (It doesn’t matter where they actually live. What matters is their legal residency.) They pay tax to their country of residence, not their country of citizenship or the place they live. Since their country of residence doesn’t tax unearned income, they don’t pay taxes on unearned income.

Note: even countries that pretend to have equal taxation offer huge tax breaks for unearned income. In the United States, a couple that earns their income pays taxes on everything above the first $10,000. The same couple doesn’t pay any income tax on unearned income until it exceeds $137,000 a year, and, of course, the largest tax in the United States, the social security tax, doesn’t apply at all to unearned income. These countries don’t want rich people to leave, because rich people spend more than poor people, generating more jobs, so they simply create tax breaks that make it very easy for rich to not pay any tax.

The huge majority of taxes in the 21st century world come from levies on money that people worked, taken on risk, or otherwise done something to earn. People who want to make improvements have to pay taxes on the materials they use to improve, on the labor, and on the supplies. They have to get permission (often at a cost higher than the cost of the improvements, payable to the government as a permit fee), and pay increased taxes on any increases that are specifically due to the improvements and therefore earned. They have to pay increased valuation taxes on the increase in value of the property (remember, earlier societies don’t have taxes and the leasehold payments never change, no matter how much the property is improved, as long as the property is owned by the same owner).

When we are higher in the destructive range, we have higher incomes from the land and smaller problems, so we don’t need very high taxes. But as we go down through the range of possible societies, we get into systems which will need higher and higher taxes. They will also be more and more unstable, more and more prone to war and other problems that reduce the rewards or increase the risks of investments that lead to increases in the amounts of value that flow from the world over time. The further we get through the destructive range, the weaker the constructive incentives become.

 

Destructive Incentives

 

As this happens, the rewards for destruction grow. The forces pushing toward war become ever stronger.

In the systems higher in the range, the human race had enormous power because we had an enormous income. We had nothing at all to gain from war in the societies higher in the range: war in these societies is nothing but sensless destruction of value that would otherwise benefit the entire human race. As we went through the destructive range, we got into systems where people needed and wanted war. The working class wanted war because war created the jobs that they needed and killed large numbers of others in their age and class who competed against them for jobs, forcing the supply of workers lower and driving up wages. The systems needed war to balance supply with demand: in peacetime the production facilities produced far more than people could afford to buy, leading to recessions and depressions (where unsold value caused market collapses). War destroyed fantastic amounts of value, reducing the supply, which had the same effect as increasing demand: more goods were needed, industry expanded, wages rose, profits rose, prices rose, government taxes increased, and everyone (except the relatively few people who were mutilated, lost their children, lost their homes and families, or were driven insane by the realties of war) was happy.

As we get into the range where war is essential to keep the society functioning smoothly (where humans must be killed to reduce unemployment, value must be destroyed to match the supply of goods with the spendable money, and the system msut employ large numbers of people doing things that don’t lead to the creation of anything valuable), we can expect the leaders to start to accept this necessity. They will start to devote a lot of effort to figuring out ways to create the state of mind needed for perpetual war, and will figure this out.

They will start taking children from their parents at an early age and indoctrinating the children to make them believe that people born in different sides of imaginary lines are different, with some imaginary lines creating people who are good and others creating people who are horribly evil monsters who are trying to destroy everything decent people care about. They must instill hatred in the enemies in the minds of the children, while instilling a love for the allies and people in their own country. They must make children believe things that are obviously untrue, like that their country has liberty and justice for all, where everyone is equal and we all have freedom ringing from every mountaintop.

Since logic and reason will quickly show the children that the things the schools teach children are not and can not possibly be true, children must also be educated in a process that we might call ‘doublethink,’ so that they won’t apply logic and reason to certain areas of existence. When it comes to making weapons, they have to be able to use logic and reason. But the reason that nations exist? The actual conditions relating to freedom, justice, liberty, brotherhood, and equally that they are supposedly building the weapons to defend? They can’t look too closely at that.

As we go lower in the range of possibilities, we would expect more and more intensive indoctrination methods, to instill the desired hatred and fear and make children think that they must inevitably submit to the realities of the system. The people who run the systems will do ever more research into ways to create the desired state of mind; to the extent that they are successful, the people will begin to think that there is nothing they can do to alter the realities of human existence.

This is not true. But if the people who run the systems have enough resources at their disposal, and use these resources well, they can convince nearly everyone that it is true. They can breed depression and misery and cause their people to give up all hope and take their role as cogs in the wheels of the giant military industrial complexes that they live in.

 

Minimally Sustainable Societies

 

As we go through this range, the human race, in their role as landlords of the world, wind up getting less and less automatic risk-free income from the land. At some point, we will get so little income from the land that we won’t have enough wealth to affect any important matters in our societies. The forces that push people to do things that lead to the creation of value are growing weaker while the forces that push people to do things that create hatred, conflict, violence, and destruction grow stronger.

You and I were born into societies where the rates of destruction of value (including ‘value’ in the form of breathable air, healthy food, safe water, and the value of knowing that your family will be safe from nuclear annihilation and that there is no pollution to give you cancer) exceed the rates of creation of value.

This is an unsustainable condition.

It is not possible for people to destroy more value than gets created forever. At some point, if they continue to destroy, some vital component of existence will no longer exist and the human race will not be able to survive. The societies we were born into are unsustainable. They do not meet the minimum conditions needed for the perpetual existence of the human race.

We have seen that some societies do not destroy more value than they create. Natural law societies, for example, clearly meet the minimum conditions needed for sustainable. We know this is true because billions of people lived in these societies for millions of years with no destruction that we can detect at this time.

If there are some societies in a range that do meet the conditions needed for sustainability, and there are other societies in the range that do not meet the conditions for sustainability, and the range is ‘continuous,’ (meaning there are no holes or gaps in the range), there must be a transitional system. There must be a system that marks the border between the two different types of societies. There must be a particular society that barely meets the conditions needed for sustainability.

Perhaps we may not be able to place the exact location of this particular society, but we know it is somewhere. If we continue going down through the range of possibilities, we will eventually get to this transitional system.

 

8 Chapter Eight Post Socratic Societies

 

In leasehold ownership systems, people who want to control parts of the planet privately must have some skin in the game. They must invest some money which they may possibly lose. The amount they invest in the property, at least initially (when the first become involved with the property), is called the ‘price.’

The landlords in the leasehold ownership system can decide how much people will have to invest (and possibly lose if they violate landlord rules or do things that reduce the value of the property). If the landlords choose a system that leads to higher prices, the people who want to control parts of the world privately have stronger incentives to manage risk (prevent anything from going wrong), to follow the rules of the landlords (to make sure they don’t violate their leasehold agreements and possibly lose money), and deal with the land in ways that make it hold its value (so they don’t lose money when they sell). All leasehold systems are based on the premise that humans (rather than invisible superbeings) are the dominant species on Earth, and therefore the lords of the land. If we, the lords of the land, want people to have incentives to manage risk, follow the rules we set, and improve the world, we can choose systems that lead to high prices. The higher the prices, the stronger incentives people will have to do these things.

There is, however, a limit to how strong we can make the above incentives.

We can’t make prices higher than ‘all the investable money in the world.’ Once the system runs out of money to invest in properties (once all investable money is invested), prices can go no higher. Although the exact point where systems will run out of money will vary by situation, this point will always come. In this example, we are assuming that we reach this point when the price of the leasehold for the Pastland Farm reaches $10 million.

We are at that point.

The price of the leasehold on the Pastland Farm can go no higher.

 

Decimal Price Leasehold Payment Leasehold Ownership System

 

The next system we visit has a price leasehold payment ratio of 1:10%, meaning that the leasehold payment offered must be exactly 10% times the price offered to bid.

This system won’t be able to work in the simple ways that the systems before us have worked, where markets determine prices and leaseholds, because there isn’t enough money in existence to pay the price that Kathy and other people in the market are willing to pay. It will function until the bidding gets up to $10 million. Then the market will break down and stop functioning. This broken down market will then start to do things that would appear to be very strange to people who had never seen these things.

These things won’t seem strange to us, however, because we are from times in the distant future when there was never enough money for markets to work properly, so markets never worked properly. We are from times when markets would simply collapse, as if they were having nervous breakdowns; where they would ‘get depressed’ and ‘go into depressions,’ where they would fire out of control leading to massive disruptions in events that cause the value of money to decline, in some cases to nothing (in events called ‘inflations’ and ‘hyperinflations,’ where they would ‘boom’ and ‘bust,’ and soar and crash, for reasons that even the most respected government and financial manipulators of economies can do nothing to stop.

The previous systems also require everyone, including the rich, to do something to get incomes: in all previous systems, the rich had to take on risk, protect society, and give up the use of their money to get returns. In all systems we visit after socratic leasehold ownership, the rich will get richer totally automatically, without any need for them to take on any risk, protect society, or do anything whatever in exchange for their increased risk. As a result of this reality of the societies we are about to visit, people will start to want to get money for rather strange reasons, basically to take it out of circulation so they can ‘be rich’ and therefore get richer. In the earlier systems, money was only useful to buy things. In all of the systems that we visit after this, money will become a tool that people can use to move them into a ‘leisure class,’ where they will be the rulers and everyone else will be their servants.

People will want very badly to get into this ‘leisure class,’ because the alternative, being in the ‘working class,’ makes them effectively slaves. In the systems we are about to visit, money will begin to play a new role, and people will begin to do truly horrible things to get more of it. This will lead to new incentives that didn’t exist before, including incentives to destroy parts of the environment to get slightly more money (more money than they can make dealing with the land in sustainable ways). We will start to see a new kind of incentives that we haven’t see in any of the systems before, incentives that actually encourage people to do things that harm the planet and the human race as a whole.

The Auction

 

Like always, Kathy just wants to be a farmer. She isn’t concerned with the numbers she will enter into the boxes, she cares only about how much the farm produces, how much of this she will pay in costs (including her yearly payment to the bank, which will include both her leasehold payment and her interest payment) and how much she will be left with after everything is done. If she can end up with $50,000 for her self running the farm, she is wiling to run it; if not she isn’t. She goes to Sally and explains this. Sally prints up a ‘cheat sheet’ that will help her see the amount she will have to put into the boxes on the bid form to make her payment exactly equal to $2.4 million at the offered interest rate of 4%.

Cheat Sheet for Socratic ownership (10x price/leasehold payment leasehold ownership)
Price (amount borrowed)	Leasehold payment (10% of price)	Interest on mortgage loan	Total mortgage payment including interest and leasehold payment
$ 1,000	$ 100	$ 40	$ 140
$ 10,000	$ 1,000	$ 400	$ 1,400
$ 100,000	$ 10,000	$ 4,000	$ 14,000
$ 1,000,000	$ 100,000	$ 40,000	$ 140,000
$ 5,000,000	$ 500,000	$ 200,000	$ 700,000
$ 7,500,000	$ 750,000	$ 300,000	$ 1,050,000
$ 10,000,000	$ 1,000,000	$ 400,000	$ 1,400,000
$ 12,500,000	$ 1,250,000	$ 500,000	$ 1,750,000
$ 15,000,000	$ 1,500,000	$ 600,000	$ 2,100,000
$ 17,000,000	$ 1,700,000	$ 680,000	$ 2,380,000
$ 17,114,286	$ 1,711,429	$ 684,571	$ 2,396,000
$ 17,134,286	$ 1,713,429	$ 685,371	$ 2,398,800
$ 17,142,286	$ 1,714,229	$ 685,691	$ 2,399,920
$ 17,142,856	$ 1,714,286	$ 685,714	$ 2,400,000
$ 17,142,857	$ 1,714,286	$ 685,714	$ 2,400,000
$ 17,142,858	$ 1,714,286	$ 685,714	$ 2,400,000
$ 20,000,000	$ 2,000,000	$ 800,000	$ 2,800,000
$ 25,000,000	$ 2,500,000	$ 1,000,000	$ 3,500,000
$ 50,000,000	$ 5,000,000	$ 2,000,000	$ 7,000,000

Kathy looks down the column on the extreme right. She is looking for the numbers that will make her mortgage payment exactly $2.4 million. Sally has highlighted this figure in green for her. To have this exact mortgage payment, she will have to offer $17,142,857 as a price and $1,714,286 as a leasehold payment.

She goes to Sally, who represents the investors. She says that it looks like she will have to borrow $17,142,857 to buy the leasehold for the Pastland Farm.

Sally says she would love to help, but she can’t. She has talked to all of the people with money to invest on the Earth. Altogether, the maximum she can raise is $10 million.

Sally says that no one, not Kathy or anyone else, can pay more than $10 million for the leasehold title to the Pastland Farm, because this is literally all of the money that there is. Sally tells Kathy that Kathy can bid up to $10 million, and no more. She won’t have to worry about being outbid if she does this, because everyone faces the same limit. Once the price gets up to $10 million, no one can bid more.

Bribery: the Risk-free Interest Rate

 

Kathy sees an opportunity for a real bonanza:

The price can’t go above $10 million.

Since her leasehold payment is exactly 10% times the price (this is the ratio that the landlords of the Earth have set, and the only ratio that bids the computer will accept can have), her leasehold payment can’t be higher than $1 million. She would be willing to give the human race more money than $1 million, but the mechanical system that the human race has created makes it impossible for her to give us more. (We, the landlords have set the ratio of 1:10%. Since the money supply is limited, we can only get 10% of the money supply, or $1 million a year, from this property, no matter how much money the people bidding would be willing to give us. We have created a mechanical constraint that makes it literally impossible for us to get the full amounts people who control property would be willing to pay us.)

Kathy will also have to pay the investors. Their interest will be 4% times the price (the amount she borrows) so she will also pay them $400,000 a year.

Altogether, her total mortgage payment will be $1.4 million a year, $1 million to the landlords and $400,000 to the investors.

The farm produces a free cash flow of $2.4 million a year. After she pays out $1.4 million of this, she will have $1 million in free money left over. She will be able to keep this $1 million (or at least she thinks this will happen; it won’t, as you will see below; the extra money will be divided among all rich people on the planet as risk-free interest). This will be a kind of bonus: she will get it (or at least she thinks she will get it) in addition to the $50,000 she makes running the farm.

She only wanted to be a farmer. Now, she sees that, if she can buy for ‘all the money on Earth (a price no one on Earth can beat) at current market interest rates, she will end up being a farmer and getting a sort of free bonus of $1 million a year. (At least this is what she thinks.)

All she has to do (again, she thinks) is be there the very first second the auction opens and enter a bid of $10 million as a price and $1 million as a leasehold payment.

 

Like always, the auction will take place over the internet and last 90 days. Kathy enters the bid the very first second the auction opens and no one bids more.

But I am there in Pastland and I know how I can win this prize and get the $1 million a year in free money for myself, if I can do some things that may appear to be dishonest, but which are perfectly acceptable in the societies that you and I now live in (sovereign law societies).

Here is what I will do: I will go to Sally and ask her for a ‘closed door’ meeting. I will offer Sally a kind of bribe if she will agree to cancel Kathy’s loan and not make the loan to Kathy. When Kathy’s loan is canceled, she will have to cancel her bid, because she can’t afford to pay. I will then enter the same bid myself and win.

In order to make this trick work I must convince Sally that she and I will be conspiring to do something dishonest. I need her to think this, for a very important reason: I don’t want her to tell Kathy or anyone else about it. If Kathy realizes that I am offering this ‘bribe,’ she will quickly realize that she can offer a higher bribe; if she does, this will force me into a bidding war that will seriously reduce the amount of free money I get.

In order to get Sally to keep her mouth shut, I use all kinds of catch phrases like ‘under the table’ and ‘just between you and me’ and ‘paid in cash in a briefcase, at a location that you name.’ This is a trick that many con artists use when they are selling phony jewelry or watches and they want the buyers to think that the items are real and stolen, rather than worthless replicas.

But not everyone is foolish enough to fall for this kind of trick. In this case, let’s say that Sally is smarter than this. She is from the future, as am I, where these bribes are not only not considered to be illegal, they are common, ordinary, and offered in formal markets. (A few people think they are dishonest. Jesus Christ, for example, is reported to have gotten extremely angry when he learned about this process. He actually took whips to ‘usurers,’ a common term that refers to people who charge more for interest than they need for the risk of the loan—in the courtyard of Herod's Temple. Jesus clearly thought usury was dishonest. Most of his modern followers don’t appear to think this, however, as a large percentage of the people who offer, pay, and charge risk-free interest rates are Christians.)

After I tell Sally that I want to offer her a ‘bribe,’ paying her ‘under the table’ in the form of ‘cash delivered to a location she specifies,’ Sally opens her door and calls in her secretary, while I am still in her office. She says to send an email to Kathy and others who have applied for loans, informing them of the offer to pay a 1% interest rate, and telling them that they will have to either match or beat my offer if they want to get the loan.

Sally also asks her secretary to email the investors. Sally is not going to steal the extra risk-free money from the investors, she is going to share it with them. It is their lucky day: they are going to get more money than they need for taking on risk. Interest rates are going up.

 

Why Risk-Free Rates Can’t Exist In The Societies In The ‘Constructive /Non-Destructive Range’

 

So far, the investors have only been charging the interest rate they needed to justify the risk of the loan. There is a practical reason that this is all she could charge before. In fact, they would not have been able to get more than the minimum they need for taking on risk for a mechanical reason. Before I explain how the risk-free rate will end up, I want to go over the mechanical reason that risk-free rates can’t exist (can’t be anything other than 0%) in all of the societies above socratic leasehold ownership in the range of possibilities:

In all of the societies, the demand for investment money was lower than the supply of money that people wanted to get invested. This meant some people had money they wanted to invest, but could not invest, period. If any investors asked for more than the minimum they needed to justify the risk of the loan, Kathy wouldn’t have borrowed from them, she would have borrowed from people who offered lower interest rates (only the 4% they needed for risk).

To show this, let’s go back to the virtual rental leasehold ownership system, which could not set a price for the leasehold that was higher than 24¢.

The leasehold payment was 1,000,000,000% times the price. An additional 1¢ for the price would require bidders to offer an additional $100,000 a year as a leasehold payment. This would not be affordable. Because the price is tied to the leasehold payment, and the maximum affordable leasehold payment is $2.4 million, the price can’t be higher than 24¢.

If the price couldn’t be higher than 24¢, the total demand for investable money couldn’t be higher than 24¢. (This is, in this example, the only private property, and therefore the only investable property on Earth. The total demand for investment capital is exactly equal to the price of this particular leasehold.)

But a great many people have savings that they would like to invest, provided they get the 4% they need for risk. In fact, by the assumption above, a total of $10 million in investment money is available. Only 24¢ of this will actually be invested. The other $9,999,999.76 will not be invested.

Say that Kathy asks you for the loan of 24¢ to pay the price. You say that you need an interest rate of 100% a year. I hear about this and tell Kathy that I will be happy to make the loan for 50% a year. Other people hear about it. They know they need 4% to justify risk and would like to get more. But if they ask for more, they know they will be underbid by others who are willing to accept only the minimum they need for taking on risk. As a result, someone will eventually offer the loan to Kathy for 4%. That person will get her money invested; the rest of the people will not get their money invested.

As long as the price is lower than $10 million, there will be people who want to invest their money but can’t get it invested at all. In the ‘double price leasehold ownership system,’ for example, we saw that the leasehold couldn’t sell for more than $4,444,444.44. People would like to invest $10 million if they can get paid for taking on risk, but only $4,444,444.44 will actually get invested. If you ask for more than the 4% you need for risk, Kathy will simply tell you ‘no’ and find someone else to make the loan to her.

This means that, as long as the price is less than $10 million, there can’t be a risk-free rate.

In all leasehold ownership systems above socratic leasehold ownership in the Road Map of Possible Societies, the market set lower prices for the leasehold than $10 million. That means that, in all societies above socratic leasehold ownership in the Road Map of Possible Societies, risk-free rates can’t exist, for practical mechanical reasons.

 

The Market Risk-free Interest Rate

 

After I make my offer, Sally sent emails to Kathy and the other people who may be interested in buying the leasehold to the Pastland Farm letting them know that she will only make the loan to whoever offers the highest interest rate on the loan.

I have offered a 5% rate, reflecting a 1% risk-free rate. If Kathy offers a 2% risk-free rate, her total rate offer will be 6%. She will pay the investors a total of $600,000 (6% times the $10 million in investable money. She will have to pay this plus the $1 million leasehold payment. (10% times the price of $10 million,) so her total mortgage payment will be $1.6 million. Remember, she is willing to pay out all of the free cash flow as a total mortgage payment. She would like to get the rights to the farm for less than a $2.4 million total mortgage payment, and will be very happy if she can win the auction for the interest rate under the terms above, because she will end up with the $50,000 she has needed and gotten in every case so far for the work she does, plus another $800,000 in free money. (She will get the free cash flow of $2.4 million, but only pay out $1.6 million of it, leaving her with $800,000 a year for herself.)

But I am still in the bidding. I offer a total interest rate of 7%, reflecting the 4% investors need for risk, plus a risk-free of 3%.

Kathy can easily beat my offer. If she pays an interest rate of 8%, her total mortgage payment will only be $1.8 million, far less than the $2.4 million she is willing to pay. She offers more. I can offer still more. Eventually, I offer a 13% interest rate. Kathy can offer 14%. At this interest rate, her total mortgage payment will be $2.4 million a year, $1 million as a leasehold payment to the human race, plus $1.4 million, in interest to the investors.

The interest rate must end up at 14%. This gives the investors the 4% they need for taking on risk, plus a 10% risk-free interest rate. (About the risk-free rate in effecting the early 1980s.) The investors will get $400,000 a year for taking on risk plus another $1 million in risk-free interest. The human race will end up with $1 million in income from the land also. Because this $1 million is backed up by the $10 million we will have in reserve after the auction, our income is still risk-free.

Let’s step back and look at the difference between the socratic leasehold ownership system and the ‘tenth of price leasehold payment leasehold ownership system.’ In socratic leasehold ownership, the entire $2 million in risk-free income from the land went to the human race. In the ‘tenth of price leasehold payment leasehold ownership system’ the human race splits this risk-free income with the investors. We get $1 million, they get the other $1 million.

Kathy’s situation, as owner of the rights to the farm, is the same in both societies. In both cases, she pays out $2.4 million a year as a total mortgage payment. The difference between these two societies is what happens to this money after she pays it out. In one case, the investors get enough to justify the risk they take on, but no more, leaving all of the risk-free income from the land to go to the human race. In the other case, the investors get half of the risk-free money and the human race gets the other half.

The human race could have gotten the entire risk-free portion of the free cash flow if we had wanted to do this. We could have done this simply by making the leasehold payment something lower than or equal to 20% of the price. In all societies with leasehold payments that are less than or equal to 20% of the price, there will be enough money to make the system work, without any need to have a risk-free rate. If there is no risk-free rate, the investors don’t get any risk-free money; they only get enough to justify the risk they take on.

But in this example, the human race has decided we don’t want the entire risk-free free cash flow.

We could have it by asking for it.

But we don’t want to ask.

Instead, we have set a price/leasehold payment ratio that makes it mechanically impossible for us to get more than $1 million a year from this land. (We can’t get more than 10% times the price the buyer pays for the leasehold and, since its price can’t be higher than $10 million, we can’t get more than 10% times $10 million or $1 million a year). No matter how much the land produces as a risk-free free cash flow.

 

Comparing Leaseholds

 

The chart below is designed to help you see the big picture, and what will happen if the landlords of the Earth (the members of the human race) choose different price/leasehold payment ratios that that lead to leasehold payments that are 20% or below times the price.

Risk-free free cash flow: I need number to refer to the maximum income from the land that the human race can get that coincides with the maximum in security and strongest possible constructive incentives. I will call this the ‘risk-free free cash flow.’ Under the assumptions we have made here (that the money supply limits the price to $10 million), the risk-free free cash flow is $2 million a year. This is the maximum in free income the human race can get in Pastland that is consistent with the maximum in security the human race can get and the maximum in constructive incentives that the human race can get.

In other situations, say if we were to choose a leasehold ownership system for the 21st century, the money supply may be different and this would mean that a different price/leasehold payment ratio may produce the maximum in risk-free income for the human race that is consistent with the highest prices. But given the assumptions here, the maximum we can get is $2 million, so if we get some amount less than $2 million, we are not getting the full risk-free free cash flow, we are sharing this totally free and totally unearned money with rich people (investors). We get something for nothing but they also get something for nothing.

The first row represents socratic leasehold ownership societies. Note that the price has reached its maximum in this society: it is equal to the total investable free cash flow and can’t go higher, because there is no more money. In fact, the price of the leasehold is as high as it can be in all of the societies on the chart.

The human race basically decides what percentage times this price we want. If we ask for 20% we get the entire risk-free free cash flow of $2 million a year. This leaves $400,000 a year for the investors who manage risk. As we have seen, people will only voluntarily take on risk if they are compensated for taking it on. All production is risky but, over the last few thousand years, people have learned how to manage the risks of farming quite effectively, so they are able to manage all manageable risks, set aside reserves to cover unmanageable risks, and still be able to make money over the long term on farm investments if they can get 4% returns on their money. The investors are happy with this situation: they are being paid the exact amount they need to justify the risk of this particular investment.

Since they get 4% times the price and we get 20% times the price, we don’t have to do any really complicated math to determine what percentage of the total free cash flow we get: The market always works in a way that makes the total mortgage payment equal to the free cash flow. (Kathy can afford to pay out all except the money she needs to compensate herself and other for farming, or the entire free cash flow. Other bidders can do this also and will compete against her, forcing her bid up to this level.) Since we know that the total mortgage payment will equal the free cash flow, and we know that a total of 20/24^th of this money will go to the landlords of the planet (the members of the human race), we know that WE will get 20/24^th of this, or 83⅓% of this money (rounded off to 83% in the chart). We this leaves the balance of 16 2/3^rd to go to the investors as returns for their risk.

Table A1.1
leasehold payment as ratio of price	Price	leasehold payment	percent of bounty to human race	percent of bounty to investors	total to investors and human race	amount investors get above the amount they need for risk
20%	$10,000,000	$2,000,000	83%	17%	100%	$0
19%	$10,000,000	$1,900,000	79%	21%	100%	$100,000
18%	$10,000,000	$1,800,000	75%	25%	100%	$200,000
17%	$10,000,000	$1,700,000	71%	29%	100%	$300,000
16%	$10,000,000	$1,600,000	67%	33%	100%	$400,000
15%	$10,000,000	$1,500,000	63%	38%	100%	$500,000
14%	$10,000,000	$1,400,000	58%	42%	100%	$600,000
13%	$10,000,000	$1,300,000	54%	46%	100%	$700,000
12%	$10,000,000	$1,200,000	50%	50%	100%	$800,000
11%	$10,000,000	$1,100,000	46%	54%	100%	$900,000
10%	$10,000,000	$1,000,000	42%	58%	100%	$1,000,000
9%	$10,000,000	$900,000	38%	63%	100%	$1,100,000
8%	$10,000,000	$800,000	33%	67%	100%	$1,200,000
7%	$10,000,000	$700,000	29%	71%	100%	$1,300,000
6%	$10,000,000	$600,000	25%	75%	100%	$1,400,000
5%	$10,000,000	$500,000	21%	79%	100%	$1,500,000
4%	$10,000,000	$400,000	17%	83%	100%	$1,600,000
3%	$10,000,000	$300,000	13%	88%	100%	$1,700,000
2%	$10,000,000	$200,000	8%	92%	100%	$1,800,000
1%	$10,000,000	$100,000	4%	96%	100%	$1,900,000
0%	$10,000,000	($0)	0%	100%	100%	$2,000,000

If you go down one line, to the system where the computer is set to only accept bids where the leasehold payment is 19% times the price, the price doesn’t change.

