On the Necessity of Transforming the Fictitious Commodities of Money, Land, and Labor Into Commons

* Article: Escaping the Polanyi matrix: the impact of fictitious commodities: money, land, and labor on consumer welfare. By Gary Flomenhoft. real-world economics review, issue no. 74, 2016

URL = http://www.paecon.net/PAEReview/issue74/Flomenhoft74.pdf comments

Abstract

"Karl Polanyi’s concept of land, money, and labor as “fictitious commodities” are found in his book The Great Transformation. He pointed out that the attempt to commodify these factors, which he said was necessary for a market economy, would demolish people, business, and nature if some mitigating steps were not taken. The impact of these fictitious commodities will be analysed in the modern market economic context to show their detrimental impact on consumer surplus and welfare. The author introduces the term “Polanyi matrix” to describe the system of unseen rules whereby land, money, and human labor are commodified, are never questioned, and are at the root of many economic problems. The author contends that commodification of land, money, and labor are not necessary for a functioning market economy, and in fact are detrimental to it. For example, land can be placed in trusts, money can be administered as a public utility, and people can reclaim sovereignty over their own labor. The concepts of socially responsible business, green economics, sustainable economics, the creative economy, natural capital, steady-state economics, caring economy, solidarity economy, cooperative economy, or any other suggested solutions, have no chance of succeeding in creating widespread prosperity or sustainability, unless the operating system of the economy can be reformed in these three crucial systemic ways. We can use Polanyi’s insights to address the fundamental roots of the problem in commodity land, money, and human labor."

Excerpts

"In order to demonstrate the impact of the three false commodities in the financial crisis we can look at asset prices for land and money, and unemployment for labor during the financial crisis.

Land as a false commodity

When looking at real estate prices it is important to remember that rising house prices reflect rising land values, not buildings. Buildings depreciate as they wear out. Their replacement price may increase due to the normal inflation rate, and their value may be maintained by investments in repair and maintenance, but buildings do not increase in value on their own. By contrast, land values are what are subject to rising real prices.

There are three important problems with land as a market commodity. First, periodic booms and busts of land prices due to speculation are extremely disruptive of the economy and cause recessions and massive unemployment. The crash of 1929 was due to an asset bubble including real estate, and it is widely understood that the “sub-prime mortgage crisis”, i.e.; a land bubble, was behind the global financial crisis in 2008, as real estate prices rose to unheard of levels historically, and then crashed.

Second, land prices rise faster than incomes driving average wages to subsistence due to mortgages and rents crowding out other expenditures by average wage earners. Housing costs rise to unaffordable levels, and households respond by putting both partners to work, increasing working hours, or working multiple jobs so they become trapped by debt peonage. Third, rising land values, or the economic rent of land, are generated by society and not by the individual land owner. Therefore society has the right to recapture it. Allowing some members of society to benefit from social progress and leaving others behind is inequitable. So there is a moral component as well, since landowners accumulate capital gains from land while doing nothing to earn them. “Did you ever consider the full meaning of the significant fact that as progress goes on, as population increases and civilisation develops, the one thing that ever increases in value is land?” (George, 1887)

Furthermore, it is a zero-sum game. For every person who makes unearned gains from land someone else must pay. Rising prices and rent benefit land owners, while renters must pay ever increasing rents. These factors sum up the essential problems with the privatization of land rent, and commodification of land.

Solutions to commodity land

Treating land as a market commodity destroys consumer welfare, and creates boom-bust economic cycles. For a sustainable economy, land must be removed as a commodity leading to asset bubbles. There are several ways this could be done. Municipalisation, taxation on economic rent of land, and community land trusts. In Singapore, Hong Kong, and formerly in Canberra, Australia all land is owned by the city and leased out on long term contracts such as 99 year leases. Covenants restricting profit on resale would be necessary to avoid turning land into a commodity.

Arnott and Stieglitz sum up another solution to the land problem as follows: “…since a confiscatory tax on land rents is not only efficient, it is also the ‘single tax’ necessary to finance the pure public good” (Arnott and Stieglitz, 1979, p. 471-471). If holding costs are less than the annual capital gains, then financiers will continue to speculate on land and housing. If land tax or capital gains taxes removed the unearned income from real estate, then land would no longer be subject to speculation or bubbles.

