Ownership and Growth (Economics of Ownership 3)

[Shann Turnbull <sturnbull@mba1963.hbs.edu>]

Keith Wilde, our facilitator, said in his posting of 12.15 on November 1,
in his response to Alan Zundel that:

"I BELIEVE, HOWEVER, THAT SHANN ALSO ARGUES THAT
HIS OWN TECHNIQUES ARE MORE LIKELY TO INCREASE GENERAL GROWTH." 

I am not aware that I made such a claim.  But I have said the reverse!  

I have always considered leveraged ESOP's (ie the Kelso technique)
complementary to my Ownership Transfer Corporations (OTC's) and Community
Land Banks (CLBs).  However, I have said that I consider leveraged ESOPs
more important in making economic development self-financing by providing
an institutional mechanism for converting debt to equity to finance growth. 

However, I  could be proved wrong!  And on reflection I may be.  It may be
useful to share my speculations in the matter and my concern that it would
be difficult to prove from current economic statistics.

My reason for speculating that leveraged ESOPs could be used to accelerate
growth is that they provide an institutional mechanism to finance
investment from the savings created by the investment rather than by income
forgone.  This avoids the need to forgo consumption to finance investment
to allow consumption and production to grow together with investment and
savings.  It permits what I describe in my "New Strategies" paper (
http://cog.kent.edu/lib/turnbull1/turnbull1.html )as "confluent"
development to replace "contrary development processes".

The contribution made by OTCs is indirect and the benefits are not usually
measured by economic statistics.  OTCs provide a technique for attracting
foreign investment on a basis local ownership and control is increased over
the ownership transfer period or what is referred to in BOOT projects as
the "concession period".  The ownership transfer would reflect what Michael
Harrington nicely described as "A FAIR MARKET EXCHANGE" in his posting
yesterday.  It would allow speculative "surplus profits" to be exchanged
for more immediate and certain return OF and ON equity investments.
 
However, economic statistics do not usually concern themselves with the
sovereignty of national income, let alond "surplus profits".  As a result,
any changes in ownership from foreigners to local citizens is not
identified in the national accounts and economists will not detect any
increase in the income of residents.  No increase in "welfare" will be
detected even if the income of residents is in fact increasing!  Indeed,
economists could argue that the transfer of income from one country to
another does not represent economic growth because there is no change in
global welfare!  What the citizens of one country miss out on, the citizens
of another are receiving.  

The same problem exists within nations.  Resource rich communities can be
cash poor.  Australia is endowed with many internationally competitive
farming and mining communities that are cash poor because ownership of the
cashflows are held external to the community.  The same situation exists
with cities, towns and suburbs that can have high levels of employment but
are cash poor.  However, this information is not normally collected.  (But
I did get the Australian Government to undertake this exercise for the
first economic study ever undertaken into Australian Aboriginal
communities.  The results are published in my second report Economic
Development of Aboriginal Communities in the Northern Territory, Australian
Parliamentary Paper 438/1978).  These remarks illustrate the utility of
basing economic analysis on cashflows be they from income, expenses, assets
or liabilities rather the much more restricted framework/paradigm of what
may be described as "income" and "expenses". 

Consider the cashflows in a suburb.  One third of the income earned by
residents may be applied to paying rent or paying off mortgages.  If the
landlords and lenders are externally based than one third of the cashflows
are exported.  Likewise, more cash will be lost to community from the need
to purchase external goods and other services consumed by the community.
Increasing levels of employment in the community will then improve the
welfare of externally based landlords, financiers and producers of goods
and services.  

The welfare of residents might better be improved by policies for reducing
the cash drains from the community.  One way to achieve this it increase
the degree of local ownership of land, buildings, the means of production
and exchange and the currency.  If local currencies could be established to
finance activities then the export of value in the form of interest
payments to external financiers could be avoided.  Various strategies for
blocking community economic/cash drain holes are set out our book 'Building
Sustainable Communites: Tools and Concepts for Self-Reliant Economic
Change', Bennello, Swann, Turnbull, Edited by Ward Morehouse, Revised
Second Edition, 1997, The Bootstrap Press, ITDG/North America, NYC.
(George Bennello was a colleague of David Ellerman at the Boston based
Industrial Co-operative Association)  One of these techniques is my
Community Land Bank concept which introduces dynamic ownership to increase
local ownership and avoid external owners obtaining a free ride from values
created by the community. (ie minimised the export of "externalities").