The price can’t go up because there is no more money; it can’t be lower than $10 million because at least two people (Kathy and one other) are willing to go up to $10 million. If the price can’t be higher or lower than $10 million, the price must be exactly $10 million.

However, the human race has chosen a price/leasehold payment ratio which makes it mechanically impossible for us to get more than $1.9 million from the land. The risk-free free cash flow is higher than $1.9 million. We could get the entire risk-free free cash flow if we want it, merely by setting the price/leasehold payment ratio at 20%. But, for some reason, our people have voted for a system that causes some of this free money to go to people with money as risk-free returns on their money.

As you go down through the numbers on the table, you will see that the total risk-free free cash flow is always $2 million a year. But we only get part of this money. The lower percentage we ask for, the less we get. If we get less, the money doesn’t disappear. It just goes somewhere else. As you can see, if we give up $100,000 a year (by choosing a ratio that is 1% lower), we are basically transferring $100,000 a year to people with money.

Remember, WE are the landlords. We make the rules. We can make any rules we want. If we want, we can make rules that cause all of the earned money to go to people who earn it (including the money that the investors earn by managing risk) and send all of the rest, the unearned money or risk-free free cash flow, to us, the landlords of the world, to share among our members. But if we want to, we can make rules that benefit a small percentage of our population (people with money to invest), giving them some unearned money also. If we decide we want a price/leasehold payment ratio that makes the leasehold payment less than 20% times the price, we are basically deciding that we want the rich to get richer.

How fast do we want the rich to get richer?

We can decide this also.

If we set a price/leasehold payment ratio that leads to a leasehold payment very close to but less than 20% times the price, we are saying we want the rich to get richer at a slow rate. If we choose a ratio that is significantly lower than 20%, we are saying we want them to get richer at a faster rate. If we want the rich to get richer at the fastest possible rate, we can choose a ratio of 0%, ending up with the final system we will visit, a sovereign law society (the type of society that you and I were born into and have inherited from previous generations).

 

Banking Realities: Why The Risk-Free Free Cash Flow Must Go To Rich People

 

In the above example, Kathy may have been dishonest. She may have not even told the investors about the risk-free payments she was offered, and kept them for herself. In early years of banking, bankers often did this: they arranged to borrow money from investors for the amount the investors needed for risk, then loaned out the money for whatever the market would bear, and then kept the rest of the money. In Book One, Forensic History, we saw that the Medici Family started with a single little bank in Rome and ultimately became the administrator of the Holy See, the financier to the Holy Roman Emperor and the Roman Catholic Church, as well as the key financier of virtually all nations in the Roman Empire: all of the money of the empire went through them. The bank (the Medici family) controlled funding for governments so they basically determined which side they wanted to win each war, and made this happen by providing that side with money to buy weapons and pay troops.

As we saw, the Medici bank funded the entire renaissance, deciding what businesses would exist by deciding what businesses would have funding. We saw that it wasn’t actually Christopher Columbus who ‘discovered America,’ but Lorenzo D’Medici, who put together and funded the expeditions of Americus Vespucci (the first European expedition to land on the mainland of America; remember that Americus Vespucci went to school with Lorenzo and worked for the Medici bank when he made his voyages.) The Medicis took in money for the low rates that investors were willing to accept, and made their loans at the much higher interest rates that borrowers were willing to pay. Other people had to work for their income. The Medicis got the risk-free free cash flow and became the forerunners of the entire world banking system as it exists in the 21st century.

As long as there is only one bank, this is possible.

For practical purposes, between the time the renaissance began and the early 1500s, there was one bank.

However, if there are at least two banks, and they have to compete with each other, the bankers will not be able to keep the entire risk-free free cash flow they get: the market will force them to share it with everyone with money, in equal shares.

Let’s look at the way this works, starting with the simple system in Pastland:

To start, there is only one bank. Let’s call it ‘Sally’s bank.’

In the early systems we visited, Sally had been forming investment pools, paying investors 4% a year for the risk they take on.

In the tenth of price leasehold payment leasehold ownership system, she sees that people are willing and able to pay much higher interest rates, in that case 14%. Rather than forming an investment pool and sharing this money with the investors, she decides to open a bank instead. This bank will take in money from investors at 4% for farm loans, transferring the risk of these loans to the investors (I will explain how this is done below). She will then lend out the money at 14%, and keep the 10% times the total invested money, which works out to be $1 million a year, for herself. She obviously becomes the richest person on Earth immediately.

But say that someone else sees what is going on and decides to compete with Sally’s bank.

This takes place before the leasehold has sold, while bidders are still trying to put together their money for the sale.

Ned announces that he will pay people who put money into his bank 5% a year and, in addition to this, he will take on all risk of the loan, so they will get their money risk-free. (I will explain how bankers do this below.) People with money can either put their money into Sally’s bank, and get 4% with risk, or they can put it into Ned’s bank, and get 5% without risk. Obviously, it doesn’t make sense to accept 4% with risk if you can get 5% without risk. All the money moves to Ned’s bank. Sally can’t make the loan to Kathy or anyone because she doesn’t have any money to lend.

But Sally is not through. She can easily afford to offer 6% without risk.

She knows that the total supply of investable money is $10 million. She knows that Kathy and other property buyers are willing to pay and can afford to pay 14% interest to get this money. (We saw this above.) She can hire people to manage risk on behalf of the bank and pay a total cost for risk management of 4% a year times the $10 million, or $400,000 a year. (We saw that this is the cost of managing risk in the ‘risk management’ section above.) If she pays 6% a year to depositors without risk, her total expenses will be $1 million a year; she will get $1.4 million a year in revenues, so she will end up with $400,000 to keep for herself, without risk (the costs of managing risk are already paid), without effort on her part (she hires people to do all of the work) and without her having to put up any of her own money (all of the money that is at risk comes from depositors).

Obviously, she will offer the depositors 6%. When she does, the people will take their money out of Ned’s bank and put it into Sally’s bank. Ned won’t have money to loan so he will have to cancel his loan agreements. Sally will have money to loan so she can start signing letters of intent to provide the money.

Of course, Ned will realize he can steal the business for himself by offering 7% as a risk-free income for investors. Sally will realize she can offer more and offer more. The two banks will compete against each other by offering higher risk-free interest rates to people who put money into the bank. Eventually, when the bidding is over, the risk-free rate offered will be 10%, or some figure so close to 10% that any difference isn’t important for practical purposes.

Although bankers can be and often wish to be dishonest, and are able to succeed at being dishonest in many ways, they are generally not able to keep the risk-free income that flows from the land for themselves.

They want it, of course. Who doesn’t want a totally unearned and totally risk-free income with out effort or any need to invest any of their own money?

If they can keep markets from developing (as the Medicis were able to do for more than a century) they can succeed at keeping the free money. But once markets exist, the bankers will be forced to compete with each other by offering anyone with money who puts it into the bank some risk-free interest on this money.

In the ‘tenth of price leasehold payment leasehold ownership system,’ the risk-free interest rate must rise to 10%. No one has to take on any risk or do anything to get this money. They are not getting paid for anything they do, they are getting paid for something they have: money. In this system, the rich get richer, totally automatically, without risk and without effort. The banks take on all of the risk (as is explained below) and transfer the risk-free money to depositors without the depositors having to do anything or worry about possibly losing their money.

The rich get richer. This happens totally automatically.

Since they get paid a percentage of the riches they already have each year, the richer people are to start with, the richer they become over time. The flow of money that goes to them comes from the bounty of the world. The more bountiful the world is, the faster the rich get richer.

 

Why Do We Care if the Rich Get Richer?

The Beginning of Destructive Incentives

 

There are certain natural rates of growth of resources. If money grows faster than resources, people are financially better off to have money than resources. It is possible to turn resources into money by extracting and selling the resources. If money grows faster than resources grow, it is profitable to turn resources into money, even if there is no current demand for resources.

For example:

In areas with abundant rain like the Pacific Northwest of America, trees grow at a rate of about 2% a year. This means that trees add about 2% of their bulk each year that passes, in the form of growing lumber. Clearly, it would not be possible to collect a yield from a growing forest that is higher than 2% a year, because that is all the additional lumber that exists.

Say that you are in a system that has no risk-free interest rate at all. You can’t get free money just by having money. Your risk-free return on money is 0%. True, you can get 4% by taking on risk, but you need the entire 4% to cover the risk of the investment. You are not getting anything for free.

If you control a forest, you are far better off to treat it non-destructively, and manage it for the highest sustainable yield you can get. For example, you may hire professional foresters to go through the forest, mark the most mature trees for harvesting (selecting first any trees that may have diseases that slow their growth, and then any trees in crowded areas that can’t grow as fast due to shortages of nutrition in the crowded areas), and remove them. Each year you do this, you will get an income from the forest. Since you only remove crowded or diseased trees, each year you harvest the lumber, the forest gets healthier. You make money, people who want to buy wood can buy it, the human race gets a healthier world, and everyone is happy.

Now let’s say that you move from the above system (which might represent a socratic leasehold ownership system) to a system that has a risk-free interest rate of 10% (which might represent a ‘tenth of price leasehold payment leasehold ownership system’).

You have to compare the pathetic return you get managing the forest sustainability (less than 1%) with a totally automatic, totally risk-free 10% return that you can get from money. Obviously, you are financially far better off to have money and collect the 10% return. You can get money to collect this return on by cutting down trees and selling them. The more trees you cut, the more money you have to collect returns on. The faster you cut them, the sooner you get the higher returns and the more money you get. If you leave trees, you collect the pathetic return (less than 2% a year) that the trees generate, rather than the magnificent return you get on money. If you leave even a single tree alive, you are losing money. You can get the maximum in money by cutting down every single tree. Your incentives are to destroy the forest as thoroughly as you possibly can.

If you wait to destroy, you wait to start collecting your magnificent returns. A single day of delay costs you money. Your incentives are not just to destroy the forest entirely, your incentives push you to destroy the forest as rapidly as you possibly can.

All property ownership systems that send less than 20% times the prices of properties to the human race each year must have risk-free rates, at least during the times that markets allow them to operate well enough to function. (We will eventually get to societies that are so unstable they can collapse entirely. During these collapses—like the ‘Great Depression that started in 1929 and ‘Great Recession’ that started in 2008, risk-free rates can fall to zero, but if the system is not in a state of collapse risk-free rates must be above zero.)

In these systems, money grows. The rich get richer, without risk and effort.

If money grows faster than resources grow, people can get extremely rich by destroying resources.

Not everyone will give in to these incentives. Some people care about the world so much they won’t destroy it, no matter how much money they can make destroying. But the control of the resources will eventually change (people die) and eventually someone will come along who gives in to the incentives. This is a certainty: if systems are structured so that the rich get richer totally automatically and without risk, environmental destruction is a certainty. It will and must happen.

 

The Strength Of Incentives

 

If people can make money acting a certain way, they have incentives to act that way. If they can make more money acting a certain way, they have stronger incentives to act that way. If we can measure the amount of money people make from a certain specific destructive act in different societies, we can calculate the strength of the destructive incentives in these different societies with a great deal of precision.

Consider the forestry example above. Let’s say that, if deal with the forest in a sustainable way, harvesting no more than nature provides each year, and using whatever methods lead to the healthiest possible forest and therefore the highest sustainable yield, you can get a total of 1% yield on the forest. (The trees grow at 2% but you use half of this money to cover the cost of management and harvesting).

The ‘sustainable forest’ yields 1%.

Say that the risk-free interest rate is less than 1%. Clearly, it doesn’t make financial sense to destroy the forest to get a lower yield than you get from a healthy forest.

Now say that the risk-free rate is higher than 1%, let’s say 2%. You can make twice as much money destroying the forest than keeping it healthy. Many people would do this, but most people I know would not: they love forests and don’t want them destroyed. If they can only make double the income from the forest destroying, they will keep the forest healthy anyway.

Now let’s say that the risk-free rate is 5%. To put some numbers on it, say that the total market value of the lumber in the forest is $1 million. Keep the forest healthy and you get $100,000 a year in income from it forever. Destroy it and you get $500,000 a year, also forever, without risk, without effort, and without having do a single thing ever.

Perhaps a lot of people would still choose to keep the forest healthy. But something may come up that will force them to destroy it. Say that they have a family member get sick and in need of expensive treatment. Keep the forest healthy and they won’t have enough income from it to provide the treatment. Their loved-one will die. Destroy the forest, and they can save their loved ones (or at least so the doctors say: Doctors are normal too and this means they are self interested and have been known to give people false hope to get their money). Perhaps you meet someone, have a relationship, and then find your lover has maxed out your credit and can’t pay on the income you get from the healthy forest. If you can quintuple your income merely by signing some documents (authorizing the destruction of the forest), you might be tempted.

The higher the risk-free interest rate, the more money you can make destroying, the stronger your incentives to destroy. Perhaps there is no amount of money that would induce you personally to destroy the forest. But you aren’t going to live forever. You can’t control what happens after you die. If the incentives are there, whoever ends up with the forest after you die may give in to the incentives.

You might think you can save the forest by turning it over to a charity that saves forests. But you can’t be sure this will happen either. Often, these charities trade land in order to make the land they protect contiguous, and therefore easier to protect. They may sacrifice your forest in exchange for another piece of land. Charities also have to worry about financial realities. Sometimes, they need money for projects the people in the charity really think will make a difference. If risk-free rates are high, they can get this money by accumulating cash reserves to invest at the high returns. Perhaps the managers of the charity will see the high risk-free rates and believe they can do more good, over the long run, if they have more money, so they may order all forests they control destroyed, to get their charity size to ‘grow’ as the money ‘grows.’

The reality is that incentives matter.

They affect the way people act.

If people can get rich destroying the world, destruction will take place. The more money they get destroying, the stronger the incentives. We can’t always predict that any individual will react to incentives, but we can predict that if incentives are stronger, people are more likely to respond to them. Stronger destructive incentives translate to more destruction.

Money grows (if a risk-free rate exists) faster than resources grow, people can make money destroying resources. This is true even if there is almost no current demand for the resources. We see this all the time in the societies that we live in: when new technology comes along that makes it possible to rape the world faster, people rape faster. A ‘glut’ of resources comes along that forces prices of resources down. Demand is not high enough to sell everything extracted, so the price has to fall. It can keep falling and falling, without the destruction stopping.

They are not destroying to meet demand.

They are destroying because they are being paid specifically to destroy.

If you pay people enough money to destroy, they will destroy.

The ‘tenth of price leasehold payment leasehold ownership system’ in Pastland pays people a total of $1 million a year—half of the risk-free free cash flow—to destroy. As you will see, the total risk-free free cash flow in the societies we live in now is roughly $30 trillion a year. If people who destroy the world get half of this, they get $15 trillion a year as a reward for destroying the world.

If we had a system that was close to socratic leasehold ownership, they wouldn’t get as much money destroying and would not have as strong of incentives to destroy. Rates of destruction would fall. If we had a system like the socratic leasehold ownership system, where all of the risk-free free cash flow went to the human race, acting as the landlords of the world, nothing would be left over to go to people with money as risk-free returns on their money.

If they couldn’t make money destroying, they wouldn’t have any incentives to destroy.

They would still be able to make money managing resources, but they would only be able to make money managing in sustainable ways, like the non-destructive forestry example listed above.

We, the members of the human race, can decide how we want our world treated. If we want our world treated as a cash register, with whoever steals the most getting the most money, we can choose a system with a very low leasehold payment relative to the price of leaseholds, like the ‘tenth of price leasehold payment leasehold ownership’ system. If we want people to treat the world with respect, and not destroy it, we can choose a system that is closer to the natural law societies that dominated the world for the first 99.99% of the time the human race existed, which didn’t pay people to destroy at all.

If we want to destroy less, the very first step is to reduce the amounts of money we pay them to destroy. We can do this by moving to a system that is closer to the natural law society we started with, by choosing a leasehold payment percentage that is higher in the range of possible societies.

 

1:5% Price/Leasehold Payment Ratio Leasehold Ownership

 

The next society we visit requires people who want to buy leasehold titles to offer a price and then a leasehold payment that is exactly 5% times the price they offer. The price can’t go above $10 million so the leasehold payment can’t be higher than 5% times $1 million or $500,000 a year. This is all the money the human race will get.

We could have gotten more money. All we had to do was ask for it, by choosing a higher leasehold payment percentage. But, for some reason, the human race in this system has decided we don’t want all of the risk-free free cash flow. We want the people with money to get 3/4^th of it, so we have set a leasehold payment percentage that makes it impossible for us to get more than 1/4^th of the risk-free free cash flow. The other 3/4^th won’t disappear. It will just go somewhere else.

The risk-free rate must now rise to 19%. (This was the rate in effect in 1981, when I started this book.) Kathy will borrow the $10 million from the bank. She will pay $2.4 million a year to the bank as a total mortgage payment, just like always. The servicer at the bank will take out the $500,000 that belongs to the landlords of the world and send it to the landlords. Our income is still automatic and free of risk: there is no chance we will not get it.

The servicer will send the other $1.9 million to the bank. The bank will have hired risk managers and will pay them the 4% times $10 million they need, or $400,000, to manage risk. The bank will then send the other $1.5 million to depositors as risk-free income.

In a competitive market, the markets will bid up the risk-free rate until it all goes to depositors, as we have seen. The bank manages risk and banks can make money by managing risk effectively. (If the bank can keep its costs of risk management below 4% of assets, it will make money managing risk.) The banks can also make money charging fees.

The bank is then authorized to lend this money (which is already in the governments bank account) back to the government at interest rates set in a weekly auction conducted by the Federal Reserve. Banks that provide funding to the United States government keep money in their accounts that they do not pay interest on but then collect interest on this same money from the United States government. This provides the great bulk of bank income in our 21st century world. It is a part of the very complex system that governments have set up to manage the supply of money and make sure they always get the funding they need to control society. Here is a link to the best book I have read that explains the way this system came to exist and how it works.

If Kathy wins at this interest rate, her interest payment to the investors will be $1.9 million. The leasehold payment is set at 5% times the price so it will be $500,000. I can’t bid higher. At any higher interest rate, I will pay out more than the $2.4 million yearly free cash flow the farm produces and won’t get enough to pay the people who earned income.

The bank actually collects the entire $2.4 million free cash flow, just as happened in the earlier systems. Once it gets this money, it turns over $500,000 of it to the human race as our leasehold payment. This leaves $1.5 million. Sally has made some deal with the investors to divide this money. She will keep some of it for things her bank does, like screening borrowers, monitoring production, signing all of the documents, keeping records, and taking care of accounting and details. Generally speaking banks will then give all of the rest of the money to the investors. They will be able to buy the free cash flow. Here, they won’t be able to buy 100% of the free cash flow, because the human race is still keeping some of it (not selling it). But they get the great bulk of all of the free cash that represents the bounty of the Pastland Farm

 

Why A Risk-Free Rate Can’t Exist In A System With A Low Enough Price/Rent Ratio.

 

There is a Saturday Night Live sketch called the ‘five minute university.’ It features Father Guido Sarduchi, who says that most people who go to college don’t actually remember most of the things are taught. Why spend four years teaching them things they won’t remember? He will teach only the things students actually remember five years after getting out of the university. He says he can do this in five minutes. (to video of skit. Please watch. It is very good.)

He gives three examples. One is foreign language. If you learn a foreign language in college, you won’t remember much of it after five years. He uses Spanish as an example. Five years after getting out of college, all you will remember is ‘como esta ustead,’ which means ‘how are you?’ The rest of the information you learned will be gone. His five minute university will teach only the part you remember. At the final, the instructor will ask ‘como esta ustead’ and you must answer ‘muy bien.’ If you do, you know as much Spanish as the average college graduate five years after graduation, so you pass.

His second example is economics. What do we remember after five years? Few people can remember anything more than the phrase ‘supply and demand.’ At the final, the tester will say ‘economics?’ You must answer ‘supply and demand.’ If you get it right, you know as much as the average economics major remembers, five years after graduation.

His final example is theology. He will ask ‘where is God.’ The answer is ‘God is everywhere.’ That is all you will remember, so why teach anything else?

This leads to something I call the ‘Father Guido Sarduchi school of economics.’ In fact, I have known a lot of PHD economics, and the truth is that few of them can go beyond the principles Father Sarduchi explains. (At least after they have been out of college for five years.) If demand is higher than supply, people will bid for the limited supply, and prices will rise. If supply is higher than demand, people will compete to sell by cutting their prices and prices will fall.

This is basically all you need to know to understand why the risk-free rate can’t possibly exist in a society that is high in the range of possible societies shown on Road Map of Possible Societies. In societies high in the range, prices for property rights are extremely low. We can make them as low as we wish, by setting the property leasehold ownership ratio. As we have seen, if the landlords of the Earth (the members of the human race) want prices to be this low, we can create a leasehold ownership system that causes the leasehold for the Pastland Farm to sell for a mere 24¢. If we build our societies on this kind of leasehold ownership system, property rights will sell for almost nothing.

The demand for investment money will be almost nothing.

But the supply of investment money depends on the amount of real treasure (wealth) in the society. If the society has large amounts of treasure, it will have a very high supply of investable money. In this example, we have been assuming that investors can supply any amount up to $10 million.

If the supply of investable money exceeds the demand for investable money, even Father Guido Sarduchi realizes the cost of investment money must go down.

The cost of investment money is the interest rate.

If the interest rate is higher than the minimum that investors need for risk, and the supply of money exceeds the demand, the cost of money must fall. Interest rates must fall.

How far can they fall?

The risk-free rate can fall all the way to zero. If people are getting more than the minimum amounts they need for risk, and more money is supplied than demanded, people will compete to get their money invested by offering to lend it for less and less, as long as they get the minimum amounts they need for risk. The interest rate must go down. It must go down until it is at the minimum amount investors need for the risk.

This clearly happens in the virtual rental leasehold ownership system, because almost no money is demanded. But it must also happen in any system that demands less money than is supplied. We saw that, in all societies above socratic leasehold ownership, the demand for investment money was lower than the supply, and in the socratic leasehold ownership system, the demand and supply exactly matched.

This means that no system above socratic leasehold ownership in the range of possible societies can have a risk-free interest rate.

As a practical matter, the higher the risk-free rate, the stronger the incentives to destroy the world. The very first system that will have a risk-free rate, and therefore the very first system we visit that will have destructive environmental incentives, will be the one immediately after socratic leasehold ownership. Socratic leasehold ownership, and all societies above socratic leasehold ownership in the range of possible societies, can not have any incentives from risk-free rates, because they can’t have risk-free rates. The particular destructive incentive explained above can only exist in societies below socratic leasehold ownership in the range of possible societies.

 

Changing Incentives

We are on a journey through possibilities. As we go through this range of possibilities, we will start to see things we never saw before. People will have incentives to destroy forests. We will start to see something we didn’t see in the earlier systems: people will actually harvest lumber from forests in ways that totally destroy the forests, totally ending what would otherwise have been an endless flow of value in the form of lumber and other products. They will begin to ignore solar energy, even when it clearly produces free electricity. The reason is essentially the same: Solar does produce returns, but the return rate is only about 2%-5%. If money grows faster than this, they are better off not to put their money into the lower-yielding solar. Instead, they can use their money to compete for the much higher returns that go to people who invest in the rights to existing properties that generate free cash flows, like the Pastland Farm. People who control land that contains coal, oil, and natural gas will want to get rid of the fuels as rapidly as they can physically so they can sit back and get rich off of the risk-free returns they get when they have money. They will dump these fuels on the market, forcing the prices down to levels that are far below the true value of the materials, encouraging wasteful and inefficient use of resources.

Certain people will realize they can make incredible sums of totally free money by conquering land or having their governments conquer it, and then getting the concession to extract and sell that land’s resources. This provides incentives to build up armies to be able to conquer the land and creates the necessary conditions for violent conflict. People will surround highly productive land with ‘borders’ and claim exclusive rights to it. They will build armies to protect their claimed rights to this land. They will need soldiers, so they will have to indoctrinate children to believe that entities called ‘nations’ are real things and really exist, and that it makes a difference which ‘nation’ controls a certain part of the world. At a certain point, these societies will need jobs in order to function. The majority of the people will need jobs and will start to petition the ruling entities (governments) to find ways to create jobs. Destruction and war are both labor intensive, so if governments react to the pressure from the people, they will actually begin to subsidize destruction and make plans to keep their nation at war for as much of the time as possible.

As we go down through the range of possible societies, we will see stronger and stronger destructive incentives. If people react to incentives, we would expect to see more and more destructive problems.

At certain point in our trip, the societies won’t have enough common income from the bounty of the land to keep the people (who will be living on the edge of poverty and barely able to survive, at least during periods of high unemployment) from fighting both among themselves and against the system. At this point, these societies will start to create a new kind of structure that didn’t exist in any of the earlier societies we visited, a ‘tax.’ They will have to start to take money away from people. As a practical matter, most of the taxes have to be paid by people who work for their money. (see sidebar below for more information.)

Taxes reduce the amounts that go to people who earn it. People who improve properties will have to pay taxes many different ways: they will have to pay taxes on the employees they hire for the improvement, on all supplies they use, and on the time and talents of engineers and other professionals who help with the planning. They will generally have to file plans with the government and pay a fee for the government to review the plans and then pay a ‘permit tax’ to get permission to do the change. Once the change is done, their property will be reassessed and they will have to pay higher property taxes due to the improvement. Their incomes will go up because of the improvement so they will pay higher income taxes on a Federal State and local levels, as well as higher social insurance taxes and other fees assessed against anyone who has earned income. (In most nations, unearned incomes are exempt from these taxes, but ‘earned income,’ also called ‘ordinary income,’ is subject to the full weight of taxation.) When they spend the money from the improvement, they pay two more taxes, one a ‘sales tax’ and the other being a higher price for the product due to all of the taxes the maker of that product had to pay to make it.

None of these taxes apply in Socratic Leasehold Ownership societies or those above Socratic Leasehold Ownership in the range of possible societies. These societies don’t need taxes, because enough money to buy far more than half of all production flows automatically to the human race, through the leasehold ownership system. But at a certain point in the destructive range, the societies we visit will not have enough common income to keep order and they will have to have taxes.

People have incentives to do things that make them money. If they know they will have to share the money they make with governments, by paying taxes, they consider only the money they will be able to keep. There is a term called the ‘effective marginal tax rate’ that represents the percentage of any increases in income that go to governments at all levels through all different taxes. As the ‘effective marginal tax rate’ goes up, the amount of money that people who improve get to keep goes down. As we down in the range of options, we move through societies that need higher and higher effective marginal tax rates to function, so they have weaker and weaker constructive incentives.

In the Socratic Leasehold Ownership system, the constructive incentives were at the maximum possible level, because Socratic Leasehold Ownership systems don’t need any taxes and they grant the greatest possible amount of income to people who buy properties and improve them. Socratic Leasehold Ownership does not have any destructive incentives. As we move down through the next range, the destructive incentives appear and then grow stronger and the constructive incentives start to weaken. There will be a certain point where the destructive incentives are so strong and constructive incentives are so weak that the destructive incentives and constructive incentives will be the same strength.

If people react to incentives, we would expect to see people destroying about the same amount of permanent value as they create. This takes us to the lowest point in our journey that meets the minimum conditions for sustainability. If people react to incentives, all societies below this point will destroy more permanent value than they create. It is not possible to destroy more value than we create forever, so none of the societies below us in the range of possible societies are sustainable.

