Although not stated in the text, this book was written in a "Cashflow paradigm" as explained in a paper: 'New Strategies for Structuring Society From a Cashflow Paradigm', presented to the Fourth Annual Conference of the Society for the Advancement of Socio-Economics held at the Graduate School of Management, University of California, Irvine, California, U.S.A. in a "track" on the Third Way, Friday, March 27, 1992. http://cog.kent.edu/lib/turnbull1/turnbull1.html

The novel ideas presented in this book were later developed and explained in greater detail in various articles. Some of these are listed in an updated selected bibliography at the end of the book. There are some other articles listed on the web page of the author at http://www.mpx.com.au/~sturnbull/index.html Over 100 articles are available from various web pages which can be located by inserting "Shann Turnbull" in leading search engines.

The book was launched on September 30^th, 1975, in the presence of Louis Kelso and Patricia Hetter by Dr. Jim Cairns, MP. Dr. Cairns, is a PhD in economics and was a former economics lecturer at the University of Melbourne. As the Deputy Prime Minister in 1975 he was the most prominent socialist in Australia. His speech to launch the book was published in a "capitalist journal", JASSA, The Journal of the Securities Institute of Australia, 1976 No. 1, pp. 9-13, http://cog.kent.edu/lib/cairns.html

The proposal to publish a book that included the ideas of Louis Kelso was first considered by the Company Directors Association of Australia in July 1975, when Mr. Kelso accepted our invitation to visit Australia on the 29^th September.

The Production of the book within such a short period could not have been accomplished without the special effort and close co-operation of our printers, John Sands Pty Ltd. The pressure of time required long and unusual hours by the other workers involved. Our appreciation for these people must be recorded: Christine Boden for the editing; Bob Astley for the cover and graphics; Wendy McGirr for typing the manuscript; and our colleague, Shann Turnbull, the author.

Bruce Champion

(Chairman, Company Directors

Association of Australia).

Sydney, 1975

Preface viii

1 Introduction 1

2 The nature of wealth 4

3 The two-layer economic cake 7

4 Wealth ¾ its non-monetary value 10

5 Leisure production 14

6 Why employees and professionals stay poor 17

7 Corporate wealth concentration 21

8 How the rich get richer 25

9 Wealth from inflation 28

10 Wealth from production 32

11 Other factors for determining wealth 36

12 Novel methods for sharing new wealth 39

(1) Employee Share Ownership Plan (ESOP) 39

(2) Ownership Transfer Corporation (OTC) 41

(3) Land Bank (town-owning co-operative) 45

(4) Producer-Consumer Co-operative (PCC) 48

13 Correcting the capitalistic system 51

14 Creating a community dividend 57

15 Social Capitalism 60

Notes and references 68

Appendix 71

Bibliography 73

This book has been written by a businessman for businessmen and, hopefully, also for the general reader. It has been based on a paper given at the Economics Section of the 46th Congress of the Australian and New Zealand Association for the Advancement of Science (ANZAAS), on 20 January 1975, in Canberra. The problem of communicating innovative technical topics in layman's language is that the ideas may be misunderstood by the specialist, or are sufficiently simplistic as to allow the technocrat to criticise the intellectual integrity or practicality of the proposals. As the purpose of this book is to introduce new ideas, a middle road has been attempted so that the proposals, which seek to change traditional orthodoxy, will not be too harshly criticised by the keepers of society's received wisdoms.

An attempt has been made to use layman's language and simplify the concepts accordingly, so the ideas maybe shared by the general public. Hopefully others will be more successful in democratising both the language and thought patterns, to achieve the objectives suggested by the title.

1 Introduction (Link to Contents)

The new approach for democratising the wealth of nations is based on four novel ways in which people may acquire wealth. All four methods have a number of common features and they all reduce, in various ways, the manifold inequities and inefficiencies of conventional capitalism. The four capitalistic innovations in the way that people can own and control things are:

The novel methods for distributing new wealth create a capitalistic alternative for achieving some of the more idealistic objectives of Karl Marx.

3. The withering away of the State ¾ but by natural attrition, not anarchy.

The defects of capitalism, identified by Karl Marx over a century ago, have not decreased, they have increased. Private-property economies are slowly being poisoned by insidious long-term changes in the way that they operate. New insights are required to detect these subtle defects, which have been accepted and even defended as a part of the system. These defects reduce incentive and result in competition acting to increase prices; this encourages hoarding. One of the rationales of the capitalistic system is that competition decreases prices and allows more efficient allocation of resources.

Defects within the present system have developed from the rules created by society for owning machines and natural resources. These defects have become greater as machines and natural resources have become more important as sources of new wealth. Such defects result in, and are magnified by, wealth being more unequally shared than income. This results in very few individuals possessing any significant private wealth. A change from a system of private property to State ownership would thus only affect a privileged minority. As a result, there is no country in the world today where a government could be elected by advocating capitalism. Political mandates can be obtained against socialism but not for capitalism.