The same thinking applies to nations.  The aggregate income for residents
can be increased if the payment of interest, dividends, profit shares,
rents, royalties, and other property income is minimised.  Interest
payments can be minimised by using leveraged ESOPs to reduce reliance on
external debt to finance growth.  External payments of Dividends and
profits can be minimised by adopting OTCs and rents with CLBs.  Because the
surplus profits exported through dividends and profits can be two, three or
more times the original investment, as discussed in my earlier postings and
in my "New Strategies" article, their value might well exceed the values
exported by some countries in the way of interest payments.  If this proved
to be so then the remark made by Keith that my techniques would promote
growth more than Kelso's techniques could be proved correct.  That is, if
we measured income growth in terms of the aggregate income of residents
rather than the national income as currently measured.

Regards

Shann


At 07:23 AM 2/11/1999 , you wrote:
>Thanks to Alan Zundel for reviewing the discussion to date and providing us
>with a summary of the issues.  I take it as an opportunity to express some
>of my biases about the appropriate role of economics and economists in
>addressing the questions that surround the democratizing of access to
>capital.  Please excuse me for having having abbreviated Alan's text and
>inserting my own comments in caps.  I should have done it the other way
>round. 
>
>On  10 /31/99 Alan Zundel wrote: ....an outline of the issues as they look
>to me, then a couple of  comments. 
>
> >1. Is broader capital ownership good, bad or neutral from a
>macro-economic standpoint? 
>THIS IS NOT QUITE THE ISSUE.  ECONOMISTS LOOK FOR AN IMPROVEMENT IN THE
>GENERAL WELFARE.  IT IS NOT EASY TO JUDGE WHEN THIS HAS BEEN ACHIEVED.  AT
>A MINIMUM, WE WOULD EXPECT AN IMPROVEMENT IN SOME MACROECONOMIC INDICATORS,
>BUT SUCH GROWTH ALONE IS NOT SUFFICIENT TO DEMONSTRATE INCREASED GENERAL
>WELFARE. 
>
> >1a. Conventional economic theory sees it as bad or neutral... .Are there 
> >flaws in the reasoning? (Everyone here thinks or hopes there are?) 
>I WOULD DISAGREE WITH THIS INTERPRETATION.  IT IS QUITE CONCEIVABLE TO
>ARGUE FROM CONVENTIONAL THEORY THAT BROADER CAPITAL OWNERSHIP COULD BE GOOD
>FROM THE PERSPECTIVE OF CONVENTIONAL MACROECONOMIC INDICATORS.  BUT WHETHER
>OR NOT A CHANGE IN GDP, EMPLOYMENT OR INTEREST RATES CONSTITUTES AN
>IMPROVEMENT TO THE GENERAL WELFARE IS ARGUABLE­EVEN IF THE CHANGE COULD BE
>IDENTIFIED CLEARLY AS A CONSEQUENCE OF THE OWNERSHIP-BROADENING POLICY
>INITIATIVE. 
>
> >1b. Is Kelso's theory...which sees it as good, sound?  
>I BELIEVE IT FOLLOWS FROM MY RESPONSES ABOVE THAT ECONOMICS IS SILENT ON
>THIS-­OR MORE ACCURATELY, IT IS “TWO-HANDED”.  IT COULD GO EITHER WAY.
>ECONOMISTS MIGHT AGREE ON CRITERIA FOR A DECISION, BUT IT IS DEVILISHLY
>DIFFICULT TO TAKE THE REQUIRED MEASUREMENTS.   
>
>>1c. Does a revised version of Kelso's ideas (e.g. Shann's) do a better job
>of it?
>IN MY OPINION, SHANN MAKES A MORE PLAUSIBLE EXPLANATION OF WHY POLICY
>INSTRUMENTS OF THE KIND DEVISED BY KELSO AND HIMSELF COULD IMPROVE THE
>WELFARE OF SOME PEOPLE WITH MINIMUM DAMAGE TO THE INTEREST OF OTHERS.  HE
>SEEMS TO AGREE WITH ELLERMAN, NEVERTHELESS, THAT THESE POLICY INSTRUMENTS
>CAN HARDLY BE IMPLEMENTED WITHOUT AT LEAST A LITTLE BIT OF REDISTRIBUTIVE
>IMPACT.  THAT IS WHAT TRIPS THE WARNING BELL FOR ECONOMISTS AND MAKES US