This takes us to our third and final transition point in our journey. All societies above this line are sustainable and all societies below it are unsustainable.

 

 

7 Chapter Seven The Socratic (The Second Transitional System)

 

If our group in Pastland has decided to start with science, rather than guesses about the intentions of invisible superbeings that may or may not exist. Infinite scientific evidence tells us that the human race is the dominant species of animals on the planet. The dominant animals have first claim on the good things the planet produces. Other animals only get anything at all if the dominant animals leave it for them. This reality of existence makes the dominant species of animals the effective lords of the land. We, the members of the human race, are the effective lords of the planet Earth.

As landlords, we can decide if we want people to have preferential rights to use parts of the world and get extra rewards from these parts of the world. In other words, we can decide if we want to allow people to be able to consider parts of the world to be their private property. If we do decide we benefit from private property, we can set any terms we wish for private property. We can decide that we will only allow people to rent property, with no deposit and no marketable rights whatever. We can decide that we want to allow unlimited ownership of rights. We may also use a leasehold ownership system, if we want, to create an intermediate system, one where people can buy and own certain rights to use a part of the world privately, but have to meet certain requirements of their landlords (the members of the human race) in order to keep these rights.

In this ‘journey through possible societies,’ I am trying to show you that we have literally unlimited options. We can decide on a natural law society with a pure rental. We can decide on a leasehold ownership system that is so close to a pure rental that no one would be able to tell the difference. We can also have leasehold ownership systems that are hybrids. Some of these hybrids are more or less like rentals, but have varying degrees of ownablity mixed in. As we get into the hybrid range, we start to get into societies that are so far from both of the extremes that they are not like either natural law systems or sovereign law societies.

 

Using Leasehold Ownership To Create Intermediate Societies

 

All of the options we have visited so far, and all we will visit in the rest of our trip, sell a leasehold to the Pastland Farm in the same kind of auction. Various people are interested in private control of the farm. We have told them that we will allow this, provided they share the bounty the land produces with the members of the human race (by sharing the free cash flow), and provided they put up an up-front amount of money that is kind of a deposit (but is called the price of the leasehold) that guarantees that they will actually share the bounty with us as they have promised.

Several people are willing to take advantage of the program we have set up. In other words, several people are willing to bid on the purchase of this leasehold.

We don’t pick one at random. We let the people who want to control the property make offers, bidding against each other. Each one offers both a price (a deposit that protects the human race) and a leasehold payment (a yearly distribution of wealth from the land to the human race) to us. They always bid on both the price and leasehold payment in the ratio that we, the landlords of the planet, set in advance. For example, if we believe that the price and leasehold payment are equally important to us, and require them to bid in a ratio of 1:1 (the EPLPLO system), bidders must offer the same prices as they offer leasehold payments.

People can’t just bid random numbers: each succeeding bid must be higher than the previous bids. As the auction progresses, people offer the human race more and more, both as security and as yearly payments. When the auction ends, the market will have selected the one person on the planet Earth that is willing to give the human race (her landlords) more money each year and more security than anyone else on Earth is willing to offer.

This happens in all of the leasehold ownership systems we have looked at so far and will look at in the future.

The only differences, at least technically, involve the preferences of the human race. What do we care about most?

Do we want extremely high amounts of current income from the land, without regard to security?

If this is what we care about, we can choose a leasehold ownership system with a very low price/leasehold payment ratio (meaning that the price is low relative to the leasehold payment, or that the leasehold payment is very high relative to the price).

Do we want some security of our income?

If we do, we can choose a system where people have to have more skin in the game (more money at risk) if they want to control parts of the world.

Do we want a lot of security?

If so, we can choose a system that has a price that is higher than the leasehold payment. If this is the case, people will lose more money if they don’t make their leasehold payments than if they have to sell everything they own to come up with the money to make the leasehold payments.

 

Socratic Leasehold Ownership Societies

 

The next system we will look at sells leasehold rights to parts of the world in a system where the leasehold payment is exactly 1/5^th of (or 20% of) the price. This is an important point in our journey, the second of the transitional societies we will visit in our journey. As you will see, it has the strongest possible constructive incentives of any possible society: It sends more money to people who buy leasehold rights to parts of the world, improve the underlying properties, and then sell the leasehold rights to those properties, than any other category or type of society on our journey.

Because this is such an important type of society, I will want to name it so I can refer to it. I will call societies built on leasehold ownership where the leasehold payment is 20% times the price ‘socratic leasehold ownership societies.’ Calling a society a ‘socratic leasehold ownership society’ does not tell us anything at all about the style of government it has; it only tells us the way the people of that society interact with the world: they consider the members of the human race to be the dominant species on the Earth and therefore the lords of the land: they allow only one kind of private property, a leasehold ownership system where people must offer both prices and leasehold payments, and the leasehold payments are always 20% times the prices they offer.

In this society, the people are offering the leasehold rights to the Pastland Farm for sale with this bid screen:

 

 

Kathy wants to be a farmer. She knows that only the high bidder at this auction will have any rights to farm this land, so she wants to bid and wants to win. However, she doesn’t know what numbers to enter into the two boxes to make this happen.

She goes the person who represents the investors, Sally, and explains what she wants to do: she wants to get the right to farm this land. She is willing to farm this land if she gets at least $50,000 a year for the work she does. This means she is willing to make a total mortgage payment of up to $2.4 million a year. She wants Sally to calculate the amounts that Kathy will wind up paying a total mortgage payments if she enters various numbers on the bid screen, so she will know how much she can afford to bid.

Sally goes to a spreadsheet program and creates a ‘cheat sheet’ for Kathy to use at the auction. The number in the first column is the number to enter into the price, the second is the number she will enter into the leasehold payment, and the final column indicates the total mortgage payment at various different bids.

Cheat Sheet for Socratic leasehold ownership
Price (amount borrowed)	Leasehold payment (20% of price)	Interest on mortgage loan	Total mortgage payment including interest and leasehold payment
$ 500	$ 100	$ 20	$ 120
$ 5,000	$ 1,000	$ 200	$ 1,200
$ 50,000	$ 10,000	$ 2,000	$ 12,000
$ 500,000	$ 100,000	$ 20,000	$ 120,000
$ 5,000,000	$ 1,000,000	$ 200,000	$ 1,200,000
$ 6,000,000	$ 1,200,000	$ 240,000	$ 1,440,000
$ 7,000,000	$ 1,400,000	$ 280,000	$ 1,680,000
$ 8,000,000	$ 1,600,000	$ 320,000	$ 1,920,000
$ 9,000,000	$ 1,800,000	$ 360,000	$ 2,160,000
$ 9,500,000	$ 1,900,000	$ 380,000	$ 2,280,000
$ 9,971,429	$ 1,994,286	$ 398,857	$ 2,393,143
$ 9,991,429	$ 1,998,286	$ 399,657	$ 2,397,943
$ 9,999,429	$ 1,999,886	$ 399,977	$ 2,399,863
$ 9,999,999	$ 2,000,000	$ 400,000	$ 2,400,000
$ 10,000,000	$ 2,000,000	$ 400,000	$ 2,400,000
$ 10,000,001	$ 2,000,000	$ 400,000	$ 2,400,000
$ 10,010,000	$ 2,002,000	$ 400,400	$ 2,402,400
$ 10,100,000	$ 2,020,000	$ 404,000	$ 2,424,000
$ 11,000,000	$ 2,200,000	$ 440,000	$ 2,640,000

Since Kathy told her the maximum she can afford as a total mortgage payment, Sally highlighted the row in the cheat sheet that would lead to that exact total mortgage payment. Any bids above the highlighted line on the cheat sheet will lead to lower total mortgage payments than Kathy’s maximum.

The highlighted line is her maximum.

Sally tells Kathy that she must not bid anything lower than the highlighted line, because that will make her payment higher than the maximum she can afford to pay. Sally only included these numbers for reference.

Note the amount of the highlighted bid: The price will be $10 million, the leasehold payment $2 million a year, and the interest she must pay on the amount she borrows to pay the price is $400,000.

She will pay out the entire free cash flow to people not involved in production: of the free cash flow, $2 million will go to the human race, and the other $400,000 will go to the investors as returns on their investment (the 4% yield they require).

If you compare this to the natural law society we looked at earlier, you can see that the income of the human race is lower: we get $400,000 less in current income in the socratic leasehold ownership system than we get in the natural law society.

But we don’t give up this income for nothing. We get two very substantial advantages in exchange.

First, we get an enormous amount of reserves to protect us from risk. As you will see later, there are limits to the amount of protection the human race can have. (We can’t have more in reserve than ‘all the reserves there are.) As you will see, we are at the limit, meaning that we have the maximum possible protection against problems that may come up and the maximum possible security. Although you won’t be able to see why this is the maximum possible security we can have until you understand the discussions that follow, you can clearly see that we have truly fantastic amounts of security:

When the leasehold sells, we will actually get $10 million in cash. This cash is receipts that represent ownership of 10 million pound of rice that already exists and is in storage in the treasury of the human race (the common granary, which holds the ‘treasure’ that backs our ‘treasure backed money’). We will hold this $10 million in reserve. If the leasehold payment comes in, fine: the $10 million stays in reserve. If not, also fine: we get all rights to the property back, at no cost to us, and we will no reason to hold the $10 million in reserve anymore. We will become the effective owners of 10 million pounds of grain (enough o support the human race for five years) that we didn’t own before.

Second, we will get the strongest possible improvement incentives. Again, you won’t be able to see why they are the strongest possible until you understand certain technical matters discussed below, but you should be able to see that they are incredibly strong: a 20% increase in the free cash flow will lead to a $2 million increase in the price. This is a fantastic amount of money, and people will be able to become fantastically wealthy.

 

Limits To The Money Supply

 

In Pastland, we are using money that is receipts that represent ownership of ‘treasure,’ meaning ‘things of real value.’ There are limits to the amount of money that can exist because there are limits to the amount of treasure that exists. Systems that use treasure backed money have limited money supplies.

It might seem that the human race could get more and more security by simply increasing the price/leasehold payment ratio: If we make the price higher, we get more money to hold in reserve, and more security.

But this is not actually true because there is only a limited amount of treasure available. After the owners of treasure (the investors, who have saved their money causing the treasure to accumulate in the granary) have pledged all of their treasure (transferred it to ‘common reserves,’ by investing it) the system will run out of money to pay higher prices.

At some point, any system with treasure-based money will run out of money. The exact place where this will happen depends on several factors, some of which are hard to predict (like people’s propensity for ‘saving,’ the self life of rice, the number of substitute ‘treasures’ that are usable as backing for money), but there will always be a limit where any system that uses treasure for money will run out of money.

For the sake of example, let’s assume that the limit has been reached when we get to $10 million. This is all the money there is to invest. The price of any title to use the Pastland Farm can’t go higher than $10 million, because nothing can sell for more than ‘all the money in the world.’ If there is only $10 million, the price of any title to use the Pastland Farm (either a leasehold title or freehold title) can’t go higher than $10 million.

See sidebar for more informatiom.

As we have seen, Kathy can afford to pay up to $10 million for the leasehold in the socratic leasehold ownership system. This means that, if this leasehold is offered for sale, the ‘demand’ for investment funds in the system will be $10 million.

Investors have and are willing to supply up to $10 million to buyers of property rights, at an interest rate of 4%. So far, there is only one leasehold being offered for sale, the Pastland Farm. Investors are willing to supply up to $10 million in investment capital for this property. In other words, the supply of money to invest at this rate is $10 million.

Markets can work as long as it is possible for the supply and demand to match.

It is possible for the supply and demand for money to match in the socratic leasehold ownership system.

As we will see once we pass socratic leasehold ownership in our journey, it won’t be possible for the supply and demand for investment money to match in any system past socratic leasehold ownership. As a result, markets will not be able to function smoothly and normally, as they have so far, in any of these later systems. The markets in the later systems will start to break down and start to do many of the things that we are used to seeing in the societies we were born into, occasionally collapsing entirely (as they did in 1929 and 2008) and occasionally forcing governments to create artificial money (‘fiat money,’ the type in use worldwide as I write this, a type that is not backed by anything other than the ‘full faith and credit of the government), and collapsing into an inflationary spiral (as happened most recently in the late 1970s).

But all this is for later. As of the socratic leasehold ownership system, we are still at a point where the supply and demand for investment capital can match, so we are still at a place where markets can work effectively, efficiently, and without any need for a government or other authoritarian body to interfere.

 

Private Reserves And Common Reserves

 

In order to really understand the societies we will visit after socratic leasehold ownership, we need to understand a little bit more about the way the tool called ‘money’ works in societies that back money with something of real value (treasure). We also have to understand what it means to save money in such a system, and what it means to invest that money in such a system:

Let’s say that you live in Pastland and, for one reason or another, have not spent all of your income over the last few years. You have money in a savings account at a bank.

This money is your private reserve. You can use it for anything you want. If the human race as a whole has some kind of problem that leads to hardship, you can decide to use it to help the human race if you want, or you can keep it for yourself if you want. It is your private reserve. You can do what you want with it.

As long as you keep this as private reserves, you do not get paid for keeping it.

This refers to societies with treasure=backed money in socratic leasehold ownership societies. As you will see, after we pass socratic leasehold ownership, it will not be possible anymore to have treasure backed money and we will have to start using phony or ‘fiat’ money. In systems with fiat money, everyone with money gets paid more money each year, even if they don’t have the money invested. But in systems where markets can work, like socratic leasehold ownership systems and those above socratic leasehold ownership in the range, where money is backed by treasure, the rich do not automatically get richer and people don’t get paid for saving money in private reserves.)

(See sidebar for more about this.)

If you want, you can invest your private reserves, by participating in the investment fund that provides money for people to buy leaseholds on properties. If you do this, you will get 4% returns, but you won’t have control over the money any longer. As long as the money is invested, it is being held in the ‘reserve account of the human race,’ not your personal bank account. To spend it, you will have to find someone else who wants to invest, and ‘sell’ your shares in the investment fund to the other investor. As soon as you sell your shares, the buyer will be the investor. She will be getting the 4% return, not you.

You will only get the return on the exact number of dollars you have invested and then only for the exact number of days it is invested. The invested money generates returns: the uninvested money (private reserves) does not.

All invested money is being held by the human race in its reserve account. This is not our money (where ‘our’ refers to ‘the members of the human race’ as long as the leasehold is private. If the leasehold payment is made over time, we have to hold this money in reserve in case the owner of the leasehold activates the ‘buyback clause’ in the leasehold agreement, and asks us to buy back the leasehold. Any money that is in this buyback fund is essentially the common reserves of the human race. If you want to collect returns on your savings, you have to turn it over to the human race to hold to protect the members of the human race against possible problems. If you don’t do this, you won’t get returns.

In other words, you will have to agree to allow your private reserves to be used as common reserves. As long as it generates returns, it protects the human race, not you personally. If you ever want it to protect you personally, you will have to find someone to buy out your share in the investment fund. If you can find someone like this, her money will become a part of the common reserves of the human race, and your money will again be private reserves to protect you personally.

Remember, money is treasure in this system. Why should people who have treasure be paid over time for merely having treasure, in any society at all?

In this case, it is clear why you are being paid to have treasure. You are allowing your personal treasure to be held by the treasurer of the human race. If your risk managers (the people who manage risk for the investors, as discussed both above and below) are able to keep bad things from happening, you will get paid for every dollar you allow to be held as common reserves for every day it is held as common reserves. Each year you leave your money as common reserves and nothing goes wrong, you get $4 for each $100 you allow to be common reserves.

 

What Happens When All Investable Money Is Invested?

 

In the previous systems, the price that the market set for the leasehold title (the price that makes the total mortgage payment exactly equal to $2.4 million) was far lower than the total investable funds. This meant that some people had money to invest and wanted to invest it at 4%, but couldn’t invest it. It wasn’t needed.

To see this, imagine that you have saved $45,000 and want to invest $30,000 of it.

Say that you are in the ‘half price leasehold payment leasehold ownership system’ that set a price of $4,444,444.44. When Sally sets up the investment fund and starts accepting investments, she announces that she will accept investors until the fund gets to a total of $4,444,444.44. Let’s say that you delay and, when you go to sign up, find out that the investment fund is ‘closed,’ meaning it has reached its goal and is no longer accepting investments. So far, we have only one private property, the Pastland Farm, so there is only one investment, the Pastland Farm. You can’t invest in the Pastland Farm because the fund is closed and can’t invest in other investments because there aren’t any.

This means that you are out of luck.

You want to invest, but can’t invest, because there aren’t any more investments.

In systems like the half price leasehold payment leasehold ownership system, there will be more money supplied than the markets demand. As a result, some money that people are willing to invest at 4% won’t be invested at all.

People who don’t have money invested, but want to invest, will have to wait and hope that someone who has money invested is willing to sell their investment to them. If this happens, they can ‘buy out’ some other investor, and begin getting returns. If it does not happen, they won’t get any returns at all.

In socratic leasehold ownership systems, the supply and demand for money are exactly in balance. This means that everyone who wants to invest money can invest it.

The price is still very much like a deposit. It is now a giant deposit, equal to 5 full years of leasehold payments. Since it is all investable money on Earth, what has happened is this: the people of the world who had private reserves that they were not willing to use have turned over all of these private reserves to the human race. The treasurer of the human race will hold these reserves in the reserve account of the human race. As long as nothing goes wrong in production, the treasurer will hold these receipts for treasure in a special fund that can’t be spent on anything as long as the leasehold is private. As long as the leasehold is private, the human race literally is holding all of the private treasure that people have saved over the years, to protect us in case something goes wrong.

We have security.

Of course, we had some security in every leasehold ownership system we visited. In the early leasehold ownership systems, like the virtual rental leasehold ownership system, we had only a tiny bit of security. As we went through the range, we got more and more security.

There is a limit to the amount of security we can have.

We can’t have more security than having 100% of the treasure in the world that is not going to be needed over the course of time to support people’s lifestyles.

We will hold security in reserve.

As long as we get the leasehold payment on time and the Pastland Farm is not used in some way that is on the ‘list of potentially harmful uses,’ this money will remain in reserve.

The investors will get their returns.

Kathy will make the money she needs to run the farm and be extremely well compensated if she improves the farm and makes it more bountiful.

Everyone will be happy.

The people taking on risk will make absolutely sure the leasehold payment is never missed. If they do an effective job managing risk, it is virtually impossible that they will fail (as you will see below); but even if they should be bad at managing risk and should fail, we, the members of the human race, will not suffer. Our income is absolutely assured.

 

The Limit To The Amount Of Security That The Human Race Can Have

 

The ‘price’ is the amount of money the buyer invests in the title.

This is the amount of money that is being placed at risk and the amount that the buyer or investors who back the buyer stand to lose if something goes wrong. Obviously, the more money these people have at risk and the more they have to lose, the stronger the incentives they have to work hard to make sure that production doesn’t fall: they need the farm to produce both well and consistently, so they can pay their bills. If we want them to have the strongest possible incentives to be responsible, to work to keep production high, and to work to make sure no harm ever comes to the land they control, we want the highest possible prices for properties, so they will have the most to lose if things go wrong.

The price is also the amount of money that the human gets as a kind of deposit to protect us from loss. If we get 24¢ as a price, as we do in the ‘virtual natural law leasehold ownership society,’ we obviously don’t have a lot of security. If we get $2 million we have more security and if we have $10 million we have a great deal more security.

It might seem logical that we would be better off to have even more, say $20 million or even $60 million as a price, because then the people who control property would have more to lose if they give us more money and the human race would seem to have more security if something went wrong.

However, this can’t happen as long as we use real money, because real money is receipts for something of real value (treasure, to the human race) that already exists and is in storage. The money that Kathy gives to the human race when she buys the leasehold title is receipts for rice that already exists. People were entitled to this rice over the years (as their share of the bounty, or perhaps their pay), but they didn’t spend their money. In this case, they are being offered to be paid if they will loan this money to Sally, who will then loan it to Kathy, who will then give this money to the human race to put into its ‘reserve’ fund to hold in case something goes wrong. The investors know they can possibly lose this money, but they also know that the risk managers are working very hard to make sure nothing goes wrong, so chances are nothing will go wrong. If nothing goes wrong, they will get richer and richer each year, with their wealth increasing at a rate of 3½% times the amount invested, provided the risk managers do their jobs and nothing goes wrong.

They are actually getting paid to release their personal reserves (savings) so that they can go to the human race to be held as common reserves. Each year they do this, and nothing serious goes wrong in production, they will get their interest. If they ever want their money back for any reason, they can ‘sell their investment’ in markets, as discussed earlier. In later systems, people will get returns on money without taking risk or doing anything, but in this system, they only get richer if they are willing to take on risk and actually place their money at risk by giving it to the human race to hold in case something goes wrong.

We have a certain amount in reserves. In this case, we have 10 million pounds of rice in reserve, enough to feed the entire human race for several years.

What if we wanted more security?

The reality is that we can’t have any more reserves than we already have.

All investable money is invested.

There is no more.

It is true that we could simply start printing money, like current governments do. But having more money doesn’t mean more security if money is just pieces of paper with numbers on them. We can’t eat these little pieces of paper.

In our case in Pastland, money is receipts for treasure that exists and is in the treasury. If we print up more receipts than we have treasure, this doesn’t give us more security. All the security we can have is ‘all the treasure in the world that people aren’t going to need in the immediate future.’

That is the exact amount we have when we get to the socratic leasehold ownership system.

We can’t get more.

 

Possible Societies

 

As we have gone on our journey through possible societies, we started in systems where the price/leasehold payment ratio was so low that the leasehold titles to properties literally couldn’t sell for a single dollar. In these systems, owning a leasehold was essentially the same thing as living in a natural law society and renting the property from the landlords of the world, the members of the human race.

We went through a long range that looked very similar. We then passed the first transitional system and got into societies that looked different. The EPLPLO system marked the place where prices were high enough, relative to leasehold payments, that people who controlled properties began to have incentives to consider the risks and things that could go wrong in production and take precautions to manage them, and where they finally had incentives to undertake improvements projects (to buy leaseholds, improve the underlying properties, and then sell the leaseholds, with no goal other than to gain from the improvements).

As we passed through the next range, prices became higher and higher and eventually people could make serious money investing in improvements. We got into a range where people could make far more money undertaking improvements projects than doing anything else that humans could do. The amounts of wealth available were so large that people would stay awake at night looking for ways to make the world better and ignore their families, their health, and just about anything else to find new ways to make money.

These systems are all built on the premise that the human race is the dominant race on Earth and its members are therefore the lords of the land or landlords. We are intelligent beings (at least, we are capable of intelligence, even though we aren’t always able to use our intelligence to overcome beliefs, superstitions, and a crowd instinct that drives us to accept the things we are told the people around us have accepted). This means we are capable of figuring out all of the different ways humans can organize their existence before we make decisions about what option to use, consider the way they work, and figure out which one best meets our needs.

We have seen that there are two extreme options and many intermediate options. One extreme accepts that no rights to the world may be owned at all, but that people can gain rights to use parts of the world by paying the people around them a yearly fee called ‘rent.’ (This payment may also be called a ‘lease payment,’ because ‘leasing’ is synonymous with ‘renting.’) The other option accepts that it is possible to buy and own 100% of the rights to parts of the world for a one time simple fee called a ‘price.’ Intermediate options can be built by the human race (landlords of the planet) deciding to require people who want to use parts of the world as their own private property yearly to pay both a yearly payment to the landlords (a leasehold payment) and a price.

The landlords can decide how important the two payments are.

If we want systems that are closer to natural law societies, we can create them by making the leasehold payments very, very important, and the prices relatively unimportant. We can do this simply by auctioning off leaseholds with very very low price/leasehold payment ratios.

For example, with ‘virtual rental leasehold ownership,’ the leasehold payment was 100,000,000 times the price, meaning that the price was 1/100,000,000^th of the leasehold payment. To gain rights to a property in this system, people did have to pay ‘prices,’ but the prices were so low that, for practical purposes, they could ignore these prices and consider this method of property control to be a rental. (Recall that the leasehold for the Pastland Farm sold for a mere 24¢, less than the price of a drink of water in most places.) If we want more characteristics of ownership systems, we can make the price higher relative to the leasehold payment, by selling property rights with a higher price relative to the leasehold payment, or a higher price/leasehold payment ratio. At EPLPLO, the price and leasehold payment are equal. At socratic leasehold ownership the price is 5 times the leasehold payment, and the system is starting to look a lot like ‘regular’ (or freehold) ownership.

At each stage, we could think of the intermediate systems as either extreme rental systems (rental with varying deposits), or extreme ownership systems (regular ownership with varying ‘property taxes’ payable to the human race.)

For example, we could think of the EPLPLO system as a rental with a deposit equal to one year’s rent if we want to do this. Kathy pays a ‘deposit’ of $2,307,692 when she signs the document. She then pays ‘rent’ of $2,307,692.

We could also think of EPLPLO as ownership (freehold ownership) with a 100% ‘property tax’ payable to the human race: Kathy buys the property for $2,307,692 from the human race and then makes a yearly ‘ad valorem property tax’ payment equal to $2,307,692, exactly 100% times the ‘price’ she paid (see sidebar for more information).

We could think of virtual rental leasehold ownership as a rental with a ‘deposit’ of 1/100,000,000^th of the rent, or we could think of it as regular (freehold) ownership with a ad valorem property tax of 10,000,000,000% of the price. (Kathy pays a price of 24¢ and then a yearly payment of $2.4 million, which is exactly 10,000,000,000% times the price she paid. You could think of the $2.4 million yearly payment as an ad valorem property tax; see sidebar for more information.)

We could think of socratic leasehold ownership as a rental with a ‘deposit’ of 500% (five times) the rent if we want. We may also think of it as ownership with a ad valorem property tax of 20% times the price. (Kathy pays a price of $10 million and then a yearly payment of $2 million, which is 20% times the price.)

Although these intermediate systems could be thought of as extreme rentals or extreme freehold systems, they are not really rentals or freehold systems, they are leasehold ownership systems. I am only showing how they resemble extreme forms of the two extreme systems to help you picture them in your minds and compare them to things you have seen before and understand.

 

Different Price/Leasehold Payment Ratios

 

I want to show you that we can structure our interaction with the world in literally any way we want. Natural law societies have certain very desirable characteristics. (Powerful incentives that push for personal, social, and environmental responsibility, for example, and powerful incentives pushing against forming ‘nations’ and claiming rights to the world that require the use of violence to enforce.) If we want these characteristics, we can choose an interaction with the world that is as close as we wish to get to natural law societies.

Sovereign law societies also have certain desirable characteristics. (They have incentives to invent, innovate, create, invest, and take advantage of the fullest capabilities of the human mind to manage risk, prevent reductions in production, and improve the world whenever possible.) If we want these characteristics, we can choose an interaction that is as close as we wish to sovereign law societies.

Intermediate societies combine the various incentives of the extreme systems in various different ways. Systems close to the extremes work very much like the extremes. Systems far from either extreme work unlike any system that people today have experienced. So far, we have gone through about half of all of the options in our journey through possible societies. Socratic leasehold ownership societies are in about the middle of the range of possibilities. They happen to combine the powerful constructive incentives of sovereign law societies with the powerful incentives pushing toward personal, social, and environmental responsibility of natural law societies.