Another viable method of removing land from the market is to place land in community land trusts, where land is owned by a non-profit organization, and is leased to homeowners who own the buildings. Limited or shared-return contracts on homes prevent homeowners from capitalizing land prices into their house prices when sold. They are most often used for affordable housing, but can also be used for commercial, industrial, or agricultural uses. These three methods essentially remove land from speculative markets, and remove the distortionary impact of land from markets of all goods and services containing a land component.

Money as a false commodity

The administration of purchasing power, in other words creation of the money supply, is currently regulated by quasi-private central banks such as the US Federal Reserve Bank, but is mainly controlled by private banks. According to a recent publication by the Bank of England, private banks create 97% of the money supply through the issuance of loans to borrowers10. “This confirms that banks create money when they grant a loan: they invent a fictitious customer deposit, which the central bank and all users of our monetary system, consider to be ‘money’, indistinguishable from ‘real’ deposits not newly invented by the banks. Thus banks do not just grant credit, they create credit, and simultaneously they create money” (Warner, 2014, p.74). “Central banks increase money supply by purchasing government bonds with money created for that purpose” (Farley et al, 2013), so-called monetizing the debt. This central bank money is often called “vertical money”, while money created by the banking system is called “horizontal money”. So the entire money supply is essentially administered by the market as Polanyi stated as a requirement of a market society. The money supply is very flexible as determined by demand for credit, but every dollar creates interest payments to banks, which increases the cost of items purchased such as homes, and decreases consumer welfare.

Market administration of the money supply and other financial products also violates the theory of consumer welfare, the invisible hand, and the magic of the market. Greater demand for currencies, credit, and financial products, rather than leading to market entry and lower prices, leads to rising asset prices until the bubble bursts. Hyman Minsky called the end stage of financial capital the “Ponzi stage”, where there are no more productive investments available to be made in the economy, so finance goes mainly into speculative activities, driving up asset prices (Minsky, 1992, p. 9). While asset prices are rising, banks are willing to extend rising amounts of credit, increasing the money supply, but when asset prices are falling banks call in loans and reduce lending, thereby shrinking the money supply. This is referred to as pro-cyclical monetary policy, which exacerbates recessions and unemployment due to shrinking demand in times of falling asset values. What is needed is counter-cyclical monetary policy. Some control is exerted by central banks through adjustment of reserve rates, interest rates and open market operations, but they don’t directly control the money supply.

Since monetary policy is out of the hands of governments, in order to address monetary contraction they often respond with Keynesian expansionary fiscal policies to address monetary contraction. That is the only tool they have at their disposal. By additional spending or reduction of taxes, governments are able to inject more money into the economy, and counteract some of the pro-cyclical trends of bank money. This goes directly against the principle of market administration of purchasing power, and is an example of one of the mitigating responses to pure neo-liberal, laissez-faire policies that Polanyi devotes his entire book to explaining. “Grave evils would be produced in this fashion unless the tendencies inherent in market institutions were checked by conscious social direction made effective through legislation” (Polanyi, 1944, p. 129).

There is also a biophysical limitation to the infinite emission of credit by private banks. All bank credit is issued with interest compounded continuously or annually as a condition of loans. Therefore, the money supply must continually expand and the economy must grow in order to obtain the funds to pay back interest on the entire money supply. This creates a perpetual growth imperative, which has resulted in the 2014 ecological footprint measured at 50% overshoot of the planet’s biocapacity11. “Robbed of the protective covering of social institutions…Nature would be reduced to its elements, neighborhoods and landscapes defiled, rivers polluted, military safety jeopardized, the power to produce food and raw materials destroyed (Polanyi 1944, p. 73). And thus it is today as planetary overshoot has already exceeded boundaries for biodiversity and the nitrogen cycle (Rockström 2009, p. 472), and the climate destabilizes from excess greenhouse gasses.

Marion King (M.K.) Hubbert identified the basic problem with our current debt and interest based monetary system in his essay entitled, “Exponential Growth as a Transient Phenomenon in Human History”

Over time, due to our debt-interest based money system, the value of money declines, making products more expensive. This perpetual decline in the value of money has resulted in one dollar in 2014 being worth the equivalent of four cents in 1913 (bls.gov), a total depreciation in 100 years of 25 times its value, or -3.16% per year compounded annually. The most stable currency in the world at the time, the Deutch Mark was worth 20 cents (pfennigs) in 2001, based on a 1950 starting point of one Deutch Mark13. This constant reduction in the value of money due to the debt-interest money system, results in perpetual price inflation, which is accounted for in economic models as an annual rate of 2-3% inflation. For consumer welfare prices should be going down, not up. Constantly depreciating currency results in prices always rising and labor needing to constantly sell itself for higher wages on labor markets.