>UNCERTAIN OF THE OUTCOME.  I BELIEVE, HOWEVER, THAT SHANN ALSO ARGUES THAT
>HIS OWN TECHNIQUES ARE MORE LIKELY TO INCREASE GENERAL GROWTH. 
>
> >2. This hasn't been as explicit, but: is broadened capital ownership good
>from a political-  >ethical standpoint? (E.g., Keith sees it as an issue of
>providing income security in an age   >of transitory employment, a position
>I very much agree with; David E., if I remember right, >argued that it is
>not ownership but rights of democratic control over the workplace that are
>>important.)
>THIS IS NOT A QUESTION THAT ECONOMISTS ALONE CAN ANSWER, QUA ECONOMISTS.
>HENCE, I AM OFFICIALLY SILENT.  AS AN INITIATOR OR COORDINATOR OF
>DISCUSSION, HOWEVER, I LOOKED FOR A GERMANE POLITICAL ISSUE WHICH MIGHT
>GRAB THE ATTENTION OF ECONOMISTS­-TO INDUCE A FEW OF THEM TO APPLY THEIR
>RATIONALE, DECISION CRITERIA, EMPIRICAL KNOWLEDGE AND MEASUREMENT SKILLS TO
>SEEKING ANSWERS FOR THE GENERAL WELFARE QUESTION.
>
> >3. If broadening ownership is a good thing, what's the best way to get
>there? 
>FROM THE ECONOMISTS’ PERSPECTIVE, ONE THAT IS EFFECTIVE WITH THE LEAST
>REDISTRIBUTIVE IMPACT.
>
> >3a. Would/do Kelso-type financing devices work as claimed? (Much
>discussion has revolved >around ESOPs, to the neglect of non-employment
>based models, except for Shann's ideas about >getting stocks into the hands
>of "stakeholders".) 
>THIS IS THE CRITICAL QUESTION, OF COURSE. AND SEAT-OF-THE-PANTS ARGUMENTS
>ALONE ARE NOT GOING TO RESOLVE IT.
>
>>3b. Are policies that, in effect, redistribute ownership justified?  
>SPEAKING FROM THE ECONOMICS PERSPECTIVE, ONLY IF THEY CAN BE SHOWN TO
>IMPROVE THE GENERAL WELFARE.  NOT EASY TO DO.
>
>>(Orthodox Kelsonians--and Shann if I read him correctly--would say no, we
>don't need to >redistribute but to change the distributive mechanisms for
>ownership of newly created >capital; David E. has, I think, been charging
>that ESOPs are redistributive and so I surmise >he is against
>redistribution.) 
>AS AN ECONOMIST, ELLERMAN CANNOT ENDORSE REDISTRIBUTION, FOR REASONS
>SUGGESTED ABOVE.  KELSONIANS AND SHANN ARGUE THAT THEIR METHODS INVOLVE A
>MINIMUM OF REDISTRIBUTION.  AS AN ECONOMIST, I AM INTERESTED IN WHICH OF
>THESE CLAIMS IS THE MOST PLAUSIBLE.  
>
>>I think there is a major problem at the heart of the orthodox version.
>There seems to be  >some confusion here over what Kelso said about capital
>productivity. Kelso rejected the >concept of productivity for his own idea
>of "productiveness."  Productiveness means >something like the amount of
>physical work contributed to producting something, and the >claim is that
>capital productiveness far outstrips labor productiveness in the modern
>>economy. I guess that is sensible enough, but Kelso went on to claim that
>in a truly free >market economy (not one distorted by political
>interventions, like our present economy, with >its 25% capital 75% labor
>income shares) income shares would be based on productiveness. 
>THANKS.  YOUR WAY OF PUTTING IT ADDED TO MY UNDERSTANDING OF THE CONCEPT.
>IT ALSO RAISES A WARNING FLAG.  THE "TRULY FREE MARKET ECONOMY" IS AN ITEM
>OF RHETORICAL BULLSHIT DRAGGED IN BY THE "PURE IN HEART" ON THE SIDE OF ANY
>DEBATE INVOLVING POLITICAL ECONOMY--AND IT DOESN'T EXIST.  MARKETS ARE A
>MANIFESTATION OF HUMAN INITIATIVE COMBINED WITH FACILITATING INSTRUMENTS
>AND RULES OF BEHAVIOR, HAVING VARYING DEGREES OF FORMALITY, ENFORCEMENT AND
>ADJUDICATION.  THE APPEAL TO "FREE MARKET" MUST ALWAYS BE INTERPRETED AS