We, the members of the human race, must decide what we want. How do we want the future to unfold? Some people believe that an all-powerful invisible Superbeing that lives in the sky has already written history, and it ends with the destruction of the world and everyone on it. (This destruction, called ‘Armegeddon,’ is predicted in the Christian Bible, and many Christians believe it is inevitable.) These people believe that the end of the Earth will mark a transition to a ‘rapture,’ a period of wonderful, ecstatic bliss for eternity, and want it to happen as quickly as possible. These people would want the most destructive system possible so we can reach the rapture as quickly as possible; they would want a system with the strongest possible destructive incentives, which (as we will see shortly) is the one you and I were born into.

Others believe that it is a sin to purposely kill yourself (this is suicide, which many people believe is the same as murder in the eyes of the invisible one who judges us all), and believe it is wrong to move purposely toward the end of the world. But many people who believe this also believe that hardship and misery build character, and is essential to have a good ‘test of our souls,’ which they believe is the purpose of earthly existence. These people would want a system that was not in the suicidal range, but was at the very limit of the non-suicidal range. As we will see, there is a system that has the maximum misery and hardship that is consistent with survival of the race (the ‘minimally sustainable society.’) If we held a global election, and the majority of the world’s people wanted to have the maximum of the characteristics of the societies we were born into that lead to misery and hardship, but which is consistent with survival for our race, we could choose the minimally sustainable society.

Others believe that we should all live simply and in total harmony with nature. They believe that we don’t need or want progress, growth, or any of the creature comforts technology and human ingenuity have created, and we are better off to get rid of them entirely. They realize that only a tiny fraction of the current world population could be supported without technology, but they believe this is the price that we must pay to be in harmony with nature, and follow its edicts (as if nature itself were a kind of god, endowed with intentions). If we held an election and a majority of the people of the world agreed with this, we could move to natural law societies, using the tools and processes that Book Two of this series (Possible Societies) explained.

Some, however, believe that misery and hardship are undesirable characteristics. They believe that human existence is better if humans have enough to eat and freedom from conflict and violence, if they live in a safe and orderly society with as many creature comforts as possible, the maximum in material prosperity, with non-destructive processes in place to convert the super-abundant raw material our world is made of (iron, silicon, aluminum, calcium, for example) into vehicles, dwellings, appliances, and other things that can make our lives better. If we held an election and a majority of the world’s people wanted this, we could move, using the processes that Book Two of this series (Possible Societies) explained, toward a socratic leasehold ownership system.

Perhaps there would be some who would think that a different incentive structure would be better. Perhaps they would think that, over the short run, we may need the extremely rapid progress and growth that would come from the maximum in constructive incentives, but that over the long run, we would not want people to feel driven (by profit opportunities) to devote their existence to creation of value for the future. Perhaps they would feel that we may want to move to the socratic leasehold ownership system to gain its advantages, but only stay there until we have stabilized our situation. After that, we may choose to move to some other point in the range, perhaps a better mixture of harmony with nature and the forces of human ingenuity.

We must decide what we want.

If we understand how all of the different societies we may form work, and know what we want, we can find a system that works to advance the needs of the human race going forward into the future, and put it into place.

Although socratic leasehold ownership may not be the ultimate destination, it has certain characteristics that indicate it is almost certainly a waypoint on any journey we may want to make into a sustainable future for our race. As a result, it seems hard for me to fathom anyone hoping or expecting to create any kind of sustainable future for our race without understanding it. If you haven’t already done so, I would strongly recommend you read the chapters on socratic leasehold ownership in Book Two, Possible Societies. If you have already read these discussions, I would ask you to consider finishing Book Three, the one you are now reading, then going back to Book Two and reading the chapters that deal with socratic leasehold ownership one more time.

 

 

 In the first post-EPLPLO societies we visit, people will only be able to make tiny amounts of money improving. They will be able to justify improvements, but the profit opportunities won’t keep them awake at night thinking of ways to improve.

As we progress through the next range, however, people will be able to make more and more money improving. Eventually, they will be able to make such fantastic amounts of money improving that we can expect them to devote a large part of their mental energy to figuring out ways to improve. We can expect them to spend more and more of their time working to find ways to increase the bounty (free cash flow) of parts of the planet that they control through their ownership of leasehold titles.

In any specific case, we may not be able to explain why they improve. Perhaps they are motivated by altruism, love of the human race, and a desire to make life better for all future generations. But perhaps they are ‘only’ motivated by profit. Perhaps they only want to make money because they are greedy, and they would be working to make money even if they lived in societies where people could make money doing things that did harm to the human race. (Sovereign law societies, for example, provide fantastic rewards for war and destruction.) As a scientist, I don’t like to spend time worrying about what people claim motivates them, because people can claim they are motivated by anything they want, and scientists don’t have any tools to disprove their claims. The only thing that scientists can say with certainty is that, if people can make money (or otherwise make their lives better) by doing things that improve the world, improvements will take place.

When we enter the next range, we can expect the stagnancy we have seen so far to disappear. We will expect change, progress, and growth.

 

Double Price Leasehold Ownership

 

The EPLPLO system was set up so that the price and leasehold payment were equal. In other words, the leasehold payment was 100% times (the same as ‘1 times’) the price. In the next system we visit, the price will be exactly double the leasehold payment. To put this another way, the leasehold payment will be double the price. Here is the bid screen:

 

Auction for the Leasehold ownership Rights to the Pastland Farm:

You must enter a number into both boxes to bid. The number you enter in to the ‘leasehold payment’ box must be 50% times the number you enter into the ‘price’ box to register the bid.

Your PRICE offer                         [$ ]            

Your LEASEHOLD PAYMENT offer                [$ ]

IMPORTANT: You must enter numbers into both boxes above to activate the bid now button. The number you enter in to the ‘leasehold payment’ box must be exactly 50% times the number you enter into the ‘price’ box to register the bid.    

[Bid Now]

 

Kathy only wants to be a farmer.

She is willing to farm the land if she can make at least enough to cover the time and talent she will put into the project. She knows she can afford a total mortgage payment of up to $2.4 million a year, but she doesn’t know what numbers to enter into the boxes to make sure her payment is no higher than her maximum.

She goes to Sally, who represents the investors, to get advise.

Kathy tells Sally that she would like to gain rights to the farm with a lower total mortgage payment than $2.4 million a year. But she is willing to go up to $2.4 million and absolutely won’t bid anything that makes her payment more than this. Her payment has to include all of the amounts she pays out to people not involved in farming operation, so it must include the leasehold payment that goes to the landlords of the planet each year and the returns including interest and all fees that go to investors.

Sally makes the calculations and tells Kathy that she can afford to bid up to the following amounts:

Price bid.                              $4,444,444.44

Leasehold payment bid.             $2,222,222.22

Note that the leasehold payment is exactly double the price of the leasehold title. If she wins, her total mortgage payment will be $2,222,222 + $177,778 interest on the loan (4% of the price) or $2,400,000.

 

The Math

The leasehold payment is 50% times the price;

The interest to investors is 4% times the price;

The TMP (total mortgage payment, which is the leasehold payment plus the interest) is:

(50% * price) + (4% * price) = (54% * price).

Since the market will set the TMP to be equal to the $2.4 million free cash flow, we can substitute $2.4 million for TMP in the above equation to get:

$2.4 million = price * (54%)

Divide both sides by 54% to get:

($2.4 million / 54%) = price.

Divide out the numbers inside the parenthesis to get: $4,444,444.44 as the price) Now that we know the price, we can calculate the leasehold payment by multiplying the price by 50% to get: $2,222,222.22.

Kathy must enter $4,444,444.44 as the price and $2,222,222.22 as the leasehold payment.

If she wins, her total mortgage payment will be $2,222,222 + $177,778=$2,400,000.

Sally instructs Kathy to watch the price closely. If Kathy can buy for any price lower than $4,444,444.44, her total mortgage payment yearly payment will be less than the $2.4 million she can afford to pay. If she has to bid this exact price, her total mortgage payment will be exactly $2.4 million a year. She must not go above $4,444,444.44 because if she does, her total mortgage payment will be more than she can afford.

If Kathy wins, she will go to a ‘closing’ at the bank that will be ‘servicing’ her account. (The section below explains the idea of ‘servicing’ mortgage loans; most investors hire banks to do the servicing, which basically involves paperwork.) At the closing, she will sign the documents that the investors have prepared.

The investors are taking on risk:

Kathy may put some of her own money into the deal. If she does, she is playing two roles, one as the leasehold owner who will be running the farm, the other as one of the investors. She will make her normal $50,000 a year for running the farm. She will also get 4% times the amount of money she invests each year as a return on her investment, to cover the risk of the investment.

For example, if she invests $500,000 of her own money in the project, her interest to the (other) investors will be $20,000 lower because she will borrow $500,000 less money. After she pays all costs, she will have $70,000 left. $50,000 of this is her normal income from running the farm and $20,000 is her returns on her invested capital.

If Kathy invests her own money in the project, she is taking on risk and could potentially lose money (say if her alter-ego the ‘owner/operator Kathy’ doesn’t do a good job). Like all of the other investors, she will want to make sure the farm is operated efficiently and well, and that the landlords’ interests are protected.

If Kathy does not make her yearly payment, the investors will have to take steps to deal with the problem to prevent the loss of the investor’s money. If Kathy doesn’t make the payment, the investors will take possession of the property (repossess) and Kathy will be totally out of the picture. The investors need to make sure Kathy knows this will happen, so they have prepared several documents making it as clear as they can make it. At the closing, the escrow officer (person who deals with the closing documents) goes over everything with Kathy to make sure she understands, and has her sign several documents certifying that she understands.

When the deal closes, the escrow officer will give Kathy a check for $4,444,444.44. Although Kathy will have the check, she won’t be able to cash it, because it will be made out to ‘Kathy and the treasurer of the human race.’ Kathy will have to countersign the check, which will then go to the treasurer of the entity that is selling the leasehold, the human race.

The treasurer of the human race then must put this money into the ‘buyback reserve fund’ for that property. If Kathy has followed the rules of the leasehold and wants to sell the leasehold back to the human race, she can do so at any time and the money will be available in the reserve fund. If Kathy can get a higher price from a private party than her landlords are willing to give her (which will happen, as you will see) she will sell it to the private party. The private party may sell it to another private party, and so on, with the leasehold remaining private perhaps for centuries or longer.

As long as the leasehold is private, the money will remain in the buyback reserve fund. This money protects the human race from whatever problems come up. Because we have twice as much money in reserve than we have been promised as yearly leasehold payments, we clearly have total income protection: No matter what happens, we will always get our leasehold payment from this property. Since the money in reserve represents real treasure that is in the treasury, we have real protection. We don’t just have the faith and credit of some government to protect us, we have real physical wealth that we can use to sustain us.

 

Technical Details

 

The investors will eventually make investments in many properties. They are not professional accountants and don’t want to have to worry about accounting, so they hire professionals to ‘service’ their loans. In Pastland, the investors will probably do the same thing investors do in our 21^st century societies, and hire ‘mortgage servicers’ to take care of the details. (The box below explains ‘mortgage servicers.’) The servicers deal with all of the paperwork. They draw up the contracts, get them signed, record them, and file them.

The mortgage servicers (not the investors) send out bills and make sure that the total mortgage payments are made. (Note: the landlords are not involved in this. We don’t care if the payments to us are made, because we are holding twice as much in our reserve fund as we have been promised as a yearly leasehold payment.) When payments come in, the servicers make sure that the right people get the money.

In this case, Kathy’s yearly payment will be $2.4 million. The servicers will send $2,222,222 of this money to the landlords of the Earth, by paying it to the ‘treasurer of the human race.’ The servicers will then subtract whatever fee they charge for their services and give the rest to their employers, the investors (in our 21st century world, servicing fees are standardized at 1/8 of 1% of the principle balance; link to source).

Kathy will not deal directly with the investors. She will deal only with the servicing company. In this example, let’s say that the investors have decided to use Sally for this. If Kathy has questions, she will call Sally and ask what to do. If you have a mortgage loan in our 21st century societies, you are almost certainly dealing with a mortgage servicing company. I have had questions for investors from time to time (see sidebar for more information).

Questions for investors:

When interest rates go up, the market value of the mortgage loan goes down. What this means is that the investors can’t sell their mortgage loans for ‘par’ (the amount owed) and the investors lose money. If you are thinking about selling the property, you can negotiate with the investors to pay off your loan at a discount, which may be substantial. Professional in the real estate business know this and negotiate such discounts before they offer their properties for sale. I have done this and gotten very substantial discounts, making my gains on the property sale significantly higher than they would otherwise have been.

Since I am not allowed to talk to the investors directly, I must make my request to the servicers. They then contact the investors for a decision, and relay that decision to me.

If you call your servicer (the company that you make out your mortgage check to), and ask them who the investors are, they will not tell you. Their job is to make sure that the people with mortgages don’t bother the investors. In Pastland, we would expect the investors to do the same thing. They will probably hire someone (Sally in this case) and tell her that if the discloses any information about the identities of the investors, she will be fired. They don’t want to be bothered by the questions most borrowers have.

 

Responsiblity

 

The last chapter showed that, in all societies below the EPLPLO society, the human race is not involved in any decisions about production. We don’t have to worry about anything going wrong, because we can’t be hurt if something goes wrong. The investors will be hurt. They will therefore make sure that their interests are protected.

They will do this by inserting clauses in the lending agreement that require Kathy to meet certain performance metrics. Although the wording may be vague in the agreement, the investors know exactly what they want. For example, I bought some apartments on time, with a lending agreement that required me to operate them in a ‘professional manner.’ I got a letter in my mail that said the lenders had evaluated the property and determined that the trees were not trimmed properly. They required that I have a professional trim the trees (or trim them myself in a professional manner) or they would foreclose on the property. They send skilled professionals out to evaluate their investment in our 21st century world. We can expect them to do the same thing in Pastland.

Exception:

This is not done for residential mortgages in most nations because these mortgages are guaranteed by the government. In the United States, for example, the government takes on all risks and lenders therefore can’t lose. If they can’t lose, they don’t have any incentives to manage risk so they can’t justify hiring people to manage risk. Because people don’t manage risk, the entire mortgage market can collapse due to excessive risks. This happens on a regular basis, most recently in the period between 2008-2012, when a default rate that exceeded 50% at one point caused a collapse in the housing market.

The investors also have a ‘lien’ on any disbursements from the community granary, which is the only place Kathy can sell grain: When Kathy ‘sells’ her grain (trades it for money at the granary) the check must be made out both to the bank and Kathy. Kathy can’t cash or deposit the check until the servicing agent (Sally) countersigns the check, and Sally won’t countersign until Kathy has written another check for her mortgage payment.

 

Improvements In Double Price Leasehold Ownership

 

If Kathy improves the farm so the free cash flow goes up by 20%, the market value of the leasehold will also go up by 20%. (The section explained this thoroughly; review if you don’t see why it must happen.)

If we are starting from a very low price, the 20% isn’t much. If we are starting with a price of $2,307,692 (the price of the leasehold title if sold with an EPLPLO system), the increase is $461,538, which we have seen is just enough to replace the amount of money paid for the improvement, with nothing left for Kathy to put into her pocket. But if we are starting with a price of 444,4444, the 20% increase is $888,888. This is enough to cover the cost of the improvement, and put more than $300,000 into Kathy’s pocket at the time of the sale.

chart a2.1 Gain from improvement at different prices
Starting price (price before improvement)	20% higher price (price after improvement	Net capital gain from improvement
$1,000,000	$1,200,000	$200,000
$2,307,692	$2,769,230	$461,538
$4,444,444	$5,333,333	$888,889
$6,428,571	$7,714,286	$1,285,714
$8,275,862	$9,931,034	$1,655,172
$10,000,000	$12,800,000	$2,000,000
$20,000,000	$24,000,000	$4,000,000
$40,000,000	$48,000,000	$8,000,000
$60,000,000	$72,000,000	$12,000.000

When she is bidding, she may not realize that, after the auction is over, she will be able to make an additional investment in the property that will not only give her a huge increase in her yearly income, it will also ‘pay for itself’ and put hundreds of thousands of dollars of ‘capital gain’ money in her pocket when she goes to sell the leasehold at some later date. But she will be able to do this. Most people who buy property rights in 21st century systems eventually figure out that they can make back the money they put into improvements through capital gains. They realize that money spent on improvements is not really a cost, in that they aren’t giving this money up forever, but it is an investment that they will get back when they sell the property rights to someone else.

If they can make money improving, they have incentives to improve.

I want to mention that this point is not always totally clear to people who buy property rights in 21st century societies.

People do have incentives to improve (because they can make money improving) in our 21st century societies. But they don’t always know how the money flows work well enough to realize they can make money improving. The fact that they don’t understand the incentives doesn’t mean the incentives don’t exist. If Kathy sits down with a pencil and paper and works through the numbers, or if she had been taught how to do the math in school, she will realize she can get quite rich by finding a way to make the world more bountiful and productive, planning the improvements, raising the money for the improvements, and then giving the go-ahead and getting the work done.

 

Trade Offs With Double Price Leasehold Ownership

 

The landlords of the planet get a tiny bit less money each year with double price leasehold ownership than with equal price/leasehold payment leasehold ownership. We get only $2,222,222 a year with double price leasehold ownership, rather than rather than the $2,307,692 we got each year with EPLPLO, so we get about 3% less money each year as our leasehold payment income.

However, we get something very important in exchange. Let’s look at the benefits:

We get even more security than before. We have more than $2 million additional dollars in our reserve account than we had with the EPLPLO system.

This $2 million is not simply a pile of pieces of paper printed up by a government which may turn out to be worthless, it is receipts for real value that already exists and is sitting in the granary waiting to be withdrawn to anyone who has money.

Before, we had total income security but not total security for all events:

It would be possible that a massive hurricane or tornado could do extensive damage to the land that cut production for more than a year. If this happened, we could possibly lose after the first year (in equal price/leasehold payment leasehold ownership we had one year’s leasehold payment in reserve; here we have 2 years leasehold payment in reserve.)

But in this double price leasehold ownership system, even a catastrophe like this wouldn’t affect us, because we have enough to totally replace our income (even if it calls to zero) for two full years.

The second benefit comes from improvement incentives:

In equal price/leasehold payment leasehold ownership, Kathy could break even but not make money improving. That was the first system where Kathy would not lose money on simple improvements. But she only has incentives to improve if she actually makes money improving. In the double price leasehold ownership, she clearly makes money improving. She clearly has incentives to improve the part of the planet that the human race has allowed her to control. Now if she improves the land so the free cash flow goes up by 20%, the market value of the leasehold title will go up by $888,889. The improvement only costs her $461,538 so she will end up making $427,350 as a net capital gain, after all of her costs, if she improves. This is an enormous amount of money, far more than anyone in Pastland has made in the past, and will make her the richest person on Earth by a huge margin. The landlords of any property want the tenants of that property to improve it.

We, the members of the human race and landlords (dominant race) of the planet Earth want people who interact with the land on a day-to-day basis to improve properties because, when they do, the amount of value that flows from the Earth will increase, the bounty of the world will increase, and all future members of the human race forever into the future will benefit.

The landlords of the planet determine the conditions that people who want to control property have to meet. If we want them to have incentives to improve, we can decide to create conditions that allow people who control property to make money by improving, giving them incentives to improve. This brings the incentives that affect individuals into closer alignment with the needs of the dominant species on the planet. As they react to incentives—as they work to get rich—they will look for and find things that make existence better for the entire human race.

We can create more incentives for people to improve by choosing some form of leasehold ownership that is even lower than equal price/leasehold payment leasehold ownership in the range of possible societies. ‘Double price leasehold ownership’ has much higher incentives to improve than equal price/leasehold payment leasehold ownership. But other systems still lower in the range of options has even stronger incentives than ‘double price leasehold ownership.’

The human race won’t actually benefit from the improvement until the leasehold ownership changes ownership in a market. When the title sells, buyers will be bidding on rights to lease a property that produces a much higher free cash flow. This leasehold is worth far more money than the leasehold on the unimproved property. When Kathy improves the property, her wealth position is higher and she is worth more ‘on paper,’ but she can’t actually spend any of her ‘paper’ wealth because it is not the right kind of paper: money. When she sells the leasehold in order to ‘cash out’ (technically called ‘realizing’ the gain), she will convert it from being theoretical wealth (a higher ‘equity’ position in the property, which is theoretically worth more money) into real money. In the equal price/leasehold payment leasehold ownership system, Kathy didn’t have any incentives to sell the leasehold because she had no gain to realize. In that system, she would only make back enough money to cover the costs she paid improving. In the ‘

Here, she can put more than $400,000 in cash in her pocket merely by selling the leasehold title to this property. If she is greedy and selfish (normal) she will sell quickly and this will cause the income of the entire human race to go up quickly. If we want people to improve properties and then sell them, we can create more incentives for this to happen by choosing a leasehold ownership system below equal price/leasehold payment leasehold ownership on the Road Map.

 

A Change in the Landscape

 

At the EPLPLO society, we make a transition in the realities of the societies we are traveling through. Before, people couldn’t make money improving properties. Now they can. As we go through the next range, people will be able to make more and more money improving. If people react to incentives, we will begin to see people doing things they never did before:

In the earlier systems, people had a lot of energy. But they didn’t devote much of it to work. There was no point. They couldn’t make any significant amount of money or change the realities of their lives by working. When they got restless, they did other things. They danced and played and made music. They planted and tended trees and flowers and gardens. They threw a lot of parties. People did things. But they didn’t gain anything from productive work. If they reacted to incentives, they didn’t do much of it.

Now many people can make their lives better by working hard. Kathy can make fantastic amounts of money on the improvements. Sally can make money investing in improvements. Contractors can bid the job at levels that give them profits. The contractors need to hire workers. They need tools and are happy to pay people to make them, because the contractors and workers make more profits if they have better tools. The tool makers can make money building better tools and need better materials. All of these people can make money doing things that would never have been done in the earlier systems.

Note: Let’s not worry now about whether this is good or bad. I am not saying devoting more time to work is good, only that there are societies that have stronger incentives to work and people will devote more time to work. These societies are possible. Does more work make a better society? That is something that our group in Pastland can decide after we understand the options. If we decide we want faster growth and progress, perhaps at the expense of more stress, mental illness, and heart attacks, we may choose a society with stronger constructive incentives. If we would prefer a slower pace of growth for any reason, we may choose one that has the exact incentives we want.

In our journey through societies, we will start to see something we haven’t seen yet: drive. Many people will get up uncomfortably early in the morning and take drugs (coffee or tea, for example) to bring to the level of alertness that allows them to be able to do their work. They will work hard all day long (perhaps carrying a thermos of coffee with them, in case they start to slow down) and will often come home late in the day, too exhausted to do anything other than take drugs to counteract the residual caffeine in their system (alcohol) and fall into bed. We can expect Kathy to be there every morning when the contractors show up (probably at daybreak), to make sure they don’t waste any time and do the job right. We can expect Sally to show up on a regular basis (or send an employee to the job site) to make sure the bank’s money is being spent wisely. We can expect the contractors profiting from the work to be there and the workers hoping to get promoted to supervisor out there trying to impress the boss.

In the societies we visited earlier, people did a lot, they just didn’t do a lot that was productive. Lewis and Clark describe the endless games and celebrations in the natural law societies they visited west of the Mississippi between 1803-1805. While we had the natural law society, we would have expected to see the same kinds of activities. Now, most people won’t have time to have fun. They will have too much work to do. They can get rich working, so they have incentives to work.

We will see fewer games. Fewer parties. Fewer people will have time to take a walk just for the fun of it, or tend the really fancy gardens. People don’t have as much time for these things as before. They will have too much work to do.

 

How Society Benefits from Improvements

 

We, the members of the human race, have sold the rights to make improvements to private, profit-motivated individuals. They own the right to make any modifications that don’t harm our world. We are not involved in these decisions. Once we rule that a specific modification does not destroy the land, the owners of the leasehold titles own the right to make these modifications.

In this case, Kathy will decide which modifications to the land she wants to make. If she is self-interested, we would expect her to look first at the modifications that will make money for her, personally. Once she has decided what she wants to do, she will draw up some sort of a plan for a project, with costs and expected benefits. She will then take the project to the investors and ‘pitch’ it to them, showing them how they will also make money from it. If they approve, she will complete these easy projects. After the easy improvements are finished, she will sharpen her pencil to work out ways to improve the land that are not as easy to see.

The landlords aren’t involved in these decisions. We have sold her the right to make them. She knows this. If the modifications she makes work out, she and her investors will make money; if not, they may lose money. We hope that she will do well for herself and her investors and find ways to improve the world and make it more productive, because if she does, the entire human race will benefit with more money and more good things to buy with that money indefinitely into the future.

What if she wants to make a change that will harm the land? For example, say she decides she wants to plant a genetically modified variety of rice that is engineered to need large quantities of chemicals just to grow. (Most genetically modified plants have been developed by chemical companies. They want to increase the demand for chemicals and advertise heavily to farmers. You will see their billboards along the road of faming communities all over the world.)

Kathy does not own the right to destroy the land. Does this change destroy the land? To find out, she will have to ask her landlords. If the majority of the landlords of the planet believe that planting crops that require chemicals and then saturating the land with chemicals does not harm the land, we will put this activity on our ‘non-destructive list’ and anyone who wants to do it will own the right to do it. (Buyers of leasehold rights own the right to do anything that the landlords have ruled is non-destructive.) If, however, the majority of the landlords believe that this farming method is destructive or even potentially destructive, they can put it on the ‘potentially destructive’ list. Kathy does not own the right to do things on this list, but she may ask the landlords of the planet for special permission. If she can convince us that we all benefit by allowing some potentially destructive activities to take place on this land, we will grant permission on a case by case basis.

So far, no modifications to the land have been made. The land is in the same condition as nature made it. She realizes she can increase yields a great deal by leveling the land, so she will may want to make this improvement first. After she has finished the improvement, she will not own the exact same farm she bought the rights to. She will own a ‘new and improved’ farm that can produce far higher free cash flows. If she sells, she knows she will be selling the rights to a better farm, one that can produce a great deal more value. She knows the market value of the rights to this farm will be higher, so she can sell and make a gain.

The bidders can’t just offer a price for the property. The bid form has two boxes to fill in, one for the price and one for the leasehold payment. In the double price leasehold ownership system, Kathy offered a leasehold payment that was exactly ½ of the price she offered. Her offered price was $4,444,444 so her offered leasehold payment was $2,222,222. The computer would not allow her to bid until she had made this calculation and entered the number into the box. The new bidder is going to offer a far higher price. The new bidder also can’t offer just a price, she must offer both a price and a leasehold payment. Since she will offer a price that is more than $4,444,444. She will necessarily have to offer a leasehold payment that is more than $2,222,222. The human race will get the leasehold payment. When the leasehold changes ownership, the income of the human race will go up. In this case, where the improvement drove up the price by 20%, the income of the human race will also necessarily go up by 20%. We had been getting $2,222,222 a year (when Kathy owned the leasehold). The new owner will pay $2,666,666 a year as a leasehold payment.

I want you to understand something very important:

if we had kept the natural law society, the improvement would almost certainly never have been made. Our income would have started out at $2.4 million a year and stayed there, perhaps for thousands of years. If we convert to a ‘Double price leasehold ownership system,’ our income goes down initially, from $2.4 million to $2,222,222, so it goes down by about 7% initially. We give up a little money for a short time. In exchange for this, we get the benefits above, which include the benefits of improvements. Kathy has very powerful incentives to improve and we would expect her to improve as rapidly as she could manage. Then, she will be able to ‘cash out’ of the improvement, by selling her rights to the farm, any time and put her gain into her pocket. People want this and have incentives to sell to get the money. As soon as she reacts to this incentive, the income of the human race goes up. As you can see, our income will go up to far more than it would have been if we had kept the natural law society.