Since land is usually appreciating faster than wages, this creates a treadmill for the average worker trying to keep up with constant consumer price and land price inflation. If the value of money was constant, then competition in real commodities would decrease prices benefitting consumers. In reality economists look at deflation with horror as it decreases demand and results in recession, and makes loans harder to repay due to increasing value of money compared to income. Since nearly the entire money supply is issued through commercial loans, it would create default and monetary crisis if there was constant price deflation. By using the concept of “real” prices adjusted for monetary inflation, we can disaggregate the portion of prices due to increased product costs, and the portion due to currency depreciation. Since nominal prices of microelectronics have declined without adjusting for “real” prices, this is an even more impressive achievement. It means that the prices of microchips have declined faster than prices have increased due to currency deflation. So if prices are inflating at 3.16% per year due to currency depreciation, that means that the price of microchips are declining in real terms faster than 3.16% per year.

Solutions to commodity money

The fact that 97% of the money supply is created by interest bearing loans is the crux of the problem. It adds the cost of interest to everything, and causes a growth imperative due to the need for economic expansion to provide the money for interest payments. Many economists and writers over the years have recommended 100% reserve requirements, most recently in an IMF working paper by Jaromir Benes and Michael Kumhof, called “The Chicago Plan revisited”. This refers to the plan by U of Chicago economists led by Frank Knight in the 1930’s and also supported by Irving Fisher and Henry Simons, to require 100% reserve requirements on all bank loans, which would transfer to government the function of creating the money supply through 100% vertical money, ideally interest free, by spending it on public goods. Lincoln’s Greenbacks were a successful example of interest-free government money. Greenbacks were created interest-free to pay Civil War soldier’s wages. With 100% reserves banks would just become intermediaries between savers and borrowers.

Several intermediate steps have been proposed. The JAK bank in Sweden issues loans interest free which would decrease the perpetual growth imperative, and perpetual inflation. However, the JAK Bank lends out only money it has on hand and does not add to the money supply. Coincidentally, JAK stands for Jord, Arbete, Kapital in Swedish – or Land, Labour, Capital in English. Public Banks such as the Bank of North Dakota have been proposed as a way to transfer some seigniorage to the public sector. Banks are able to create credit while states are prohibited by the US Constitution. The Bank of North Dakota receives all deposits of state revenues, and uses them to leverage many loan programs for agriculture, industry, commerce, and student loans. Even more decentralized would be a system of municipal public banks creating credit for their infrastructure needs, at minimal interest, and paid back by tax money, with revenue going to the municipality instead of to banks. A voluntary decentralized approach is also possible. Around 70-80% of all bank loans in the US are for mortgages. If non-profit financial institutions were formed to take on the financing of nonmarket land in community land trusts, then we could begin to escape the Polanyi matrix. These banks could establish credit on the basis of the JAK bank which takes equity in properties instead of interest, and can begin to remove the use of money as an extractive commodity.

For the problem of monetary speculation, a financial speculation tax or Tobin Tax has been proposed worldwide as a means to reduce the level of speculation in financial assets, but would not change the creation of money. To eliminate the commodity nature of money, the creation of the money supply would have to be transferred to government, and maintained at a stable price level.

Labor as a false commodity in the financial crisis

The third of Polanyi’s false commodities, labor, is a special case. As factors of production, people are no longer human beings, but are commodities bought and sold in labor markets, so called wage slaves, or “human capital”. Without unionization or government intervention, labor is generally at a disadvantage to the owners of business, except in the case of highly skilled labor, as labor is normally overabundant, and easily reproducible by a very enjoyable process. In Polanyi’s words, “Robbed of the protective covering of cultural institutions, human beings would perish from the effects of social exposure; they would die as the victims of acute social dislocation through vice, perversion, crime, and starvation (Polanyi, p. 73). As a factor of production, it is in the interest of business to minimize wages to labor. As consumers, laborers benefit from low prices resulting from reduced labor costs, which act directly against their interests as employees seeking higher wages.