>"MY IDEA OF BETTER RULES TO GOVERN HUMAN BEHAVIOR IN EXCHANGE
>RELATIONSHIPS".   THUS IT IS A POLITICAL ISSUE,  NOT AN ECONOMIC ONE, AND
>THE OUTCOME DEPENDS ON WHOEVER CAN GET THE MOST INFLUENCE OVER LEGISLATORS,
>REGULATORS AND JUDGES.  
>
>>A lot of Kelso's theory is built on that foundation, but I have yet to get
>an answer as to >*why* income shares in a free market would reflect
>productiveness.
>LOOKS LIKE A VERY IMPORTANT QUESTION.  DOES THE ANSWER HAVE SOMETHING TO DO
>WITH HISTORICAL CONTEXT?  THAT IS, WITH THE POWER ENJOYED BY LABOR UNIONS
>IN THE DECADE FOLLOWING WW II--WHICH TO ECONOMISTS REFLECTS THE RELATIVE
>PRODUCTIVITY OF LABOR, IN SPITE OF THE PHYSICAL QUANTITY OF WORK THAT WAS
>BEING PERFORMED BY STEEL AND CONCRETE FACTORIES ENERGIZED BY THE
>COMBUSTION OF FOSSIL FUELS?
>
>>It seems to me that supply and demand set the price of labor and
>capital... . 
>
>>... the orthodox Kelsonians' attachment to the concept of productiveness
>hinders other >people from looking [at the]...good in Kelso's complex web
>of ideas. 
>
>>Second, to reemphasize a point made above: the discussions of ESOPs are
>interesting, but >even Kelso saw them as second-best to his other policy
>ideas. Some of the flaws of ESOPs as >devices for using credit to help the
>capital poor become owners come from the fact that they are
>employment-based devices, which is not a necessary feature. 
>BUT DO THE OTHER DEVICES RAISE EVEN MORE CONCERN ABOUT REDISTRIBUTION IN
>CONTRAST TO "EARNED" OR "MERITED"  INCOME?
>
> >And last, if such capital-credit devices are really redistributive, as I
>take David E. to >be arguing, is that a bad thing? I know the claim is that
>they are not, and it is an >interesting issue, but if the principle of
>income redistribution (at least to some degree) >is morally and politically
>acceptable (I think this is quite tenable), wouldn't wealth >redistribution
>also be? I am inclined at this point to see this as somewhat of a side
>>issue, so I am wondering why it seems so important to others?
>I HOPE THAT MY INSERTED COMMENTS HAVE HELPED ON THIS LAST QUESTION.  TO WIN
>THE UNEQUIVOCAL ENDORSEMENT OF ECONOMISTS, THE CAPITAL CREDIT DEVICES WOULD
>HAVE TO BE FREE OF REDISTRIBUTIVE TAINT.  AND THAT SEEMS TO BE WHAT THE
>KELSONIANS HAVE TRIED TO CLAIM FOR THEM, THEREBY DEMONSTRATING AN
>UNDERSTANDING OF THE ECONOMISTS' POSITION.  REDISTRIBUTION IS INDEED A
>MORAL AND POLITICAL ISSUE, AND IF IT IS RESOLVED IN LEGISLATURES ECONOMISTS
>WILL SIMPLY ACCEPT IT AS PART OF THE FRAMEWORK IN WHICH MARKETING BEHAVIOR
>MANIFESTS ITSELF, AND WILL THENCEFORWARD ACCOUNT FOR IT IN CONDUCTING THEIR
>WORK MORE OR LESS AS USUAL.  IT IS WHEN WE ARE ASKED TO PARTICIPATE IN THE
>MORAL AND POLITICAL ARGUMENT THAT ECONOMISTS GET EDGY ABOUT WHAT WE MAY
>RESPONSIBLY SAY AS MEMBERS OF A DISCIPLINARY GROUP WHICH HAS AGONIZED AT
>LENGTH OVER THIS KIND OF QUESTION.  AS INDIVIDUALS, OF COURSE, WE HAVE OUR
>MORAL AND POLITICAL PREFERENCES LIKE ANYONE ELSE.  THOSE OF US
>PARTICIPATING IN THIS DISCUSSION EXPOSE OUR PERSONAL BIAS BY THE VERY ACT. 
>
>Keith Wilde
>Canada Pension Plan
>Ottawa
>kwilde@magi.com
>613 990-8125 (office)
>613 747-6847 (res)

Shann Turnbull
P.O. Box 266 Woollahra, Sydney, Australia, 1350
Phone: 02 9328 7466 office; 02 9327 8487 home
Fax: 02 9327 1497 home & office.  Mobile 0418 222 378
Outside Australia, replace first "0" with "61" after international access code
Life long E-mail: sturnbull@mba1963.hbs.edu
http://www.mpx.com.au/~sturnbull/index.html