The system still has incentives to improve. Future owners will build on the improvements that nature provided for this land and that past owners made. Each time the improved land is sold, the income of the human race goes up. This happens totally automatically, without any need for anyone to access anything; our income is still totally automatic and totally risk free.

This is yet another example of the alignment of incentives that is often called the ‘invisible hand.’ People can make money improving. This doesn’t benefit the human race in every society that can exist. For example, in the societies we were born into, the human race as a whole doesn’t have any rights at all to share in the increased cash flows that come from improvements. In fact, if the improvements come about by mechanization or the elimination of jobs, the amounts that go to workers globally will fall from these improvements, so the great majority of the people of the world will actually have lower incomes because of the improvement.

What If A Leasehold Owner Improves But Does Not Sell the Leasehold Title?

 

Once the improvements are finished, Kathy has incentives to sell the leasehold title, so she can ‘cash in’ on the improvements. When she finished the improvements, the value of her property rights increased. She is worth more ‘on paper’ because her ‘equity’ in the property (the amount of money she would net if she sold) is higher. But she can’t spend this kind of ‘paper gain.’ To turn the paper gain into a real gain that she can spend, she has to sell her leasehold title. People have incentives to act a certain way if they can make money acting that way, and Kathy can make money selling, so if she responds to the incentives she will sell. However, she doesn’t have to sell.

Even if Kathy never sells for her entire life, the leasehold title must go on the market eventually because leasehold titles can only change ownership in markets. This means that she can’t give the leasehold title away, either while alive or by bequest.

Before Kathy was even allowed to bid on the leasehold title, she was required to take a class and pass a test that verified she understood that leasehold ownership is not fee-simple ownership. She learned that the members of the human race are the landlords of the planet and the landlords make the rules. In the society we are visiting, the landlords of the planet got together and decided they wanted the buyers of leasehold titles compete in markets where they offer leasehold payments to the human race. Various people will offer various amounts to us and the market will select the one person who gets the title, by selecting the highest bidder. Obviously, this can only happen if properties sell in markets. In this particular society we are visiting, the landlords of the planet decided that they want all owners of leasehold titles to be on equal footing, so they didn’t want some of them to get their leasehold titles for free while others had to compete in markets to get them. They decided they would only recognize transfers of ownership if they take place in an electronic market that they set up for this purpose. Kathy learned all this in the class she took before she was allowed to register to bid.

Leasehold ownership societies may have billions of privately owned leasehold titles. How do the landlords of the planet know that all owners will know the rules? In this society we are visiting, they decided to only accept market sales and they required that all bidders take the class that goes over all of the rules and makes absolutely sure that students understand them before the students can pass. Only those who pass can register to bid. Every single owner bought the leasehold title in a market and was qualified to bid before bidding. The computer made sure of this. They all understand the rules.

No one will ever be required to own a leasehold title. No one has to bid. The landlords are allowing people to compete to gain special or exclusive rights to parts of the world. They are not forcing people to compete, they are allowing them to compete. If you don’t like the terms of the competition, don’t compete. Kathy knew that she would not be able to give away the leasehold title, either while alive or by bequest. She knew this before she entered her first bid. Since she bid anyway, even though she knew this, she must have been willing to accept this condition.

 

What If Kathy Wants Her Daughter To Have The Farm After She Dies?

 

Kathy can still make sure her designated heir gets the property, she will just have to go through one more step to make this happen. She can direct in her will that, upon her death, the leasehold title be sold in the market that the landlords have set up for leasehold titles to sell and 100% of the money from the sale go to her daughter. If her daughter enters the high bid for the property, she won’t have to pay any of the price, because if she does, she will be buying from herself and paying herself. (Say she buys for $3 million. She writes a check to her mom’s estate for $3 million, and gives it to the attorney handling the estate; the attorney then deposits the check into the estates account and writes a check to Kathy Jr. for the same $3 million. Kathy Jr. can then deposit the check in her account and it will clear. As a practical reality of banking, the shortest unit of time is a day, so you can write a check in the morning and, as long as you have the money to put into the account by the close of business, it will clear. Kathy Jr. has ‘paid for’ the title, gotten the money from her bequest, and used it to pay the price.)

When the auction takes place, Kathy Jr. can top any bid, no matter how high it is, and will always have enough to pay any price she offers, because she will get all of the proceeds of the sale.

However, in the ‘double price leasehold ownership system,’ people can’t offer a higher price without also offering a higher leasehold payment to the landlords of the planet. What if the price of the leasehold title gets so high in the market that Kathy Jr. decides she would rather have the money than the farm? She can simply drop out of the bidding and let the other person bid. (A lot of parents think their children want their farms or businesses and bequeath them; then, once the parents are gone, the children simply sell the farm or business and keep the money.)

Either way, the human race will see its leasehold payment adjust upward due to the improvement. The bounty of the world is higher. Kathy Jr. benefits from this, because she gets more money at the time of the sale than she would have gotten if the property had not been improved. But the real beneficiaries of the improvement are the landlords of the planet, the members of the her, present and future. The improved world generates more value with more effort. Its bounty is higher. All members of the landlord class (all human beings, from no on) will have more to share. We will all get more money each year than we would have gotten without the improvement, and we will have more good things to buy with this money.

This happens no matter who winds up owning the leasehold rights to the farm.

 

Triple Price Leasehold Payment Leasehold Ownership

 

We get into the bus and head to the next society we visit. This system is called a ‘Third of price leasehold payment leasehold ownership system.’ Here is the bid screen:

 

Auction for the Leasehold ownership Rights to the Pastland Farm:

You must enter a number into both boxes to bid. The number you enter in to the ‘leasehold payment’ box must be 33⅓% times the number you enter into the ‘price’ box to register the bid.

Your PRICE offer                                                             [$ ]            

Your LEASEHOLD PAYMENT offer                [$ ]

IMPORTANT: You must enter numbers into both boxes above to activate the bid now button. The number you enter in to the ‘leasehold payment’ box must be exactly 33⅓% times the number you enter into the ‘price’ box to register the bid.    

[Bid Now]

 

Kathy still just wants to be a farmer. She has no idea what numbers to enter into the boxes. She goes to Sally and asks for a loan. Sally asks how much and Kathy says she has no idea. She wants to pay whatever will make her payment affordable. Sally asks how much she can afford. Once again, Kathy says she needs to keep all of the money she earns, so she will need the earned cash flow for herself, but she is willing to pay out up to the free cash flow, of she has to, to get the right to farm this land. She can afford up to $2.4 million a year as a payment.

Sally makes up a ‘cheat sheet’ for Kathy, so she will know her payment at various different amounts she might bid. The cheat sheet is below. Note there is one and only one set of numbers she can enter to make her payment exactly $2.4 million a year. If she can win for a lower offer, she will do this; she will not go above the offer that will make her payment $2.4 million no matter what, because she can’t afford it.

Cheat Sheet for third of price/leasehold payment leasehold ownership
Price (amount borrowed)	Leasehold payment (one third of price)	Interest on mortgage loan	Total mortgage payment including interest and leasehold payment
$ 300	$ 100	$ 12	$ 112
$ 3,000	$ 1,000	$ 120	$ 1,120
$ 30,000	$ 10,000	$ 1,200	$ 11,200
$ 300,000	$ 100,000	$ 12,000	$ 112,000
$ 3,000,000	$ 1,000,000	$ 120,000	$ 1,120,000
$ 4,200,000	$ 1,400,000	$ 168,000	$ 1,568,000
$ 5,400,000	$ 1,800,000	$ 216,000	$ 2,016,000
$ 6,000,000	$ 2,000,000	$ 240,000	$ 2,240,000
$ 6,600,000	$ 2,200,000	$ 264,000	$ 2,464,000
$ 6,675,000	$ 2,225,000	$ 267,000	$ 2,492,000
$ 6,400,000	$ 2,133,333	$ 256,000	$ 2,389,333
$ 6,420,000	$ 2,140,000	$ 256,800	$ 2,396,800
$ 6,428,000	$ 2,142,667	$ 257,120	$ 2,399,787
$ 6,428,570	$ 2,142,857	$ 257,143	$ 2,400,000
$ 6,428,571	$ 2,142,857	$ 257,143	$ 2,400,000
$ 6,428,572	$ 2,142,857	$ 257,143	$ 2,400,000
$ 6,429,000	$ 2,143,000	$ 257,160	$ 2,400,160
$ 6,430,000	$ 2,143,333	$ 257,200	$ 2,400,533
$ 6,500,000	$ 2,166,667	$ 260,000	$ 2,426,667

Note that the human race gets even less in Third of price leasehold payment leasehold ownership than we got in Double price leasehold ownership system. But we get four things in exchange for this slightly lower income:

 

1. We get much more security than before. We are holding much more money in reserve (we hold the entire price in reserve). If we should ever not get the payment, for any reason, we will get three times the missed payment in reserve. Obviously we can’t lose.

2. The investors now have much more money on the line and much more to lose if something goes wrong. They have even stronger incentives to make sure nothing goes wrong and to fix any problems that should arise.

3. Kathy can make A LOT more money by improving the farm than she could in the Double price leasehold ownership system, so she has much stronger incentives to improve in this system than the previous one. We can therefore expect her to work even harder to improve the farm than before.

4. After Kathy improves the farm, the market value goes up. But she can’t spend this money, it is only a ‘paper gain.’ If she wants to spend it, she has to ‘realize’ the gain by selling her rights to the property. We, the members of the human race, want her to do this because as soon as she does, our income goes up. In the Third of price leasehold payment leasehold ownership system, Kathy will realize a huge gain on the improvement. The market value of the leasehold will increase by more than a million dollars ($1,285,714 to be exact). After she repays the improvement loan, she will be left with $824,176 in her pocket. Tax free of course. All income in this system will be tax free. The human race gets the free wealth that the land produces. We don’t need to or want to take anything people have worked to earn.

Kathy only gets this money once she sells. If people can make money by acting a certain way, they have incentives to act that way. Kathy can make a lot of money selling, so she has incentives to sell. We want people to sell improved leaseholds, because we only start to gain (in the form of higher income) after the sale takes place. Kathy’s interests—to become the richest person on Earth (which will almost certainly happen after she sells)—align even better with the interests of the human race than they did in the earlier systems.

 

 

 

The first society we visit on our journey, and the starting place, is the natural law society in Pastland:

No one owns the land around us. The reason that we don’t have ownership really isn’t important. It may be that many people in our group believe that the mountains, rivers, lakes, and forests of the world were here before we arrived and, since we didn’t create them, they aren’t ours. It may be that this was a key factor in their decision to vote in favor of the moratorium on ownability: they thought ownability was improper (or possibly impossible) any way and, even though the moratorium didn’t ban it entirely, it at least put it off of the table for a time. Others voted for the moratorium for the reason stated earlier: they saw that, if we accepted anyone could own a part of the world, people would start fighting over who owned (or which group or ‘nation’ owned) almost immediately. We would have wars that didn’t have to exist. They didn’t have any philosophical objection to the principle of ownability of land, but they didn’t want to create motivations that would lead to conflicts if they could avoid this.

Whatever the reason, no one owns the world around us. It is as unowned as before our group went back in time.

Although we don’t own the land around us, we have the same basic needs as all other animals: we must have food or we die. The world produces food. We are superior beings: humans have advantages that other animals don’t have and we can simply take the food that would have otherwise gone to other animals. We find ourselves in a very bountiful natural world. The rice grows here wild and has for thousands of years. We can simply take it. Other animals have been coming here to eat this rice for thousands of years. They will come again this year. But we will be there, ready and able to turn them into food as well.

The marsh land was not really a ‘farm’ when we arrived. But we can call it anything we want. We decided to call the land that produced rice the ‘Pastland Farm.’ Several people, most of whom had no idea how to do anything on a rice farm, stepped forward and agreed to help bring in the rice, provided someone was there to help them figure out how to do it. Kathy stepped forward and agreed to take care of organizing the harvest and replanting, so we would have food. She was the ‘manager.’ She knew that a lot of the people who had volunteered would probably get bored in a few days and stop showing up. She wanted them to be motivated to show up so she proposed the payment system.

We had a community meeting and decided Kathy’s idea was a good one. We would put the grain in the cargo hold, issue money backed by the rice, and use part of this money to pay the workers, suppliers, and people who fabricated and operated equipment, setting up the payment system so they would get pretty close to the same amounts they would have gotten back in the 21^st century.

Kathy made sure everything went smoothly.

She knew that we would appreciate her efforts. We were paying the others the same amount they would make back in the 21^st century. She would not ask for anything, but she would hope that we would see the value of her time and agree to pay her the same amount she would have made back in the 21^st century. We all were very happy that Kathy was with us in Pastland: if she hadn’t been there, the people may not have had any idea of how to harvest rice. We may have all starved. We see her value and agree to pay her.

Year after year passes while the moratorium is in effect. The system we have works a lot like the societies of the American native people before the conquest of their lands by people who had different societies.

These societies are very simple.

She brought in the rice and had it sold (traded for money) at the granary; she then gave this money to the treasurer we had elected to manage the funds that belonged to the human race. We kept our word and paid the suppliers and workers; they got a total of $700,000. We also decided to give Kathy a reward equivalent to the amount she would have gotten for doing the same work back in the future. We gave her $50,000. After we paid all of the rewards for the volunteers who helped bring in the rice and put it into storage, we had $2.4 million left over.

Since we had fully compensated everyone involved with seeding, harvesting, managing, and all other activities related to taking in the rice at rates they considered acceptable, we knew that we could expect them to continue to do all of these things, year after year, into the future. After they got too old to do these things, or if they decided not to do these things for other reasons, we knew that the rewards (pay) offered for the jobs would be enough to attract replacements, so the work would get done year after year. The farm would essentially be a money machine, producing a continuous river of free money, with each dollar of free cash being a receipt for a pound of rice that is in storage. Almost as if a magic genie were working for us, our granary would fill with rice. Each year, we would get a river of money that we could use to buy 2.4 million pounds of that rice.

If someone had owned the Pastland Farm, the free cash flow the land produced would belong to her. But while we have a natural law society, no one owns or can own any part of the world. No one owns this free cash. Since no one has any natural rights to this money, we must have meetings and decide what to do with it. Each year, we have a meeting and elections. We decide to use part of this free money to reward people who volunteer to provide services for us. Some goes to the people who help maintain the electrical generators so we can have electricity. Some goes to the people who maintain our water supplies and internet. Some goes to the doctors at our little medical clinic. We reward any people who do things that bring benefits to the human race. But we have a truly enormous income. We only spend $400,000 a year on services. This leads $2 million a year as ‘surplus free cash;’ free cash that is over and above the amount we need to pay for services. We divide this money in some way we can agree on. So far, we have divided it equally, with the exception of a few minor reductions in payments for a few people who break rules and have penalties subtracted from their share.

We are very lucky to have been sent back in time onto this particular world. (The space-time warp may have sent us somewhere else.) It is a very bountiful world, pouring forth massive amounts of wealth over time. Every single human being on earth benefits from this bounty. All you and I have to do to get our share is to act responsibly, treat the world and people around us with respect, and follow whatever rules the human race as a whole has made to allow its members to live in harmony with each other. Life is very, very good for people in natural law societies, particularly if the population level is low and there is sufficient food.

 

Natural Law With Rental

 

We could have gotten to this point a slightly different way: We could have rented the property out.

After everything was said and done each year, we ended up with $2.4 million. We could have gotten the same income by simply renting the land to Kathy for $2.4 million. We could have allowed her to operate the farm, sell anything it produced, pay her costs and take care of her workers, give us $2.4 million a year, and keep everything else.

Many natural law societies rented property out. The Nez Pierce Indians, among the last to be wiped out and therefore one of the most thoroughly studied, raised a crop called ‘camas’ on their lands in the states currently called Idaho, Washington and Oregon. I have raised camas and it takes a great deal of intensive and skilled labor to raise. In order to make sure people paid the proper attention to the crop, the Nez Pierce decided to divide the camas-producing land into plots. They then rented the plots out to families. Each renter would turn over a certain number of bulbs to the tribe as rent, and could keep the rest.

Natural law societies don’t accept land can be owned. But renting is not owning. Renting is just one of many ways that people who live on land can interact with the land they live on. We can decide to rent out the land without ever even deciding whether or not it is ownable. We may decide that the issue of who owns the land is too complicated for us to figure out now. We may decide that, until we can figure this out, we will act as the caretakers or conservators of the land. Our job will be to make sure that the land remains healthy and productive, so that if we should ever find that it is ownable, and make a determination of which people, gods, or other entities own it, we can turn it over to the rightful owners in good condition. Conservators of land can treat it many different ways. Renting it out is one of these ways. We don’t have to decide we own the land to change Kathy’s title from ‘employee’ to ‘renter.’

If we rent out the land, we get the same income from it as we get if we put it under management (paying Kathy to manage it). As long as she doesn’t do anything differently, she will have the same income also. The flows of value will be the same so the incentives will be the same. The basic realities of a natural law society with rentals are going to be the same as those of a natural law society without rentals. Renting the farm doesn’t change anything critical about our society.

 

Leasing

 

What if we ‘leased’ the land, rather than ‘renting’ it?

In common usage, people think of ‘leasing’ as a long-term arrangement (a year or more) while ‘renting’ is a short term arrangement, but in courts of law, the two terms are generally used interchangeably. In other words, there are no formal differences between leasing and renting; all of the differences are in the way people use the terms in normal conversation. This means that, at least formally (and legally, if we decide to apply the common legal terms from the 21st century in Pastland) we could call our arrangement ‘leasing’ or ‘renting’ if we want, but the name we give it wouldn’t affect the way it works: Kathy would have the right to operate the farm and keep all excesses it produced, in exchange for a $2.4 million yearly payment. We might call this payment a ‘lease payment’ or ‘rent’ if we want.

A lease: formal document that authorizes the use of property in exchange for a yearly payment. If the document is not marketable (can’t be transferred) it is just a ‘lease.’ If it is marketable, it is called a ‘leasehold.’

We could lease the property by drawing up an document authorizing the lease of this property for $2.4 million a year. We could then advertise to find candidates willing to lease the property and accept applications from them. We could go over the applications and select the best candidate. For this example, let’s imagine we do this, and select Kathy to lease the farm for $2.4 million a year.

 

A Market System

 

Rather than simply offering the lease with a fixed lease payment, we might conduct an auction.

We might advertise that we are willing to consider leasing the Pastland Farm. We can tell people that we will conduct an electronic auction to see how much money people are willing to pay each year as a lease payment. Once we get the final bid in, we (the landlords) will have a meeting and make a decision about whether to lease the property to the high bidder.

How would we expect such an auction to turn out?

Remember this premise: Kathy likes farm work. She is willing to farm the land if she can get $50,000 a year for her time and skills. The farm generates net operating profits of $2.45 million a year. Kathy can afford to pay up to $2.4 million a year as a lease payment; if she pays this exact amount, she will get $50,000 a year for herself after the lease payment.

Some other people understand farming. They have seen the farm run and know it can generate net operating profits of $2.45 million a year. Some of these people are also willing to run the farm for $50,000 a year. These other people can also afford to offer up to $2.4 million a year as lease payment.

At any auction like this, some, and often most, of the bidders will be people who have no interest in actually running the farm; they are bidding because, if not many people are bidding and bids are very low, they may be able to get the rental for a very low rate; they can then hire someone to run it and make a nice profit. These people are called ‘speculators’ and they play a very important role in all land auctions: they make sure that the rental rate will not be extremely low. (The technical term is this: ‘.’ Consider this example:

Say we set the opening bid at $1 million and, since we have never had an auction like this before, people are initially afraid to bid and, for several days, no one enters a bid. You are in Pastland. Consider what would happen if you bid $1 million and win. You can hire someone to run the farm for $50,000. (Kathy has already made it clear that she is willing to run the farm for this; others are also interested either at this price or at a slightly higher price.) The farm generates $2.45 million in net operating profits. You can pay your manager $50,000 of this, us $1 million to make your lease payment, and be left with $1.4 million for yourself. Obviously, this is a great deal for you: you do nothing and end up with $1.4 million.

A great many people come to auctions hoping to get what they consider ‘a great deal.’ Because these people are always there, great deals are very rare. The speculators bid against each other hoping to get a great deal until the lease payment gets up to a reasonable level. At a certain point, the deal won’t be good enough for speculators and they will drop out. After all of the speculators have dropped out, only people who are interested in running the farm themselves are left in the bidding.

The saying ‘speculators provide liquidity to markets’ means that speculators will do most of the bidding in markets. If there were no speculators in markets, only a few people or perhaps only one person may be bidding. In this case, Kathy may be the only person interested in renting the farm. That doesn’t mean she will be able to win the bidding for a very low rate: Speculators will bid against her, to make sure this does not happen.

 

The Auction

 

The auction is electronic and will last 30 days. Terry sets the minimum bid at $1 million. No one bids for the first week. You do the calculations above and realize that, if you can win for $1 million, you will get a really great deal. You enter this bid.

Kathy can afford to offer $2.4 million. But she isn’t going to enter her highest offer right away. She is going to try to win for a much lower number. (This is not going to happen for the reasons discussed above, but people can still hope. A lot of people go to bed the high bidder for an item on Ebay and hoping they will win; when they wake up, they generally find the item sold for about the same price they would have had to pay if they had simply shopped for the item from a shopping site.) She is dreaming of a windfall and offers $1,000,001.

I am in Pastland. I know I can easily afford to offer $2 million, I can then hire a farm manager for $50,000. After paying all costs, including the cost of the farm manager and the lease payment to the landlords, leaving me with $400,000 a year for myself, without doing anything.

I have been to and bid at a lot of auctions and I know there really isn’t much chance of me winning. But I don’t lose anything by bidding. I can only win or lose. If I win, I get the windfall; if someone bids higher and I lose, I am no worse off than I would have been not bidding. It doesn’t hurt me to bid either way so I will bid.

Other people will see the same opportunity. They would like to end up with a $400,000 windfall but will settle for less. You can offer $2.3 million. After paying your manager and lease payment, you will end up with $400,000. This is still a great deal. You lose nothing by offering this rent and can hope to gain if you win. As the bid gets closer and closer to the free cash flow ($2.4 million), the speculators will drop out of the bidding, one at a time. At a bid of exactly $2.4 million, they make no money at all: they have to pay out all of the net operating profits either to the manager or the human race as a lease payment. At a bid slightly below $2.4 million, they won’t be interested in the deal: if they can only make a few hundred dollars, most people won’t want to get involved.

After the speculators drop out, the only people bidding will be those willing to operate the farm. Kathy is willing to operate the farm for $50,000 a year. Say that another person, let’s call him ‘Harry,’ is willing to work the farm if he can make $50,001 a year. The most Harry can offer as lease payment is $2,399,999 a year. Kathy can afford to offer more and, since she can still make enough money to justify the work she does at a bid of $2.4 million, she will enter this bid.

A society with a ‘market leasing system,’ is still a natural law society. Market leasing is not owning. The person with the lease does not own any rights. She is only leasing the property for a rate determined in the market.

People who deal with real estate and leases know that there is a very simple formula that tells them how much a property will lease for in a market transaction. This formula is:

 

Market Lease Rate = Free cash flow

 

This makes sense. The free cash flow is the amount of surplus money left over after subtracting all operating expenses, including the pay of the person managing the property, from the revenues. People don’t work for the free cash flow: it is the bounty or unearned wealth the land produces. If they have to pay this entire amount out as a lease payment to get the right to operate the farm, they will still be left with enough for themselves to justify the work they do.

They can’t pay more than the free cash flow because, if they do, they won’t be left with enough to pay everyone involved with collecting production, including themselves. They would like to pay less but the market forces discussed above will make this impossible: if a property is leased in a market and the current bid is substantially less than the free cash flow, speculators can enter higher bids, hire people to run the property, and make a windfall for themselves. They will keep bidding against each other until that windfall is basically gone, meaning that the winning bid will wind up being equal to the free cash flow of the property, or some amount so close to the free cash flow that any difference isn’t important for practical purposes.

Later, we will look at other land tenure systems, including freehold ownership. We will see that the most commonly used method of appraising these properties (determining the amount they would sell for in a market transaction) involves dividing the free cash flow by the market interest rate on assets with similar risk at the time of the transaction, called In order to appraise properties, the appraisers need some figure to use as the ‘free cash flow.’ If the property is leased out at a market rate, the appraisers take the market lease rate as the free cash flow.

This is the only really objective way to calculate the free cash flow: let the market do it for them. If they make guesses about the revenues, operating costs, and costs of running and operating the property, they can be way off. But the market tells them how much people are willing to give up each year to control the property. Since people are not willing to give up money they need to cover the value of their time or their costs, they will offer up to the free cash flow, but no more; other bidders will force them up to the free cash flow or to a number so close to the free cash flow that any difference isn’t important for practical purposes.

If we start with the simple natural law society in Pastland without leasing and then visit an identical one with market leasing, we would expect the lease payment to be $2.4 million a year. The flows of value are identical to those in a natural law society without leasing, so the incentives will also be identical.

 

 

A Leasehold (A Marketable Lease)

 

In some cases, people setting up leases do not allow the people who lease the property to sell or otherwise transfer their rights. In other cases, they don’t care. Often people who are leasing property only really care about getting their money and making sure the property remains in good condition. They don’t care who, specifically, is living on the property, operating it, making day-to-day decisions on the property or even whose name the lease is in. They don’t mind if the people who first sign the lease decide to sign it over to someone else. They allow leases to be transferred.

A lease that is not assigned to a specific person, but may be purchased or transferred as many times as desired during the lease term, is called a ‘leasehold.’

At times, leaseholds can be very valuable. We saw this with the examples in Book One, which used the socratic leasehold ownership system. The first time Terry sold the leasehold, she created a document that granted the right to lease the Pastland Farm for a yearly payment of $2 million. She then sold the leasehold for $10 million.

When Kathy bought the leasehold for $10 million, she borrowed the money at 4% interest, making her yearly interest costs $400,000. She made this payment and the leasehold payment of $2 million, so her payments totaled $2.4 million a year, the exact amount of the free cash flow. She was willing to make payments of $2.4 million a year to control the farm because, after the payments, she was left with the $50,000 she needed for her time and effort.

(Why was it worth $10 million? See sidebar.)

Since leaseholds can be worth a lot of money, people care a great deal about making sure all of the paperwork and details are right and they list the name of the person with rights to the leasehold in the proper places. The person with rights under the lease is called the ‘leasehold owner.’

Some leaseholds are worth a lot of money. Some are not worth anything at all. After Kathy wins the market leasing auction, she may find that she gets a kind of bonus when she signs the papers. The leasehold agreement may say something like:

 

This leasehold is ownable property and the first people to have rights under it are to be called ‘leasehold owners.’ The leasehold owners may sell or give away the rights under this leasehold. If they do and both the sellers and buyers agree to this, all rights under this leasehold may be transferred to the new owners.

 

The reason the leasehold in Book One was extremely valuable was that it leased the property for far less than the $2.4 million. In that example, it leased the property for only $2 million a year, $400,000 less than the free cash flow. The buyer of the leasehold would get to keep this $400,000 a year. If you happen to have money to pay the price of the leasehold and pay it in cash, you will end up with a $400,000 yearly income from the farm. (It produces $2.45 million in net operating profits. You can hire someone to run it for $50,000, make the leasehold payment of $2 million, and end up with $400,000 for yourself.) If you have $10 million of your own money to pay cash, you will get exactly a 4% yearly return on your investment.