There are several specific results of labor as a market commodity. During bust cycles, labor is hit with unemployment, leading to many of the social consequences pointed out by Polanyi. Due to globalization, labor has not been compensated for its increased productivity contribution since 1975 in the US. Also, as a result of treating labor as a market commodity, Polanyi predicted starvation and crime would result, without social intervention. We can evaluate these results in light of the 2008 financial crisis.

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Since 1975 workers have received almost none of the gains of increased productivity, which has increased by 143% since around 1975 (figure 14). In other words, productivity has more than doubled, while workers received none of the gains. This can be explained by the deindustrialization of the US economy, as heavy industries followed by manufacturing in general were exported to Asia. Due to this trend there was a huge decrease in unionization which went from 39% in 1940 to around 10% in 2014. During the same period there was a trend toward part-time work and contract labor, mergers and acquisitions, with downsizing and layoffs. The Reagan revolution and Republican “Contract with America” both served to remove power from the working class and transfer it to corporations. One of Reagan’s first acts as President was to break the Pilots and Air Traffic Controllers strike (PATCO), replacing them all with military personnel. That was the final nail in the union coffin. The Democratic Party in 1992 through the Democratic Leadership Conference chose to seek the same corporate and Wall St. money as the Republicans, and from that point on effectively stopped serving the working class. All these factors led to the reduction of bargaining power and political power on the part of labor, and can help explain the stagnating real wages during this period of time.

Solutions to commodity labor

One of the responses to critiques such as Polanyi’s of labor as a market commodity was Marx’s prescription of a “dictatorship of the proletariat”, and state ownership of the “means of production”. It turns out that one dictatorship is no better than another. Also owning the means of production does not necessarily eliminate land or money as commodities, although presumably putting labor in charge of managing industrial production would give them more sovereignty over their work lives. In reality during Soviet communism, laborers remained commodities ruled by party elites. More recently the Mondragon cooperatives have demonstrated a more cooperative form of labor management, still within the market system, but with good results. In the US Louis Kelso originated the idea of Employee Stock Ownership Plans (ESOPs), which would ideally turn all employees into capitalists by giving them a share of stock in the company. This has had limited success. Many ideas for returning power to workers have been proposed in recent years. Community land trusts often employ development and construction companies for housing construction and renovation. Therefore, combining community land trusts with worker-owned construction companies is feasible. Gar Alperovitz has promoted many structural reforms including, “the traditional radical principle that the ownership of capital should be subject to democratic control” (Alperovitz, 2013). This refers to worker ownership or participation in their own workplaces, a very different proposition than state communism or state capitalism. Democratizing the workplace is a great unfinished business of society.

What few reformers have advocated directly is to remove labor as a factor of production sold in labor markets. It is probably a lack of imagination that prevents us from imagining an economy where labor consists of human beings doing meaningful work in alignment with their skills and interests. Aboriginal and tribal people managed to do it, through non-simultaneous reciprocity. Even in feudal times according to Polanyi, labor was tied to feudal estates and was remunerated according to social relationships, not according to labor markets. Surely we can find an approach embodying something like Sen’s capabilities approach that respects the humanity of labor, while still remunerating them for their work. We need to find a way for laborers to gain control of their lives and work according to their capabilities, instead of simply selling their labor in markets.

Conclusion

Commodity land, money, and labor remain a largely unseen matrix as they have been part of the market economy since “The Great Transformation” from a feudal to market society. Market competition raises the price of land and money through increased demand for fixed assets, rather than lowering it through increasing supply as in the case of microchips or other competitive product. Commodity labor in flexible labor markets normally results in wages being driven down due to the oversupply of labor. Labor is also subject to periodic unemployment and loss of income during recessions resulting from booms and busts in commodity land and financial products. Therefore commodifying land, money, and labor reduces consumer surplus, and lowers economic welfare. It is entirely unnecessary, as all three can be managed outside of markets. None of the major proposals for economic reform address the three false commodities identified by Polanyi, except for Daly. Combining solutions developed in this article and Daly, by implementing 100% reserve requirements and public banks, community land trusts, and housing companies set up with worker ownership and management, all three fictitious commodities could be addressed. Since 70-80% of commercial loans are for real estate, this would comprise a huge portion of commodity money, land, and labor. Only by addressing the Polanyi matrix can the fundamental problems of inequality, poverty, environmental destruction, boom-bust monetary cycles, exorbitant housing prices, and many other problems be solved."