Kathy didn’t have the money to pay cash for the leasehold in the example in Book One, so she had to borrow it. She borrowed at 4% and, after paying her interest, she didn’t get anything more from the leasehold in Book One than she will get from the leasehold here.

If a leasehold is set up so the leasehold payment is exactly equal to the free cash flow, the leasehold is not worth anything. If Kathy wins this auction and then tries to sell the leasehold, no one will want to buy it for any positive amount of money.

The first leasehold ownership system we look at is one where the leasehold is marketable, but the leasehold payment is exactly equal to the free cash flow. Technically, Kathy will own rights to the land. That means that this is no longer technically a natural law society. But the flows of value are identical to those of a natural law society with market leasing system, and the incentives will be identical. If we were to look at two societies, side by side, one that had ‘market leasing’ and the other with ‘leasehold ownership with the leasehold payment set to be equal to the free cash flow’ we would not expect to see any difference.

 

An Almost Non-Change Change

            In this book, I want to show that it is possible to get from a sovereign law society to any other society, including a socratic leasehold ownership society and including a natural law society, by infinitely tiny steps.

Why does this matter?

We were born into sovereign law societies. People are often told that there is nothing we can do about the basic realities of our existence, because they can’t be changed without a revolution. Since revolutions hurt everyone (and don’t really change anything over the long run), we are helpless. If we can’t do anything, we are wasting our time try and any mental effort we put into thinking about change is wasted effort. Why think about it if you can’t change it?

The truth is that it is possible to get from the societies that we were born into to societies that can meet all of our needs by infinitely tiny steps. Each step may be too tiny to even notice. But by taking one tiny step at a time, we will eventually get to societies that can meet all of our needs. If you understand this, you will see that the common notion that we are helpless is totally wrong. We can change the realities of our societies and make them work any way we want, without revolution, without violence, and without ever taking anything away from anyone.

Why does this matter?

If we can accept this in our minds, we can accept that mental effort spent working out other societies is not wasted effort. We will see that the only reason we don’t have sane societies now is that we are unwilling to even think about creating them. Obviously, if we never even think about how to build descent societies, we will never find a path to these societies.

It may seem that the discussions above go into unnecessary detail to describe changes that are so tiny that they would have no impact on society that anyone could notice. But that is exactly the point I am trying to make here: this is possible. We will see that we can go all the way from the simple natural law societies that the American native people had to the societies that now use nuclear weapons to protect the sovereignty of nations by infinitely tiny steps. Then, we will see that all of the steps can take us the other way if we want to take them.

To really understand that we can make changes to make our world better, without violence, you must first understand that there is a continuum of options. The old saying goes ‘a journey of a thousand li begins with a single step.’ If there is a path from where you are to where you want to go, and this path has no blockages, holes, or gaps, you can get there. Perhaps it will take a long time, but you can get there.

I need you to know that this path does exist.

 

Virtual Natural Law Leasehold Ownership

 

The next change is so tiny it doesn’t even appear to be a change at all. It doesn’t alter the flows of value in any way that anyone would notice and therefore doesn’t alter the incentives in any way that anyone would notice. But it is a real change that takes us our next baby step toward the other end of the spectrum, a sovereign law society.

This system uses a kind of leasehold ownership called ‘virtual natural law leasehold ownership.’ In this system, the leasehold is not given away, it is sold for a price. The bidders must offer a price for the leasehold and it will go to the highest bidder. The bidding will be in millionths of a cent (for reasons that will become apparent shortly) and the leasehold payment the winner pays will depend on the price she bids: it will be exactly 100,000 times the price. For example, if the leasehold sells for exactly 24¢, the leasehold payment will be exactly $2.4 million.

Before I describe the auction, I want to tell you how it will turn out: Kathy will win the bidding for a price of 24¢. This will set her leasehold payment to $2.4 million a year.

Now let’s see why:

Terry has prepared a document she calls a ‘leasehold title.’ This title will grant rights to the buyer/owner of the document. She will then sell the rights to the property by selling the leasehold title. Here is the leasehold title people will be bidding on:

 

 

Although this may seem quite complicated, it really isn’t: People aren’t going to really care about the price: it is just a number. They will bid up in millionth of a cent increments. But a millionth of a cent is obviously not going to affect anyone’s decisions. It can’t even be paid because we don’t have any coins smaller than a cent; it will round off and become meaningless.

The bidders won’t care about the price for its own sake, they will only care about it because it determines the leasehold payment. They will bid as if they are bidding on the leasehold payment. Speculators will be in the market if the bidding is very low (say 23¢, leading to a leasehold payment of $2.3 million.) As the price gets within a few thousandths of a cent of 24¢, the speculators will drop out of the bidding and only people like Kathy—those who intend to operate the farm—will be in the bidding. At a price of 23.99998¢, the leasehold payment will be $23,999,998, and both Harry and Kathy will still be in the bidding. Harry can bid 23.99999¢ and be left with $50,001 after his leasehold payment. Kathy can bid up to 24¢.

 

Improvement Incentives In Virtual Natural Law Leasehold Ownership Societies

 

Book One we looked at socratic leasehold ownership systems in detail. In socratic leasehold ownership systems, people could make a lot of money buying leaseholds, improving them, and selling them. If she improves the property so its free cash flow is 20% higher, the price goes up by 20%. In that example, the starting price was $10 million; it went up by 20% to $12 million so Kathy made $2 million improving the property. She spent $400,000 on the improvements, so she made $1.6 million on the improvement.

In the virtual natural law leasehold ownership society, if she improves the property so its free cash flow is 20% higher, the price will also go up by 20%. (See sidebar for reason.) But 20% of 24¢ is only 4.8¢. Kathy could level the land for $400,000, then sell the leasehold for a total of 28.4¢. She would make a 2.4¢ as a gain, but she would have had to invest $400,000 to make this gain, so she will end up with a net loss of $399,999.976 on the entire project.

This not as much money as she would have lost in the natural law leasehold ownership society: in that case, the price would have started at 0¢ and gone up by 20% to 0¢, for a gross gain on the sale of 0¢ and a loss on the project of $400,000. But the difference between these two numbers is so small that they wouldn’t affect anyone’s decisions. If Kathy wouldn’t have made the improvement in the natural law society, and wouldn’t have made it in the natural law leasehold ownership society, she wouldn’t make it in the virtual natural law leasehold ownership society either.

Natural law societies existed and were stagnant for millions of years. People who want to make improvements must invest far more in the improvements than they can ever hope to recover. If they use money for transactions, they lose money; if they don’t use money, they lose their time, skills, resources, and other forms of wealth. People are motivated to avoid losses, not create them. We would not expect to see any more progress or growth in a virtual natural law leasehold ownership system than in a true natural law society.

 

1,000K Leasehold Ownership

The next system we look at will sell this document:

 

 

To offer us a leasehold payment of $2.4 million a year Kathy must offer a price of $24.

It is true that this is a hundred times more than in the previous example. But it is still not a significant amount of money relative to the amounts of money that Kathy will be handling. She may worry a little more and be a little more upset about having to pay this $24, but it isn’t going to affect her decisions or those of other bidders. The leasehold title will sell for $24 with a leasehold payment of $2.4 million. The flows of value will be the same, the incentives will be the same, and if we look at the two societies side by side, we would not expect to see any differences worth noticing.

 

10k Leasehold Ownership

The next system we look at will sell this document:

 

 

To offer us a leasehold payment of $2.4 million a year Kathy must offer a price of $240.

She could ignore 24¢. She didn’t think $24 was much compared to the amounts the farm generated. But $240 is quite a bit of money. She might start to think about this decision a little differently.

Kathy is putting her $240 at risk. Back in the future she occasionally made investments where she put her money at risk. She didn’t do this because she liked risk, but because she expected to make returns on her investment, and she wanted the returns. Kathy knew that, if she put money at risk in enough different ways, she might lose money on some of the investments. In order break even she needed to make a certain return on every dollar she put at risk.

Back in the future, she realized she could make money on farm investments if she got a 4% return on her ‘at-risk’ money. Here, she is willing to make the investment if she can get 4%, but not if she doesn’t get 4%.

She works through the math and figures that she can get her 4% return if she reduces her leasehold payment bid by $9.60. In other words, she could offer $2,399,990.40 as a leasehold payment. (She will have to bid 1/1000000% times this figure or $239.99 and 904/1000 of a cent as a price. Since we have no coins less than a penny, when she pays, this will round up to $240.) If she does this, she will get $9.60 a year as a return on her invested capital, the same 4% return she would have made back in the future.

 

The same math works for any leasehold ownership system we look at, so I will repeat this description of the math several times, inserting the appropriate numbers into the same formulas:

 

We are on a trip through various possible societies. We started at a natural law society with a ‘pure’ rental (a rental with no deposit, price, or other investment or security required). We then went to the virtual rental leasehold ownership system. This system is a tiny, tiny bit lower on the road map of possible societies than the natural law society. We then went to the almost rental leasehold ownership system. This is a tiny bit below the virtual rental system on the road map of possible societies.

Although these systems are different from each other, the differences are so small that they aren’t going to have any real incentives of these societies. For practical purposes, these systems will have the same incentives as natural law societies.

 

1K Leasehold Ownership

 

The next system we visit will sell this leasehold title:

 

 

Kathy goes through the math in the yellow box below. She calculates that she can offer $23,990.4038 as a price and $2,399,040.38 as a leasehold payment. If she wins, she will borrow the $23,990.40 at 4% from investors, with an interest payment of $959.62. Add this to her leasehold payment to get a total mortgage payment of exactly $2.4 million a year.

 

 

Note that Kathy’s decision is exactly the same in every case: she will agree to make a total mortgage payment of $2.4 million a year. She has to do a little math to figure out how to make this happen, but this is what she cares about: she wants to run the farm and end up with $50,000 after all her costs. She can afford to pay out $2.4 million as a total mortgage payment and, if other bidders force her up to this bid, she is willing to go this high, and no higher.

Although Kathy’s situation is the same, the situation of the human race is different.

 

A Trade Off

 

Note the human race gets $959.62 a year less money in the ‘nearly natural law leasehold ownership’ system than in the natural law society. We don’t give up the $959.62 for nothing. We get a kind of ‘deposit.’ When Kathy comes to sign the documents and pay for the leasehold, she will bring a check for $23,990.40 for the price of the leasehold.

We will have this money.

Because of the buyback agreement, this is not really our money. Kathy can ask for it back at any time, so we have to hold it in a ‘buyback reserve account.’ As long as the leasehold is private, the money will stay in the buyback reserve account.

As long as Kathy makes her leasehold payment as promised, the leasehold will remain private. If she ever misses it, however, the leasehold terminates and is no longer private property. All rights to the Pastland Farm revert back to the landlords. If this should ever happen, we won’t have any reason to continue to hold the $23,990.40 in reserve. It will become ‘our money.’

The nearly rental leasehold ownership system is very similar to a rental with a deposit. Kathy puts up $23,990.40 when she signs the document, and we hold this money aside for her in case she wants it back. If she has met all of the terms of the leasehold agreement and asks for it back, she gets it back, just as if it were a deposit.

If landlords have deposits on rentals, they have more security than if they don’t have deposits. In this case, we have a deposit on the Pastland Farm. Although the amount is quite high compared to nothing at all (or the mere 24¢ we got with virtual rental leasehold ownership), it is still small relative to the yearly leasehold payment. In fact, we only get 1/100^th of the yearly leasehold payment as a ‘deposit.’

We do have security. But we don’t have much security.

If we wanted more security, we could get more, by choosing a price leasehold payment ratio that leads to higher prices.

 

10X Leasehold Ownership

 

The next society we visit on our journey is called ‘10X leasehold ownership.’ In this system, the human race sells this leasehold title:

 

 

Kathy calculates that if she offers $239,043.8247 as a price her total mortgage payment will be $2.4 million a year.

 

 

Kathy only wants to be a farmer.

She would like to be a farmer, get paid for everything she does, AND get free money (a part of the free cash flow) if she could find a way to make this happen. If she can buy this leasehold on terms that make her yearly total mortgage payment anything less than $2.4 million a year, she will get this kind of bonus free money. However, if the other bidders force her to pay out her maximum, by bidding against her, she will not get this free money. In this example, at least one other bidder has enough background in farming to have come up with the same figures as Kathy (for revenues, costs, amounts of work required, and value of her time), and is therefore willing to offer the same total mortgage payment as Kathy. As a result, we know that the bidding will go up at least until the total mortgage payment is $2.4 million. If anyone were willing to make a total mortgage payment higher than $2.4 million, the bidding will go higher. But no one is willing to pay out more than her opinion of the free cash flow, and no one here thinks the free cash flow is more than $2.4 million. This means that no one is willing to make an offer that will lead to a total mortgage payment of more than $2.4 million. Since we know the bidding must go at least this high, but can’t go higher, we know how the auction will turn out: the leasehold will sell on terms that make the leasehold payment exactly $2.4 million a year.

Kathy (and other bidders) is making the same decision she has made in each case so far.

In all of the auctions that will follow, she will make the exact same decision. She will need to get all of the money she earns. The farm produces more than she needs for the work and, of course, she would like to get the amount she earns plus some free money. But if the other bidders force her to give away all of the money she does not need for work she does or labor/materials she pays for (the entire free cash flow) she is willing to do this. We know this is true because of the assumption about her personality made when she was first introduced: she likes to farm and is willing to farm the land as long as she gets paid for the work she does. Because we know how much she thinks the free cash flow is ($2.4 million a year) and we know that other bidders will force her to offer whatever numbers make her total mortgage payment equal to the free cash flow in the auction, we know how all of these auctions will end up: the total mortgage payment will wind up being exactly $2.4 million in all of them.

Kathy has to do some math to figure out the correct amounts to bid. But Kathy doesn’t care about these details. She just wants to be a farmer. She needs $50,000 a year for the work she does and will farm if she gets it. The math may be difficult for her, and in fact, it may be too difficult for her to do herself. (She may go to a professional and ask the professional to work through the math for her, as she has done in every case so far.) But the decision she will make, in every case, will be very simple.

In some of the systems we get to later in the book, she will realize some things after she has purchased the leasehold that will make her realize that she can get very rich by improving the property and then selling the leasehold rights to the property. But before she buys, she will probably not go to the trouble of going through calculations to determine what may happen if she treats the property differently after she buys. Before she buys, all she really cares about is making enough money to justify the work she will do operating the farm. As long as her total mortgage payment is no higher than $2.4 million a year, she is willing to operate the farm.

We are taking a mental a journey through possible societies. We will end up at societies that are a great deal different than the ones we saw in this chapter, but the changes we will see are yet to come on our journey. So far, this system looks very much line a rental with a deposit. The final system, the ‘tenth of rent deposit leasehold ownership’ system, looks very much line a market-based rental system, where people have to post deposits that are 1/10^th of the rent.

Note that the ‘price’ Kathy pays is exactly 1/10^th the leasehold payment she offered. Although we call it a ‘price,’ it is ‘acting’ like a rental deposit. The landlords will collect this at the time the documents are signed. We will then hold this money as long as Kathy operates the farm. (If she transfers it, she can transfer her right to get this money back to the person who takes over, provided she follows the rules). If Kathy wants it back, and has followed the terms of her leasehold agreement, she can turn the property back over to the landlords and get it back.

Technically, it is not a deposit for a rental, but in practice it works very much like a deposit on a rental. The next system we look at will be the first that has different incentives.

 

The next society we visit on our journey is called ‘Equal Price/ leasehold payment leasehold ownership.’ In this society, the landlords of the world are willing to allow private property, by allowing people to lease parts of the planet from them under these terms: people who want to control property privately must take a class and pass a test to confirm they understand how private property works before they can even register to bid on rights to control parts of the planet privately. They are taught that the human race does allow people to own property rights, but not freehold property rights. In other words, they can’t own parts of the planet itself, they can only own the permission of the landlords of the world (the human race) to use parts of planets in certain ways and in accordance with certain rules the landlords have made to protect the rights of the landlords of the world.

In order to buy rights to the world, they must bid in auctions to show that they place more value on these rights (and are willing to pay the landlords of the world more to get them) than anyone else on Earth is willing to pay. They must be willing to pay two ways:

 

1. By paying a price for the leasehold document itself and,

2. By agreeing to make a leasehold payment over time to their landlords.

 

In the class, people are taught that the landlords of the world have decided that they want a great deal of security to guarantee that leasehold owners are responsible. In order to make sure that leasehold owners will be responsible, the landlords of the world will require an initial investment (called the ‘price’ of the leasehold title) that is equal to the amount that will be promised to the human race each year as a leasehold payment.

This is a kind of hybrid system between a natural law society with pure rental and a sovereign law society with freehold ownership. In the class, people are taught that they can think of this kind of leasehold ownership either as an extreme kind of rental or as an extreme form of ‘regular’ ownership, with a very high ‘property tax.’

If they want to think of it as a rental, they could say that it is a rental with a huge deposit, a deposit that is equal to the yearly rent. They could think of the auction as a bid for this rental: whoever bids the highest amount to rent each property, knowing in advance that they will have to post a ‘deposit’ equal to the amount they bid, will win the auction. For example, if Kathy is willing to offer $2 million a year as a yearly payment to the landlords (which she could think of as ‘rent’ if she wants) she must also be willing to offer $2 million as a ‘deposit’ on the property. She will ‘post this deposit’ when she signs the rental agreement; she can get it back at any time (by ‘selling the leasehold back to the landlords’) provided she is current on her ‘rent’ and providing she has followed the other rules of her rental agreement (mainly not using the property in ways that are on the ‘list of potentially harmful uses’).

If they want to think of it as an extreme form of ‘regular ownership,’ they could say that they are bidding to buy the property, under terms that will create a yearly ‘property tax’ obligation (the leasehold payment) that is exactly equal to the price they pay. For example, if Kathy is willing to offer a price of $2 million a year, she will be aware that by offering this price she will create an obligation to make a yearly payment to her landlords for the same $2 million.

Although we can think of this system either way (as a rental with a very high deposit or regular ownership with a very high property tax), it is technically not either of these things. Technically, it is a leasehold ownership system, with a price/leasehold payment ratio equal to 1:1. In other words, it is a leasehold system where people who bid to buy the leasehold must also bid to make a leasehold payment equal to the price they pay.

 

The Bidding

 

The EPLPLO system is based on the premise that the human race is the dominant species of being on the planet Earth. We are in charge and make the rules. We can make any rules we want and no other being on the planet can override them. In this particular case, we have decided that we want an enormous amount of security to guarantee our yearly leasehold payment, so we have set the price of the leasehold equal to the yearly leasehold payment bid.

In the auction, we will allow people to bid on the leasehold. They will have to bid in an electronic auction that has a bid screen like this:

 

Auction for the Leasehold ownership Rights to the Pastland Farm:

You must enter a number into both boxes to bid. The number you enter in to the ‘leasehold payment’ box must be exactly the same as the number you enter into the ‘price’ box to register the bid.

Your PRICE offer                                                             [$ ]            

Your LEASEHOLD PAYMENT offer                [$ ]

IMPORTANT: You must enter numbers into both boxes above to activate the bid now button. The number you enter in to the ‘leasehold payment’ box must be exactly 100% times the number you enter into the ‘price’ box to register the bid.    

[Bid Now]

 

When we arrive in this society, we are looking in at a private meeting:

Kathy and Sally are getting together a few days before the auction is set to open. Sally is working for the investors, who will provide the money that will be transferred to the sellers of the leasehold (the landlords of the Earth, the human race in this case) as a ‘price.’ Sally is a financial expert and understands all of the numbers.

As always, Kathy just wants to be a farmer. She is meeting with Sally to help her understand how to make this happen (how to become a farmer in this system). Kathy points out that she is willing to farm the land if she can make the $50,000 she needs for the work she does, after all of the costs and expenses (including any payments she must make to either investors or landlords). Kathy knows that the farm is bountiful and produces a free cash flow of $2.4 million a year. She can afford to pay out $2.4 million a year (the entire free cash flow) as a total mortgage payment; she can’t afford to pay more than this.

Kathy has seen the bid screen.

She tells Sally that she is very confused, because it doesn’t have a place for her to offer a ‘total mortgage payment.’ She can only put down a ‘price’ and a ‘leasehold payment,’ these numbers will determine her total mortgage payment. Kathy tells Sally that she needs to know what numbers to put into the boxes to make sure her total payment is affordable. Sally sits down at her computer and a few minutes later a sheet of paper Kathy’s phone buzzes to confirm she has received an email from Sally that contains an attachment called a ‘cheat sheet.’ Sally explains that Kathy can use this to show her how much her total mortgage payment will be if she bids different numbers. The columns are color coded, with the first column (in blue) representing amounts she might put into the ‘price’ box, the yellow column the amounts she must enter into the ‘leasehold payment’ box at each different ‘price’ entered, the red column showing her interest payment to investors at each different price offer, and the green column at the end her total mortgage payment at each combination of numbers.

Cheat Sheet for equal price/leasehold payment leasehold ownership
Price (amount borrowed)	Leasehold payment (equal to price)	Interest on mortgage loan	Total mortgage payment including interest and leasehold payment
$ 100	$ 100	$ 4	$ 104
$ 1,000	$ 1,000	$ 40	$ 1,040
$ 10,000	$ 10,000	$ 400	$ 10,400
$ 100,000	$ 100,000	$ 4,000	$ 104,000
$ 1,000,000	$ 1,000,000	$ 40,000	$ 1,040,000
$ 1,400,000	$ 1,400,000	$ 56,000	$ 1,456,000
$ 1,800,000	$ 1,800,000	$ 72,000	$ 1,872,000
$ 2,000,000	$ 2,000,000	$ 80,000	$ 2,080,000
$ 2,200,000	$ 2,200,000	$ 88,000	$ 2,288,000
$ 2,225,000	$ 2,225,000	$ 89,000	$ 2,314,000
$ 2,250,000	$ 2,250,000	$ 90,000	$ 2,340,000
$ 2,301,978	$ 2,301,978	$ 92,079	$ 2,394,057
$ 2,307,678	$ 2,307,678	$ 92,307	$ 2,399,985
$ 2,307,691	$ 2,307,691	$ 92,308	$ 2,399,999
$ 2,307,692	$ 2,307,692	$ 92,308	$ 2,400,000
$ 2,307,693	$ 2,307,693	$ 92,308	$ 2,400,001
$ 2,307,703	$ 2,307,703	$ 92,308	$ 2,400,011
$ 2,307,778	$ 2,307,778	$ 92,311	$ 2,400,089
$ 2,300,000	$ 2,300,000	$ 92,000	$ 2,392,000

Sally prepared the cheat sheet so that Kathy, would know what happens if she makes various bids. Sally knows that the leasehold will sell for whatever price/leasehold payment combination makes the total mortgage payment exactly equal to the free cash flow. She has highlighted the appropriate numbers on the spreadsheet so Kathy will know what numbers she can bid to make this happen.

When she gives Kathy the spreadsheet, she points her to the last column, which indicates her total yearly payment on the property. Sally calls this the ‘mortgage payment’ and shows that it includes both the amount she has promised to pay the human race and the amount she has promised to pay Sally (which she calls the ‘interest on the mortgage loan’). Kathy has already pointed out that she can afford a total cost of owning the leasehold rights (a total mortgage payment) of $2.4 million a year. To help her find the right numbers, Sally has highlighted the appropriate numbers on the spreadsheet.

Sally has highlighted one row, starting with a price of $2,307,692. If she wants to bid this price, she must also enter a leasehold payment bid of $2,307,692 (exactly equal to the price bid). At this price, her interest to the investors will be $92,308 a year. Add this to the leasehold payment to get a total mortgage payment of exactly $2.4 million a year.

Sally says that this is the exact maximum that Kathy can bid. If she can win the bidding for less than this, her total mortgage payment will be less than $2.4 million a year. (Note that all of the total mortgage payments in the columns above the highlighted bid are lower than $2.4 million.) If she bids this exact amount and wins, her total mortgage payment will be the maximum she can afford. If she bids more than $2,307,692 and wins, her total mortgage payment will be higher than the $2.4 million maximum she can afford. Since she won’t be able to afford this payment, she will probably wind up losing the property and going bankrupt (perhaps leading to lawsuits and claims against her personal property). She could therefore not bid anything higher than $2,307,692.

 

Technical Details

 

Sally also points out that the investors want to make absolutely sure that the leasehold payment gets made, so they will require that Kathy make only one payment, to Sally, who represents the investors. Sally must collect the full amount due everyone from Kathy. For example, if Kathy’s total interest payment plus her leasehold payment is $2.4 million a year, Kathy must pay this entire amount to Sally. Sally will then take the money that belongs to the human race ($2,307,692 of this) and put it into an ‘escrow account.’ This money will then be used to make the leasehold payment to the landlords when it is due. Sally will then turn over the interest to the investors.

Kathy won’t have to worry about this. The investors will make it very simple for her: she will have to make one payment, of exactly $2.4 million a year, to the bank that ‘services’ the loan on behalf of the investors. The investors will be paying the bank a yearly fee to then make sure that this money gets to the people who are supposed to get it. For example, if Kathy wins at her exact maximum bid (which will happen, as you will see), the bank will separate the $2.4 million it gets into two payments, one of $2,307,692 which will go to the landlords as their leasehold payments, the other will be $93,208 and will go to the investors.

 

The Auction

 

Let’s simplify this auction so we don’t have to go over things we already understand from previous auctions. We know that at least two people are willing to enter the exact same bids, that will lead to a total mortgage payment of $2.4 million a year. Kathy wants to have the greatest chance of winning, so she isn’t going to start with a low bid and risk someone bidding her maximum and outbidding her, offering a figure that Kathy can tie but not beat. To prevent this, Kathy is going to enter her maximum bid the instant the auction opens. Then, she will either win or not win. She won’t have to stress out about the bidding process, she can turn off her computer and go fishing. When she gets back, she will either have won or not won. As soon as the bidding opens, she enters her maximum bid and the computer lists her as the highest bidder.

Here is the way she has filled out the bid form:

 

Auction for the Leasehold ownership Rights to the Pastland Farm:

You must enter a number into both boxes to bid. The number you enter in to the ‘leasehold payment’ box must be exactly 100% times the number you enter into the ‘price’ box to register the bid.

Your PRICE offer                                                             [$2,307,692]

Your LEASEHOLD PAYMENT offer                [$2,307,692]

IMPORTANT: You must enter numbers into both boxes above to activate the bid now button. The number you enter in to the ‘leasehold payment’ box must be exactly 100% times the number you enter into the ‘price’ box to register the bid.    

[Bid Now]             

 

The auction lasts 90 days. Kathy goes on an extended vacation, away from anywhere her computer can bother her. When she comes back she logs on and finds she has won.

 

I need a simple term to refer to a leasehold ownership system where the price and leasehold payment are equal, so I don’t have to refer to this over and over. I will call this ‘equal price/leasehold payment leasehold ownership.’ I need a name to refer to societies built on this form of property control. I will call such societies EPLPLO societies.

 

Documents

 

The investors require that people who borrow money to buy leaseholds sign certain documents that indicate they understand their responsibilities to the investors. The investors require the buyers/borrowers to sign these documents before the investors will ‘disburse funds,’ which basically means they need the documents before they give up any of their money.

Kathy will go to a ‘closing’ (similar to the ‘closings’ that people have to go through to buy property rights in our 21st century societies) where she will go over the documents and sign them. Kathy is aware of this: she has already taken the class on leasehold ownership, which went over all of the documents she may be asked to sign at the closing.

The first document she must sign is the leasehold agreement with her landlords, the members of the human race. The landlords are willing to allow Kathy to have special rights to this property: she can control it as private property and use it in any way that is not on the ‘list of potentially harmful uses.’ In exchange for granting Kathy these rights, the landlords are requiring Kathy to make a leasehold payment to the treasurer of the human race equal to exactly $2,307,692 a year. The leasehold agreement goes over this and several details of her agreement with the members of the human race. Kathy studied this agreement in her class, learned why her landlords put in each provision and what it meant. She already understands and has agreed to these terms. (This must be true: she knew from her class she would have to sign this document and, if she weren’t willing to sign it, she wouldn’t have bothered to bid.) Kathy signs the document and Sally, who is ‘closing’ the deal on behalf of the investors, puts it in a pile she is starting for ‘signed documents’ so she can keep track of it.

Kathy must then sign her mortgage document, which stipulates all the details of her agreement with the investors.

Her landlords don’t require her to actually farm the land. (She owns the right to use the land for anything she wants, provided it is not on the ‘list of potentially harmful uses.’)

But the investors do require that she farms the land: They need to know that Kathy will be able to afford to make her yearly total mortgage payment, because they want to make absolutely sure the money will be there, when the time comes, to pay them (and pay the landlords). The investors have long and detailed agreement which goes over everything Kathy must do in order to satisfy the investors.

For example, they require her to use the land to raise rice. She can’t use it for any other purpose without first getting the written consent of the investors. The agreement not only says that Kathy must use the farm this way, it says how she must do it: she must operate the property as a rice farm, in a ‘businesslike manner,’ in accordance with the ‘highest standards of professionalism.’ The investors have hired people to check up on their investments and make sure the purchasers and owners of leaseholds are complying with the terms of the agreement. If the investigators find that Kathy is not complying, they will send her a letter ordering her to bring herself into compliance; if she doesn’t, they can take the farm away from her (repossess it) using procedures explained in the mortgage agreement.

Kathy signs a number of other documents dealing with various details. The escrow officer at the closing puts the signed documents into a pile. After Kathy signs all of the documents, the escrow officer gives her a certified check for $2,307,692 which is made out to ‘Kathy and the treasurer of the human race.’ The check is made out to both parties, so that both parties must sign it before it can be cashed. The escrow officer at the closing gives it to Kathy to countersign and puts it with the papers that will go to the ‘treasurer of the human race.’ As soon as the treasurer signs acknowledging the receipt of the check, the deal has ‘closed’ and is done. Kathy is the new owner of the leasehold title to the Pastland Farm.

 

New Incentives

 

Kathy runs the farm just as she always has. She makes all the same decisions, hires all the same people, negotiates worker pay and supply costs the same way so she presumably pays the same amount to run the farm. She runs the farm the same way as always so it produces the same as always. She ‘sells’ total production of 3.5 million pounds of rice like always (trades it for money) and gets $3.15 million. She uses $700,000 of this to pay her cash costs like always.

In the earlier systems, she paid another $2.4 million to the human race. This time, she pays this exact same amount of money each year, but this money doesn’t go the landlords anymore: It goes to the ‘servicer’ of the loan. The servicer gives $2,307,692 of this money to the landlords as their leasehold payment, and gives the rest of the money to the investors as their returns on wealth.

Kathy cares a great deal about the amount she pays, but she doesn’t really care about what happens to this money after she pays it. In this case, she pays the same amount she paid before.

Although her situation may seem the same as it was before, it isn’t exactly the same. You see, she has actually paid a very high ‘price’ for the leasehold. (She paid with borrowed money, but she still paid it.)

The price depends on the free cash flow; if she improves the farm so the free cash flow is higher, the price can go higher. In fact, it is now high enough, and can go up by enough from improvements, to cover the cost of simple improvements. In the earlier systems, we saw that the price would not go up by enough from improvements to cover the cost of the improvements. As a result, Kathy would have lost money if she had purchased the leasehold, improved the property, and then sold the leasehold on the property. Now, for the very first time, she will not lose money if she buys, improves, and then sells. (I will go over the numbers below so you can see them.)

In the systems we will visit later, she will actually be able to make money buying, improving, and then selling. In some of these systems, she will be able to make millions of dollars buying, improving, and selling. But here, we are in a transaction system, one where the realities of societies change. The earlier systems did not have incentives to buy, improve, and then sell; this is the first system we get to where people who improve are not penalized for this by having to put up with a financial loss to make the world a better place.

On our journey through possible societies, we have seen only societies without incentives to buy leaseholds on properties, improve the underlying properties, and sell the leaseholds. If people respond to incentives, we would expect all of the societies so far to be stagnant. They would not change for incredibly long periods of time. Now, there are some people who may be motivated to improve. We may see some changes, improvements, progress, and growth.

The incentives to buy, improve, and then sell is one of the two things about society that will change with the EPLPLO system. The other involves a transfer of risk from the human race to investors. In the systems before EPLPLO system, the price was lower than the leasehold payment. The price is the amount of money the investors will lose if the leasehold payment is not paid on time. In the earlier systems, they would actually lose less money by not making the leasehold payment than they would lose if they did make the leasehold payment. They had incentives to not make the leasehold payment (to keep the money Kathy pays as a leasehold payment rather than turning it over to the landlords of the planet, the members of the human race; see sidebar for more information.)

 

For example:

In ‘virtual rental leasehold ownership’ the leasehold to the Pastland Farm sold for 24¢ with a leasehold payment of $2.4 million a year. If the leasehold payment is missed, whoever put up the 24¢ will lose it. But say you have $2.4 million in your hands that you are supposed to pay to another party, but know that all you will lose if you don’t pay it is 24¢. You have incentives to keep the $2.4 million, and give up the 24¢.

In this case the leasehold payment is $2,307,692 and the price is $2,307,692. If you are holding $2,307,692 that you are supposed to pay to a third party, and know you will lose $2,307,692 if you don’t pay the $2,307,692, you do not have incentives to keep this money. In all the societies we visit later, people lose more money if they don’t pay than if they do, so they have incentives to pay rather than keep the money. This is the first society that they do not have incentives to keep the money.

 

Risk

 

When the deal closed, the landlords of the world actually got a certified check for $2,307,692. The landlords are holding this money, but it isn’t really our money, because Kathy has the right to sell the leasehold back to us and we are required to buy it back, provided she is in compliance with the leasehold agreement for this amount. As long as there is a chance that we will have to buy back this leasehold, we have to hold the $2,307,692 that is committed to buying it back (this is the exact price we must pay if we buy it back) in a reserve account.

This is not our money, and it isn’t really Kathy’s money. It is a kind of protection money: it represents reserves that private individuals (the investors) have accumulated over time. The investors can only get returns on these reserves if they agree to make these reserves common reserves, by investing in this loan, so they have agreed to do this. This money represents the common reserves of the human race, available to protect us in case something bad happens.

The investors know this. They will know that, if something bad happens, they can lose their money. To make sure that they don’t lose their money, they will want to find ways to make sure bad things don’t happen. They aren’t going to guess about ways to do this, they will hire professionals, as described below, and use the best risk management techniques available. If they do a good job at this, they will be able to prevent anything major from going wrong, and have reserves (described below) to make sure the leasehold payment can be made even if something does go wrong, so the human race will never be affected by any problems at the farm. If the investors do a good job, the reserves in the ‘reserve account of the human race’ will never actually have to be used to protect the human race, and will stay in the reserve account for as long as the human race wants the property to be private.

In all of the earlier societies we visited, it was possible that the human race may not get the full leasehold payment that has been promised to us. While we did have some reserves, we did not have enough reserves to replace the full leasehold payment. (The price was lower than the leasehold payment; the price is the money the human race holds in reserve.) Now, for the very first time in our journey, it is no longer possible for the human race to not get its full leasehold payment as promised and when promised. We will either get the leasehold payment we have been promised of $2,307,692 or we will get the property back and be able to transfer the $2,307,692 in the reserve account into our working account. From this point forward, the landlords (members of the human race) will not be taking on any risk.

When there is no possible way an income stream can not come in, it is called a ‘risk-free’ income stream. The income of the human race in the EPLPLO society is now a ‘risk-free income.’

 

Risk Management

 

All farming is risky. Things can go wrong. If our entire group isn’t taking on the risk, that doesn’t change the risky nature of farming. Someone else must take on risk. In this case, the investors are taking on risk. They have put up $2,307,692 at risk. As long as the landlords of the planet get our promised leasehold payment, the investors know their money is safe. In fact, they will all make very nice returns on their investment. Kathy will be happy because she will be able to keep doing what she loves to do and get paid for it; the investors will be happy because they will get their promised returns, and the human race as a whole will be happy because we will share in the bounty of the land without having to do anything.

 

Note: We only get protection for one year’s worth of leasehold payment in the EPLPLO system. If a event like a hurricane causes serious damage to the land, we may not get as much when we sell the leasehold ownership rights the second time so we may lose. In the leasehold ownership systems discussed below, we will get more than one year’s protection. We will, of course, have to give up a little bit in current income to get the greater security. We, the landlords of the planet, can decide how we want private property to work and make it work that way. If we want more security and less income, we can have it, as you will see.

 

The professional investors are taking on this risk. If something goes wrong, they will lose money.

Sally, the person who organized the investment pool and deals with the investors, knows about the risk.

Sally was a professional risk manager at a bank back in the United States before she took this trip and she knows that farming investments are risky. Things can go wrong. Back in the future, she took steps to manage risk so that, if she could help it, nothing would go wrong. Here in Pastland, she will put the exact same skills to work for the same reason: She wants to make sure nothing goes wrong so she will keep getting her money. Her interests (to reduce her risk of not getting her money to the lowest level possible) match our interests (to get our share of the bounty of the world no matter what happens).

As long as nothing goes wrong, everyone will be happy.

Sally started managing risk before the auction even took place. Several people approached her for a loan so that they could buy the leasehold title on the Pastland Farm. She required them to submit very detailed applications. She wouldn’t loan money to people with no farming experience, because they are too risky. She wouldn’t loan money to people who had a bad credit profile (they had bought on credit and not paid their bills) for the same reason. She wouldn’t loan money to people in bad health or people who had gambling or drug problems. She only approved people she knew would be good risks. Kathy qualified for the loan and got a loan commitment because she was known to be a good farmer, a responsible borrower, and able and willing to meet the commitments she was making.

Sally managed risk when she wrote up the lending agreement that Kathy had to sign to get the loan. The agreement required Kathy to run the farm in a ‘businesslike manner’ (all farm lending agreements have a clause like this) and failure to do so would be a violation of the agreement. Sally had the right to watch Kathy to make sure she did a good job on the farm. If Kathy wasn’t doing a good job, the lending agreement allowed Sally to step in and take over. Sally didn’t expect this to happen, but it was possible and she wanted to make sure she had the right to take over if necessary. The lending agreement required that Sally get a ‘lien’ on the harvest money. When she sold the crop, the check would be made out in both women’s names, and both would have to sign to cash it. The lending agreement required that the entire mortgage payment be made the same day that the check was cashed, so Kathy had to make sure Sally got the full amount she was promised before she got a dime herself.

Back in the United States, Sally had been a risk manager at an agricultural bank in Texas that specialized in mortgage loans to farm buyers. She will take the same steps to manage risk here in Pastland that she took back in the United States. She will watch the farm and the weather. She will keep a rolodex of people who do certain things so she will have people to call in case of an emergency. If it looks like there will be a flood, Sally will call Kathy and ask if she has a crew ready to make sandbags to keep the crop safe. If not, Sally will offer to round up people for this. If Kathy can’t afford the sandbaggers, Sally will offer to loan Kathy the money to pay them, to make sure the harvest is safe. If Kathy won’t agree to the loan, Sally will evoke the clause that allows her to take over (not protecting the crop is not ‘businesslike) and make sure the crop is safe.

Sally knows that, with good risk management practices, rice farms produce very consistent yields. However, sometimes there are problems no matter how carefully people manage risk. Back in the United States, she kept a ‘loan loss reserve fund’ to deal with these issues. She put about half of her yearly interest into this account, to use in the event the mortgage payment was missed. Here in Pastland, she will do the same thing. She will build up an account and fund it with half of her yearly interest. If something major goes wrong, in spite of her best efforts, she will step in as rapidly as she can and manage the loss to keep it as small as possible. If there is enough to make the leasehold payment, she will make it. If not, she will use as much of production as she can to make as much of the leasehold payment as she can, and take the rest out of her ‘loss reserve fund.’ She will make absolutely sure the human race gets paid because, if we are not paid, Sally loses everything.

Perhaps something truly major, a catastrophe, will come along that leaves her without enough money from production and the reserve fund to pay the leasehold payment. If this happens, she will use other savings to make up the difference. If she doesn’t have enough savings, she will borrow it from anyone in Pastland that has anything to borrow. She will do this to avoid missing the leasehold payment, knowing she will lose $2,285,714 if she misses it. If she can’t borrow enough, she will sell anything she owns to get this money. If there is any way to get the money to make the leasehold payment, she will find it and we will get our money.

I want to point out that we aren’t involved in any of these activities in any way. It is entirely up to Kathy and Sally to make sure everything goes smoothly. We don’t involve ourselves because we can’t lose no matter what. Kathy and Sally will do anything they have to do to make sure we get ours and we can expect them to succeed because they are both professionals who know what they are doing. But even if they fail, we can’t lose. We already have $2,285,714 and are holding it in reserve. If worst comes to worst, both Sally and Kathy may be totally broke, but we won’t lose a single dime of our income from this land. Even a catastrophe won’t affect us—the human race as a whole—in any way.

 

Improvements

 

This land is in the same condition as it was in when nature made it. Only the owner of land has any right to alter it. When we first arrived her, people started arguing over who owned the land. As time passed, these arguments got more and more heated and eventually they threatened to turn violent. We wanted to stop the fighting (or at least put it off until some time in the future when we would be better able to deal with it) so we put the moratorium into effect. During the moratorium period, no one could own, claim to own, or even suggest the land may possibly be ownable. To suggest that we had the right to alter it was to suggest that the land is ownable (only the owners can alter land) so to even suggest an alteration violated the moratorium.

Nature made this marsh fairly level, but not perfectly level. There are high spots that stick up out of the water in the summer; the rice on these spots withers and dies. There are low spots where the water is so deep that the plants can’t reach the sun and don’t produce any rice at all. From the very first, Kathy knew that the farm could produce more with level land. While the moratorium was in effect, she had some private conversations with her friends about suggesting improvements. While they generally supported her, they said that some of the members of our group appeared to be true believers in natural law and would interpret any suggestion about modifying the land to be a violation of the moratorium. She thought about it and eventually decided not to say anything.

We ended the moratorium a few years ago and could talk about ownability. She brought up the topic at a meeting. She said that this land was really our land, meaning the land of the human race, and we have the right to improve it if we want to do this. Many people agreed with her. As soon as she brought up the topic, they started explaining their ideas about the best way to improve the land.

Natural law societies are not hierarchical societies and no one’s opinion has greater weight than anyone else’s opinion. Kathy thought people would listen to her because she was a professional rice farmer with a great deal of experience. But a few other people are professionals in other fields and believe that their ideas are just as valid as Kathy’s. For example, one of our people is a karmic audiologist. Before we went on this trip, he was the foremost man in this field, and did research on sounds that would help solve problems. Wealthy people from all over the world hired him—for enormous sums of money—to find the sounds that would help sooth them, cure their phobias, improve their artistic qualities, or help them with their other problems. He says that plants respond very well to the proper sounds, and particularly to the sound of human voices. He says he talked to his garden back in the United States and always had a far better garden than neighbors who didn’t talk to their plants. He has several studies on his laptop that prove that plants have feelings and react to love.

He has been telling them they are loved all along, but his voice is not enough. He suggests we organize ourselves into teams so we can keep telling the rice plants how loved they are 24 hours a day. If we do this, the land will produce more and we will all have more for ourselves, and better lives.

Another of our members believes in a group of gods who he claims determine plant growth rates. If we don’t get good yields from the low-lying areas, this is because we haven’t prayed enough to the gods that determine growth rates in these areas. He suggests we organize prayer vigils to get the favor of the gods. Another person has been an aroma therapist his entire life. He says plants grow better if exposed to certain smells. He advocates opening a research facility to determine which smells have the best effect and then finding way to produce those smells. Another specializes in past-life regression. He says we need to regress the rice to its previous lives and deal with the trauma they felt in those lives. Once we release them they will be happy and grow better, giving the yields we want without having to go to the trouble of leveling the land.

We have a chemist who says we need to grind up rocks to add minerals to the land. When we replenish the minerals, the plant growth rate will increase. A geneticist that says we need to modify the DNA. A lot of people have a lot of different ideas.

The natural law society highly values social harmony. Kathy has to get along with these people. If she starts fighting with others to try to get them to back down and accept her land-leveling project, she will make people angry. She secretly believes that most of these people are just nuts who have no idea what they are talking about, and most of their ideas will not have any material effect on the yields. But she knows she will get along with people a lot better if she doesn’t express her opinion openly. She can’t really push too hard on her land-leveling project without having to tell these people why they need to back off, so she doesn’t really want to push too hard.

She also has practical reasons to not push too hard for change. If she should get us to agree to the leveling project, she can expect us to ask her to draw up the plan on her own time. Then, she will have to present the plan to the group and justify it to the group. She will have to come up with estimates of the required work and find some way to get people to agree to do the work, or do it herself. She can expect that if she doesn’t show up for work, no one else will do anything. She will have to organize everything. She will have to set the pace, meaning she will have to work at least as hard as she wants everyone else to work. If people don’t show up or goof off, she will have to be the autocrat that gets them back on track. If something goes wrong, she will be expected to find a solution to it and get it back on track. If the entire project is a failure—for any reason, even if it is beyond her control—she can expect to be blamed. Even if everything works out perfectly, something unrelated may go wrong, lie a drought or an insect infestation, and many people will claim that it wouldn’t have happened if we hadn’t upset the natural order, and blame her for the weather or insects. Even if absolutely nothing goes wrong and production goes up as she expects, she will get only 1/1000th of the increase (in the natural law society) and this won’t increase her personal income enough to compensate for all of the hardship she will have to go through to make the change work. After she thinks about these things, she decides it might be a good idea to back someone else’s plan so she doesn’t even have to worry about being asked to carry through on her leveling project.

I have some experience in this kind of situation. I live on a commune in the woods of Oregon. Because of the stigma of the word ‘commune,’ it is officially called a ‘club.’ Right after I moved there I tried to get a change through. Our swimming pool was heated with propane, and we spent $1,000 a month on fuel to heat it. I have a background in solar and knew we could put up a solar system for a small amount of money that would cut the heating cost to nothing most of the year, and keep it lower the rest of the year. At a general meeting, I brought this idea up. I was actually surprised no one had brought it up before, it seemed so obvious.

I found that others had brought it up. It had been mentioned many times and it had provoked many arguments. One group of people had come out as the voice of reason, claiming that people who were in favor of solar were unrealistic idealists who only wanted to spend (other people’s) money on unproven ideas in order to assuage their guilt. The ‘realists’ had done a complete cost analysis and shown that a solar system that would provide 100% of the year-around heat for the pool would cost $40,000. We wouldn’t be able to meet the club’s maintenance needs if we stripped the budget for this totally unnecessary project. I was told about all of the absolutely ‘vital’ projects that had to be completed immediately with the funds we had, or the club wouldn’t be able to function anymore. If my project were approved, all of the buildings would fall down, the swimming pool would slide into the field below it, and the world as we know it would end. I would be to blame for all of this.

Then I got all of the arguments against solar. Solar panels are ugly. Why am I advocating uglying up the club? The solar system would require maintenance and no one here is qualified to do it. We would have to get experts at sky-high rates for this. (Unless I was willing to agree to maintain it on my own time and at my own expense forever.) It would have pipes that would have to run over the ground, and deer could trip over the pipes and break their legs. The birds would get fried when they landed on the solar panels. All of these arguments came at me and I stood alone and confused answering them.

I later found that these same people had presented the same arguments many times before, because the issue had been brought up many times before. (The club had been in existence since 1949). They felt that they had ‘won’ these arguments because the solar-proponents had always dropped their case in the past. To them, ‘winning’ meant ‘getting the other side to back down,’ not ‘saving $10,000 a year on heating bills.’

They wanted to win.

The issues weren’t the issue. They were in positions of authority and people listened to them. Their credibility was at stake. They had been against solar 30 years ago and felt they had to continue to be against it, no matter how much technology had changed, or people wouldn’t respect them anymore. It wasn’t about efficiency, improvements, or cutting costs, it was about personalities and respect. This experience taught me something about proposing change in a communal living situation: The easy course is always to oppose change of any kind. This leaves you clear of blame and, as long as you can prevent change, you can never be proven wrong. Once you have come out against change, you obviously have to stick with this position in the future. The proponents of change will have to fight every inch of the way or nothing will ever get done.

This may help you see why millions of natural law societies could go for millions of years without making any material changes in their living situation: Even if people who wanted change could overcome the religious and philosophical objections to the change (like that the creator of the universe owns it and will punish us if we change it), and can get over the social hurdles, chances are you won’t be able to overcome the practical resistance to the idea of change in general.

The basic problem boils down to incentives: If Kathy pushes hard enough and eventually gets the change made, she knows she will have to do the lion-share of the work, take on the lion-share of the responsibility, and pay more than an equal share of the costs, but she will only get 1/1000th of the benefits. To each individual, the cost of just about any permanent change that they hope will lead to improvements will exceed the benefits. People have incentives to avoid behaviors that bring less in benefits to them than their costs, so people have incentives to resist change in progress in any natural law society.

For millions of years, humans lived in natural law societies. These people appear to have been no different than people in current societies. But we didn’t see any progress or investment in improvements for virtually this entire time. If you consider the incentives, you should have some idea why this happened: the incentive structure pushed very strongly to against activities that would have led to progress and growth.

 

Improvement In Equal Price/Leasehold Payment Leasehold Ownership

 

Now, in the EPLPLO society, things are entirely different.

All ownership-accepting societies are hierarchical societies. Kathy owns rights to the world and this gives her a different set of rights over it than the rest of the people of society. She no longer has to ask us for permission to level the land. She owns the right to do anything that doesn’t harm the land. Leveling the land is not on the ‘list of harmful acts’ so she has purchased and owns the right to level the land.

She doesn’t have to get anyone’s permission before she makes modifications to this land, because she owns the right to modify the land. If she wants to level the land, she hire people tomorrow to start moving dirt.

There are two basic ways to make money improving:

The first option is to invest in improvements that drive up the free cash flow and collect the higher free cash flows. However, most of the money people make from improving in current systems has a different source: they buy unimproved properties for a low price, improve to drive up the free cash flows, and then sell the improved properties for a much higher price than they paid. This generates a gain called a ‘capital gain’ on the improvement. Since most of the money people make from improving and selling for the gain, most if the incentives come from this source.

People will be able to make money both ways in the EPLPLO system. To fully understand the incentives, we need to understand both options. The easiest way I can think of to explain this involves coming up with some numbers for the sake of example.

 

Improvements to the Pastland Farm

 

Kathy starts by hiring someone to make a survey of her land and draw it up on a map with contour lines. (These lines are lines that show the height of various parts of the land.) She then hires an engineer and sits down with her to work out the best way to build the walls. The engineer has been trained in this field. She knows how to calculate the number of lineal feet of wall that will be needed with each plan and therefore the cost of each project. The engineer finds the lowest-cost method of leveling the land, draws up the plan, and submits it to Kathy for approval. Kathy suggests some minor changes that she needs in order to get equipment from terrace to terrace during the harvest and the engineer finalizes the plan. After she has a finalized plan, she goes to some people who know how to build rock walls and move dirt and gets bids on the project.

I need some numbers to explain the example so let’s say that she gets total bids for the entire project of $461,538.

Then she works out the projected yield of the leveled farm and figures out how much both the total revenues, total costs, and free cash flow will go up if she makes this change. Let’s say that she finds that yield on the farm will go up by 20%. This will make the revenues 20% higher. She will have to pay more money each year to harvest the extra rice, so she figures her costs will also go up by 20% a year.

 

	before	after
Revenues	$3,150,000	$3,780,000
Costs	$750,000	$900,000
free cash flow	$2,400,000	$2,880,000

 

So far, this is what she has: (see table to right).

Both revenues and costs go up by 20%, so the free cash flow must also go up by 20%. Her leasehold payment will remain the same at $2,307,692 a year. She will have to borrow $1 million to pay for the improvement, leading to another $40,000 a year in interest, in addition to her current $92,308 in interest, making her new total interest payment $132,308 a year.

 

	before	after
Revenues	$3,150,000	$3,780,000
Production costs	$700,000	$840,000
Interest	$92,308	$132,308
leasehold payment	$2,307,692	$2,307,692
Money to Kathy	$50,000	$500,000

 

The table to the right shows how everything works out:

Notice the bottom line: If she makes this improvement with totally borrowed money, her personal income from the farm goes up by a factor of 10 times, from $50,000 to $500,000. Remember, this is not taking a single penny out of her own pocket, and without having to do a bit of the work. I hope you can see that she will make a great deal of money making this improvement.

But there is one problem we haven’t talked about yet. If she puts $1 million into this property, she will owe $1 million more money on it than she owes now. She will be responsible for paying back this money. She needs to know that she will be able to get her money back, when she sells, or she probably won’t be willing to make this improvement. To find out, she calls a property appraiser and has an appraisal done to determine what will happen to the price of the leasehold if she improves. (She will probably need to do this to get the loan. The banker will have to know that the collateral will be worth at least as much as she owes on it.)

The appraiser points out that the prices of leaseholds depend entirely on the free cash flow. If the free cash flow of the property goes up by 20%, the market value of the leasehold will also go up by 20%.

 

	Before	after	increase
free cash flow	$2,400,000	$2,880,000
leasehold payment	$2,307,692	$2,769,231
Price	$2,307,692	$2,769,231	$461,538
interest on debt	$92,308	$110,769
cost of owning the leasehold	$2,400,000	$2,880,000

 

The appraiser explains how and why this happens with a table showing the costs and benefits of owning the leasehold at both free cash flows. People will keep bidding as long as they can keep free money, after paying their total costs of owning the leasehold. (In other words, they pay out all of the free money either to the human race or to investors, leaving them with only the amounts they need to justify the work.) The first column shows what Kathy paid and why the market set that particular price: Other bidders were greedy. They wanted free money. As long as the costs of owning the leasehold were less than the free cash flow, they got free money. They kept bidding until the bids got so high that, after paying the leasehold payment and interest, they had none of the free cash flow left.

If the free cash flow goes up by 20%, all of the numbers go up by 20%, including the price. As you can see, the price is $461,538 higher.

In the systems we look at later, the prices of leaseholds will be a great deal higher and the increases in prices due to improvements will be a great deal higher. But here we can see that the price increase is just high enough to justify this particular improvement. Kathy can show the banker that the property price will go up by the amount of extra money she will borrow to pay for the improvement, so the collateral will be worth at least as much as she owes on the loan. This satisfies Sally that she will have security on the loan. Kathy will be able to get enough money back from the sale (when she sells) to repay the original loan plus the improvement loan, so she will not have to worry about possibly losing money if she is forced to sell for some reason. She will not take any money out of her own pocket to make this improvement, but her income will go up from $50,000 to $500,000 a year, clearly a huge increase.

People have incentives to improve if they can make money improving. Here Kathy will make a huge increase in her yearly income, so she clearly has incentives to improve. In many of the systems we will look at later, she will also make a multi-million dollar ‘capital gain’ on the sale. Here, she doesn’t make any gain at all, but she does at least break even on the ‘capital’ side of the investment. Everything is either ‘break even’ or positive, so she has no reason not to make the improvement and powerful incentives to make it.

 

Improvements in Different Societies

 

We, the members of the human race, can decide what is more important to us, the price or the leasehold payment.

We are the landlords of the Earth. We make the rules. We decide whether people will be able to hold private property and, if so, what conditions they must meet to hold private property. If we want to, we can allow people to obtain rights to private property for a one-time simple fee called the ‘price,’ with nothing again ever to the human race. If we want, we may decide to let people hold private property with payments made over time to the landlords of the world (rents), and no ‘price’ at all. We may also decide to choose intermediate options, that require a payment of both a price and yearly leasehold payment to the landlords of the world.

If we choose an intermediate system, we must decide how important we want the ‘price’ to be and how important we want the yearly payment to the human race to be. We may want higher prices for leaseholds (accepting, in return, lower leasehold payments) if we want people to have stronger incentives to manage risk, protect the human race from harm or shortages in production, and to improve the world so it creates a higher bounty for the benefit of future generations.

The higher price creates stronger incentives to manage risk because it gives the people who control property (and their investor/backers) more of something investors call ‘skin in the game.’ They have to invest more and therefore can get ‘hurt’ more if something goes wrong. If you have ever invested money and then lost it, you will know that this hurts: I have felt real pain after losing large sums in projects that didn’t work out. (Many people feel so much pain at investment losses that they kill themselves rather than continue to bear it. My grandfather was one of thousands of people who killed themselves immediately after the market crash of October 1929 wiped them out financially.) If they invest more money (pay higher prices for properties) they have more ‘skin in the game’ and more to lose if something goes wrong. If we, the landlords of the world, want people to have more ‘skin in the game,’ more to lose if something goes wrong, and stronger incentives to manage risk, we can set up a leasehold ownership system that has prices that are higher relative to leasehold payments. (In other words, the price/leasehold payment ratio is higher, as in systems lower in the Road Map of Possible Societies.)

To see how this will make a difference in the way people think, compare the virtual rental leasehold ownership system with the EPLPLO system. In virtual rental, Kathy would pay a price of 24¢ for the leasehold, and would have 24¢ at risk. If she misses the leasehold payment, she will lose 100% of the price. You might imagine, however, that Kathy wouldn’t lose much sleep at the possibility of losing 24¢. If she makes the payment; fine. If not, well she will lose so little money it won’t make any difference in her disposition. However, in the EPLPLO system, she will lose more than $2 million. Not many people can lose more than $2 million in a day without feeling some real pain. She will have a lot more skin in the game in the EPLPLO system than in the virtual rental system, so we would expect her to work harder and try harder to make sure nothing goes wrong. (In the systems that follow, buyers and owners of leaseholds will have even more skin in the game, and far stronger incentives to manage risk.)

We, the members of the human race, decide what we care about.

If we want the highest possible leasehold payments, we will have to choose leasehold ownership systems that lead to very low prices. (In other words, choose leasehold ownership systems with very low price/leasehold payment ratios, or those higher in the Road Map of Possible Societies.) In these systems, the buyers won’t have much skin in the game and may not give us anything at all. If we want the people who interact with the land on a day-to-day basis to have more skin in the game, and more to lose if something goes wrong, we will have to accept lower leasehold payments in exchange. In this case, we get only about 96% of the total free cash flow (the amount we would get in a pure rental system).

Higher prices are also important for incentives to improve. If the free cash flow goes up by 20%, the price of the leasehold goes up by 20%. If the price starts out at 24¢, the 20% increase is only about 5¢. This is not enough money to cause Kathy to lose any sleep looking for ways to improve the property. If the price starts out at $2.3 million, the 20% increase is $460,000. A lot of people would lose sleep at night, thinking about ways to improve property, if they knew they would make $460,000 on the project.

We don’t get these wonderful incentives for free. We must give up something: we must give up part of the current income we could get from the property if we want incentives to protect the human race from risk and improve the world to make it better. But we—meaning our group in Pastland who have accepted that we are the dominant species on the world (rather than some invisible Superbeing in the sky that has created ‘nations’ and given nations ownership of land)—are in a position to decide what we want to happen in our world. We can come to understand the different options. Once we understand them all, we can decide what is important to us (strong incentives to protect the human race from risk or a higher current income), find the system that matches our priorities, and create it.

 

Incentives in Different Societies

 

The chart to the right shows the amount of gain people can make from an improvement that increases the free cash flow by 20% in various different leasehold ownership systems.

If Kathy wants to get the land leveled, she will have to pay people to do the work. This will cost her something. Let’s say, for the sake of example, that it will cost her $461,538.

In the virtual rental leasehold ownership system (the first one), she bought the leasehold rights for a price of 24¢. If this goes up by 20%, it only goes up by 5¢. This won’t be enough to cover the cost of making the improvements. She will lose money on the entire project (buying the leasehold rights, improving the property, and then selling the leasehold rights). In fact, she will lose virtually everything she pays for improvements.

The first society where she doesn’t lose money on this project is the EPLPLO system. Even there, she doesn’t make money, she only breaks even. Perhaps she may want to improve the land for some reason other than her capital gain. (For example, perhaps others have doubted her capabilities and she wants to show them they are wrong, or perhaps she sees that the population is growing and wants to show people that food production can also increase.) In the earlier systems (those before EPLPLO) she would have a hard time justifying this improvement: only very rich people can afford to lose massive amounts of money to make the world a better place.

In all systems after EPLPLO, she won’t have to justify anything: her interests coincide with the interests of the human race: we want growing production to feed our growing population, and Kathy wants to get rich, something she can do by improving the world.

EPLPLO systems are transitional systems: In these systems, for the first time, people can at least break even on improvement projects. This is the first society where the interests of the people who control property don’t conflict with the needs of the human race. It is the first society where people who are not punished for making the world a better place.

 

A Transitional Society

 

In our journey through possible societies, we started out in a range that looks pretty much the same. All societies above the EPLPLO system are very similar in many respects. The EPLPLO society is one of three transitional societies. It is the first place where constructive incentives appear. After this, the constructive incentives will get stronger and stronger until they reach their maximum, at the socratic leasehold ownership societies. Socratic leasehold ownership societies are the second transitional system we will reach. When we get there, the constructive incentives will be as strong as they can possibly be, but the system won’t yet have any destructive incentives.

All societies below socratic leasehold ownership will have destructive incentives that grow ever stronger, and constructive incentives that grow ever weaker as we go through the range. This will continue until the constructive incentives and destructive incentives are the same strength: at that point, we will reach our final transitional society, systems that have the minimum conditions needed for sustainability, and therefore the minimum conditions needed for survival for the human race.

I call this third transitional society ‘minimally sustainable societies.’ All societies below the minimally sustainable societies are suicidal: any people who decide they want to keep any society inside this range (rather than working to push it into the sustainable range) are doomed, and will perish with absolute certainty, given enough time.

The EPLPLO system is the first transitional society. At this point, the realities of societies change in three major ways:

 

1. All societies above the EPLPLO society expose the human race to some risk.

If people don’t invest as least as much money as they are agreeing to pay the human race, they don’t have enough skin in the game to ensure they will protect the interests of the human race. All societies above EPLPLO societies don’t require people to put enough skin in the game, so they expose the human race to risk. All societies below EPLPLO societies force people to put so much skin in the game that they will be hurt more (imagine the skin being scraped off) if they don’t protect the interests of the human race than if the do protect the interests of the human race.

In EPLPLO systems, people must put up exactly enough money to replace the leasehold payment if it is missed. This causes the incentives to make a sudden transition: It is no longer possible to profit by harming the human race by shorting us or cheating us out of our share of the bounty of the world. It also provides an amount in the ‘reserve account of the human race’ that will exactly replace the leasehold payment if it is missed, meaning that we have total income security (at least for the next year) starting at this exact spot.

In the earlier systems, the members of the human race had cause to worry: the people who interacted with the land may possibly be bad managers, be dishonest, incompetent, or otherwise have come characteristic that prevents them from providing the food and other necessities we care about. From this point forward, we can all sleep soundly at night, knowing that we will either get our leasehold payment this year, or we will get the property back and get the amount in the reserve account, which is exactly the same as the promised leasehold payment. At this point, the risks of production are transferred to profit-motivated, skilled, professional risk managers, not the members of the human race.

 

2. The second transition involves responsibility.

In every society, someone or some group must take on the responsibility of making sure everything goes smoothly in production. In societies above the EPLPLO society, the human race as a whole takes on risk (we will suffer if production is low) so it is our responsibility to make sure nothing goes wrong. In real-world situations, large groups of people are extremely poor at making organizational decisions. (A common joke is an illustration of a tire swing made a committee, see cartoon to right.) qqqq

Once the human race is absolved of risk, we have no reason to worry about production decisions anymore. We don’t have to screen people who want to control properties to make sure they will do a good job anymore: If we can’t be hurt by them doing bad jobs, we have no reason to care. (The people who take on risk and will be hurt by bad managers will make sure the people who control property know their jobs; see sections on risk management above.)

In all societies below the EPLPLO system on the Road Map, the human race is totally passive, with no need to involve itself in production decisions in any way. All of the people who make these decisions are professionals, with their own money on the line and their own skin in the game if something goes wrong. Their interests, to avoid losing money, will coincide exactly with the interests of the human race (making sure production never falls enough to affect us).

 

3. The third difference involves constructive incentives. Societies before EPLPLO societies do not have constructive incentives: they do not work in ways that make it possible for people to make money specifically on improvement projects (buying leaseholds specifically to improve them, improving the underlying properties, and then selling the leaseholds.)

All societies below the EPLPLO system do have constructive incentives: people who want to do nothing other than improve the world can make money by doing this. In other words, people who have no interest whatever in farming, but only want to improve farms so they will produce more value (buy leaseholds, improve the underlying properties, then sell the leaseholds) can make money doing this.

The EPLPLO system is the first system we get to that has these constructive incentives. People in the past have shown that some societies have incentives to make the world better, and compared these incentives to an invisible hand, that pushes people to make the world better. The EPLPLO system is the first place in our journey where this ‘invisible hand’ appears.

When this ‘invisible hand’ first makes its appearance, it is week and feeble, like the invisible hand of an infant. As you will see, the invisible hand will grow stronger and more powerful, until it is an overwhelming force that leads to progress and growth that can alter the basic realities of human existence.

 

 

 

We didn’t choose the conditions of our birth.  There are billions upon billions of worlds in this galaxy and billions upon billions of galaxies this size in the part of the universe we can see.

We were born here.

We were lucky.

This is an incredible planet.

The book ‘The Meaning of Life,’ a part of this series, talks about the conditions needed for the thing we call ‘life,’ as it works on earth, to come to exist, reproduce, and evolve.  The most basic condition for life is water existing in a liquid form. We don’t just have water in liquid form.

We have oceans of it.

We have a mixture of gasses in our atmosphere that is basically perfect for circulation of this water, making it available in just the right quantities almost everywhere.  Billions of tons of water are lifted from the oceans each day through evaporation. The evaporation purifies the water, removing all salts and contaminants that might accumulate to harm the living things below; the water floats upward forming massive clouds that circulate across the land, dropping the water in ways that create incredibly diverse ecosystems. 

There is great synergy in this diversity.  Plants need carbon dioxide to grow; animals provide it; animals need oxygen which plants produce.  Plants are food for the animals and animals take this food, digest it, and return most of it to the earth to feed the plants. 

The earth is extremely productive and incredibly bountiful. 

It was productive and bountiful long before humans arrived, producing trillions of tons of plant material which fed trillions of animals.  When the first humans arrived in each area, we could simply take this bounty for ourselves; we had abilities to organize, plan, make tools, and otherwise dominate the other animals and they couldn’t do anything about it.  The bounty of the earth is available for the dominant animals to take at their pleasure.  We are the dominant animals.  If we want the bounty of the world, it is ours for the taking.

Who Benefits From the Bounty?

The human race is lucky we wound up evolving on such a bountiful planet.  It has food in vast abundance and great variety.  It produces fantastic amounts of lumber that we can use to make things and burn to keep us warm and cook our foods.  Its has abundant iron, aluminum, silicon, and calcium, which we can process into steel, concrete, glass, electrical wiring, LED lights, photoelectric panels, water pipes, bridges, skyscrapers, and other things that can make life better for the members of the dominant species. If you were to compare the composition and productivity of the earth with other known planets (including the more than 5,000 verified ‘exo planets’ circling other stars), you would not find anything even remotely close to this wonderful world.  It is clearly at the very top of the list of the desirable places for earth life.  It is so much better than all other known worlds that, if we were trying to come up with names to refer to the different worlds, the only names that would seem to fit would be terms like ‘heaven’ or ‘paradise.’

But not everyone benefits from this incredible bounty. 

For some people on earth today, live really is a paradise.  They have everything they ever want and need.  They have so much money that, if the want something to eat, they don’t even consider the price.  If you make a million dollars a second (which many people do), what difference does it make if a steak costs $20 more than a hamburger?  If they want a steak, they get a steak.

Others live very hard lives.  More than ¾ of the people who live on Haiti live on less than $2 per day.  When Columbus first wrote about Haiti in  his logs, he described it as ‘terrestrial paradise.’  (Columbus actually came up with theory that the land of Haiti was geographically closer to heaven than Europe; this was how he accounted for the incredible abundance there.)  Haiti had many things that Europe lacked and, as soon as European companies found out it existed, they moved there to rape the island of everything valuable it contained.  The result was utter destruction.  Now the island is consistently rated as one of the worst places on earth to live.  The government sends out trucks to pick up the corpses of those who have died there. Sometimes they get behind and the smell is horrific. 

Not everyone benefits equally from the enormous bounty the world produces.  In different societies, the bounty goes different places.  If we want to understand the way different societies work, we need some way to follow the different flows of value and wealth that come to exist on the world over time to their destinations. 

In societies that use money to divide and distribute wealth, we can do this by following money.  In Pastland, for example, we muse money to divide wealth.  People who get money actually get wealth.  (Remember:  each dollar bill is actually a certificate that represents ownership in a pound of rice that already exists and is in storage in the central granary.  If you get a dollar bill, you get a piece of paper that is ‘worth’ whatever value people mentally assign to a pound of rice.) Each year the land produces wealth. The more money people get, the more of this wealth they get.  Some of the money they get might be thought of as representing the bounty of the world around them.  If we can define this bounty in a practical way, so we can tell which dollar bills represent the bounty of the land, we can follow this bounty, and determine who gets it, by following these dollar bills to the people who get them.

Our group in Pastland has a natural law society.  (This is due to the moratorium on countries and ownership of land.  We haven’t banned countries and ownership forever, we just don’t want to deal with the conflict and violence that go along with them until we have had time to solve other problems.)  Natural law societies are simple.  No country or person owns any part of the world. Ownership (by countries or any human entities) leads to great complexities.  Since natural law societies don’t have ownership, they don’t have these complexities.  The are simpler societies than societies that have any kind of ownership.  (Sovereign ownership, the kind of ownership practiced by countries, is only one of many possible kinds of ownership; it is complete, absolute, and unconditional ownership; there are many other systems where people own, but only own partial rights.)

We can look at what happens to the bounty of the world in natural law societies first. Then, once we understand how this works in simple societies, we can move all of the same people and same land and same kind of money to a more complicated society (for example, the territorial sovereignty society that people who were patriotic and loved their nations first tried to build in Pastland) to see where these same dollar bills would go on this other system.  This allows us to see where the bounty of the land goes in each system and to understand the different incentives these flows create. 

If people can get money if they do certain things, they have incentives to do those things.  Incentives are not behaviors themselves, they are behavioral motivations.  If the structures of a society tie the right to get money to certain behaviors, these structures create incentives that encourage those behaviors.

For example, in some societies people can get money if they organize for and engage in violent conflict.  These societies have incentives that we might call ‘pro-violence incentives.’ The incentives push people to act violently.  They may not react to the incentives:  not everyone reacts to incentives the same way and some people won’t promote or engage in violence no matter how much money they can get by doing this.  But if we have three societies to compare, and we see that one society does not have any structures to give people any money at all in exchange for violence, another gives them small amounts of money for violence, and the third gives them enormous amounts of money if they assist in organizing for violence, we can compare the incentives:  One society does not have ‘pro-violence’ incentives; one has weak ‘pro-violence incentives’ and one has very strong pro-violence incentives.

 

If we know how people react to incentives, we can then predict the behaviors we will observe in the different societies.  We now have tools we can use to compare societies scientifically, without any need to make value judgments.  The key to this is understanding where flows of value come from and how the structures of society work to cause people to get this value if they act certain ways. The example in Pastland was designed to make this easy to see.

The Bounty of the Pastland Farm

In Pastland, we live on land that some people might call a ‘swamp.’  Others may call it a ‘productive freshwater marsh.’ Others still might call it a ‘rice farm.’  No matter what we call it, the land produces 3.15 million pounds of rice a year. 

None of this production is due to anything humans have done. 

The land produced the exact same amount before our group (the first humans) arrived in the area.  We aren’t responsible for the production, nature is.

In any area, the dominant animals have first claim on the things the land produce. Before we arrived, other animals got their pick.  The ducks and geese ate whatever they wanted.  They could have stayed all year and, if they had some way to store the grain, it would have fed them all year.  But there is a bounty available for ducks and geese in many places.  They can fly pretty much anywhere they want and find food. Since they have a choice, they choose to live in the north during the summer, to avoid the heat of the tropics, and choose to live in the tropics during the winter, when it is cold in the north.  Other animals also migrated in various ways, taking food where it was easiest to get and living where life was most pleasant.

When we arrived, we became the dominant animals in this area.  We had first claim on the wealth it produced.  We could take what we wanted.  Other animals only got what we left behind.

What did we do with the wealth we took from the land?

First, we ‘sold’ it.  This basically means ‘traded it for money.’  We made this trade by using dollar bills as rice certificates.  Each dollar bill represented one pound of rice that was in the granary.  We then divided this rice by dividing the dollar bills.

We put $3.15 million in cash on the table in the front of the meeting room.  We then opened the meeting and had people come to the front and explain to us why they thought we should give them some of this money. 

Kathy came up first, speaking on behalf of her workers.   She said we should give her $700,000 to give to her workers and suppliers.  She told us that she had promised them she would do her best to make sure they got paid and she wants to keep her promise.  She told us that if we paid the workers and suppliers this year, they would know that we appreciate their efforts and feel confident we will reward them in the future. These people gave up things of value to them, including their time, to make sure the wealth nature produced was available to the group as a whole.  If we pay them the right amount of money (market rates, as discussed earlier), they will feel whole:  they have broken even and gotten enough money to compensate them for the things they gave up.  They are willing to do these things if they at least break even.  All she wants is for us to allow her to keep her promise to them and pay them enough to break even. 

None of them are going to get rich.  They are only going to get enough money to break even.

We voted and approved the expense.  Kathy came to the front with a luggage cart and loaded huge stacks of dollar bills onto the cart.  Later, she held another meeting with her workers and suppliers and paid them all. 

Kathy didn’t get any of this money.  She didn’t ask for anything for herself, she only wanted money for her workers and suppliers.

After she left, someone came to the front and said that we need to let Kathy know we appreciate the things she did.  Kathy didn’t do any actual work.  She was crippled in the events after the time warp and can’t even get out of bed without help.  But we should pay her because, even though she didn’t do any actual physical work, her efforts and skills brought us great benefits.  She knew what to do and organized a system that causes wealth to flow from the land into the grain silo.  We want her to keep doing these things.  It is true that she volunteered to do them and didn’t ask for anything.  She might continue to volunteer for the rest of her life.  But she might not.  Even if she does volunteer for the rest of her life, if people don’t think organizing is important enough to get rewarded, they may not take the time to learn the skills needed to organize.  When Kathy dies, no one may know how to do the things she did and we may all starve.

It makes sense to pay her.   We all benefit by this.  Even if she doesn’t care for the money and gives it all away, the fact that the money goes to her tells everyone in the community something important:  You help the human race and the human race rewards you. People will step forward to do things that they wouldn’t do if this relationship wasn’t established in their minds. 

After we pay Kathy, there is $2.4 million left on the table. 

This money is there because nature was kind and generous to the residents of this part of the world.  It is not due to anything any human has done.  If nature had not been as generous, the rice that this money represents would never have come to exist, and the table would be empty after paying everyone who does anything in production.  But nature is generous, so the money is there.

No one in Pastland can take credit for the generosity of nature.  No one in our group created the dirt of the swamp.  No one is responsible for the evaporation on distant oceans that eventually led to the rain that the rice needed to grow. No one here painstakingly put together the 16 million ‘base pairs’ that are in rice DNA and provide the coded instructions that tell rice plants how to grow.  All this existed before humans. 

You could think of the 2.4 million pounds of rice that this money represents as the ‘bounty’ of the land around us.  It is a gift from nature.  Whoever gets this rice gets gifts from nature.  We will divide these gifts by dividing the $2.4 million in cash. Whoever gets some of this money will get certificates of ownership of the ‘gift rice.’ 

The Basic Productivity of the land

In each of the societies we examine in this book, we will divide the bounty of the land by dividing money.  We need name to represent ‘the money that represents the bounty of the land’ so we can discuss this flow of wealth without having to use this long term each time we want to refer to this money.

This book uses the term ‘basic productivity’ to represent the ‘money value of the bounty’ of the land.

In the case of the Pastland Farm, the bounty is rice.  Not everyone likes rice.  Some people never want to see a bowl of rice in their lives.  Just because people don’t see rice doesn’t mean they don’t benefit from the bounty of the land.  They benefit by getting money which they can trade for anything they want.

They don’t get the bounty of the land by having a truckload of rice dumped on their lawn; they get the value of the bounty of the land in the form of money.

The Free Cash Flow And The Basic Productivity

In our 21^st century world, many farms are bought and sold in countries all around the world every day.  If you look on websites where people advertise these farms, you will see that sellers put a certain number in their ads that they clearly think must be important to buyers, because they put it in very bold type and use many tools to call attention to it. 

This is the ‘free cash flow’ of the farm.

This is the number buyers care about.

If they buy this farm, they will be buying a package of rights. 

These rights include the right to get a certain amount of money, for free (without doing anything) each year that passes.  They naturally care a great deal about how much free cash ‘flows’ from the farm, and therefore how much free money they will get as owners.

The amount of free cash flow is an extremely important matter to potential farm buyers. If there are two farms for sale at the same price, but one has a higher free cash flow than the other, buyers will naturally want the one that gives them more free money each year.  If a farm produces a higher free cash flow, people are willing to pay higher prices than they would for a farm with a lower free cash flow.

For example, a farm like the Pastland Farm, which produces $2.4 million a year in free cash flow, is going to sell for a lot more than a farm that barely produces enough to cover its costs and has only $24,000 a year in free cash flow.

Some potential buyers don’t care about anything else (other than the free cash flow).

Corporate buyers, for example, only look at numbers.  They have shareholders who tell them exactly what they want. Almost always, they want the same thing:  the most money they can get for each dollar they invest.  The corporations hire buyers to find properties that can  meet these guidelines and buy them. 

A buyer who wanted to live on the farm might care about a lot of things that a corporate buyer wouldn’t bother with.  Is the farm close to schools and stores?  Is the farmhouse big and comfortable?  Is there a pleasant view?  Are there trees for shade?  If you are going to live there, these things will matter. 

If you are a corporate buyer, none of these things matter.  You aren’t going to live on the property and may never actually lay eyes on it.  Corporate buyers often buy and sell farms to other corporations for tax and other reasons unrelated to farming.  They don’t send people out to look at the land.  Why bother?  It doesn’t matter to the shareholders.   Shareholders only care about one thing: the free cash flow.  When they buy, they basically ignore all benefits of ownership other than the right to get the free money.  That is what they are buying.

It is true that some farms are purchased by people who intend to live on them and operate them.  But most farms that generate free cash flows like the Pastland Farm sell for prices that are far above the means of people who are interested in actually farming land personally.  A farm like this might sell for $50 million or more.  If you want to own this farm and operate it, you will have to accept living in a remote place with few services.  Your kids will have to take a long bus ride school.  If you need to go to a hospital, you will may have to travel for hours.  You will be living in a swamp and have bugs around. They won’t be any fancy restaurants or nightclubs.  Generally, people with $50 million burning a hole in their pocket aren’t going to want to live like this. 

In practice, corporations buy almost farms that generate these free cash flows.  I was raised on a ranch in Montana.  I remember the corporate buyers coming to the ranch to make offers when I was a kid.  He refused to sell and swore a blue streak about them as soon as they left. He never did sell.  But his kids didn’t want to live on a ranch in remote Montana.  The land now belongs to a corporation.  I knew all the farm owners around the area when I was a kid.  They were all old people, having inherited the farm during the depression, when people couldn’t move to cities because there were no jobs.  Now, corporations own all this land.  Kids don’t want to live in remote areas and put up with bugs and isolation, when they can make the same amount in cities.  Corporations buy the land.

The corporations care about one thing:  the numbers.  They don’t care about the great stoker furnace that my uncle was so proud of.  (Put the coal in a bin and an auger feeds it constantly.  No more getting up at 4am to stoke the furnace!) This wasn’t a selling point. The corporations only cared about the free cash flow the land generated.  The corporations are patient:  corporate charters in the United States never expire; the corporations last forever. 

In the end, the farm is going to be a kind of ‘black box.’  A certain amount of money flows from this ‘black box’ each year, for free.

What happens inside the box?  The corporations don’t care.  All they care about is the amount of money that flows out of the box.

There is a standard term for the amount of money that flows from a farm, without anyone involved in production having to do anything: the free cash flow.  In this specific example, (the Pastland Farm) the free cash flow will be exactly equal to the number I call the ‘basic productivity,’ which represents the money value of the bounty of the land. 

I don’t want to use the term ‘free cash flow’ however, in discussions, because there are times when farms produce enormous free cash flows, but not only aren’t bountiful, they don’t produce anything at all.  The problem is that the money that represents the free cash flow doesn’t have to come from the farm itself, it can come from government subsidies, options to drill oil or to allow the land to be converted to housing under certain conditions, payments to farmers who agree to not grow crops on their land, and many other sources.  The corporations that are buying and selling property rights care about the amounts of cash flow from the land, not whether the land actually produces anything useful.

I need a term that represents real value that comes to exist due to the bountiful nature of our world, so we can see how bountiful the world is (measure the bounty in dollars) and determine who gets this bounty.   In many cases, the ‘free cash flow’ advertised by sellers of cash-flow generating properties will be identical to the basic productivity, and for practical purposes we can normally use the free cash flow that is advertised by sellers as a proxy for the basic productivity, but I don’t want to simply use the common term, because the basic productivity will always represent something real of value that gets created over time and makes the world better for the human race.

If there is more basic productivity, the human race is always better off.  More wealth has come to exist on the world and will continue to come to exist each year in the future. (The basic productivity is a flow of money, just as the ‘free cash flow’ is a flow.)  You may not be better off personally, because you may not get any of this money.  But someone or some group has higher incomes. If we want to understand who benefits because the world is bountiful, we need to be able to follow the money.  We need to pick a spot where we can identify the money that represents the basic productivity.  (Preferably as something we can clearly identify like a huge pile of dollar bills on a table.)

Then we have to follow the money.