New initiatives are required, not only to spread the popularity of private-property economics, but also to further appreciation of their benefits in safeguarding individual freedoms. A new type of market economy is required, which can offer ideals with incentives, co-operation with competition, justice with efficiency, and man's fulfilment in work or leisure. Such a society would be the ultimate achievement of the four novel structures for distributing the wealth of nations. This society would distribute economic benefits according to the credo of:

From each according to his interest;

To each according to his contribution;

Provided the basic needs of all are fulfilled.

The four innovations permit wealth to be distributed according to social and political considerations of need, justice and efficiency ¾ without involving government ownership and control, or even the necessity for governments to redistribute incomes through taxes and welfare payments. The distribution of income is achieved indirectly by democratising the ownership of assets that produce income and that can also generate other cash flows. The new economic co-operative structures would create a new form of capitalism, which promises to provide a far more powerful and effective means of distributing new wealth and managing affluent societies.

The traditional and largely ineffectual methods of western governments for managing their economies and redistributing wealth have been limited to measures involved with income or flow of money and benefits. These measures do not involve ownership and control of things that constitute wealth. Changes in the ownership and control of natural resources or "the means of production and exchange of goods and services" is not, however, a subject of economics. So economic theories cannot help. It is simply a matter of changing the rules and procedures, established by society, for how people own things.

There is no need and, indeed, no advantage for governments to become directly involved in either the ownership or transfer of wealth. The new rules proposed for owning things can be determined and implemented by those individuals in society who own or control resources and enterprises. However, it may be desirable, in practice, for governments to become in directly involved as agents. While the initiative for change rests with business communities and their leaders, government involvement would be desirable to provide an incentive for change and to orchestrate uniform adoption of the new rules and practices proposed for owning and controlling wealth. The government might also be needed as an umpire and to formulate rules of change.

Governments could provide leadership by transferring the ownership of public assets and services to their employees in negotiable form. This would increase the total value of negotiable wealth held by individuals in the community and increase the ability of citizens to live from their capital. Ownership of negotiable and/or income-producing assets would provide private social security, economic independence and greater freedom of lifestyle, choice of vocation and fulfilment.

This book and its proposals are based on the economic values arising from the ownership, control, operation, use and obligations of assets. These values are determined by:

(a) The rules established by society for obtaining claims and obligations in regard to property rights.

2. Man's possessions imperative ¾ this is as real and motivational as the territorial imperative that it incorporates.

The behaviour aspects of property rights are not the prime concern of this book. However, they cannot be ignored. Man seeks and values property for its embodiment of power, status and influence. Property provides man with his toys, and his monuments for seeking immortality. The greatest benefits that may arise from the new rules proposed for owning property may be the modifications that they initiate in man's values and behaviour patterns.

2 The nature of wealth (Link to Contents)

Wealth is defined as the surplus value of assets over liabilities held by a person. Assets are created by a person having a legal claim over things that have economic value. Liabilities are created when a person has a legal obligation to provide economic value to another. Wealth then exists when the value of a person’s claims over property exceeds the value of his obligations.

Wealth may not only be held by persons but also by artificial bodies that are created by the laws and conventions of society. Important examples are bodies corporate (or companies) and bodies politic (or the government of a country, region, municipality or town).

Various types of assets that constitute wealth are classified in Table 1. The table has been constructed to illustrate the importance of a special class of man-made durable asset that is described as procreative. Although all other types of wealth are called passive, most of them may still provide its owner with income. The exceptions are money (when it is held in specie and not deposited at a bank) and most types of consumable assets, like food and fuel. However, consumable articles like clothing may be rented out and so still generate an income.

The ability of assets to be sold and converted into cash provides a very important practical use of wealth, as well as increasing its no-monetary value. The ability to transform real or financial assets into cash provides security for borrowing money. Bank managers and other money lenders commonly ask their potential borrowers to list their assets and liabilities, so they can assess the ability of the borrower to repay a loan without relying on his future income or cash flow.

The reliance on being able to obtain cash from assets to repay loans becomes particularly important when the borrower is a corporation. The concept of wealth, as defined at the beginning of this chapter, is thus found in commercial law. Personal bankruptcy or corporate insolvency is defined as occurring when liabilities exceed assets.

Businessmen may use different words to describe wealth: shareholder's funds, net assets, net worth, owner's equity, equity, and proprietor's interest. While each refers to the excess value of assets over liabilities, the basis of the valuation of assets may vary considerably. This needs to be taken into account when estimating the value of wealth in terms of a realistic net cash-equivalent value; especially by those who lend money on the security of wealth.

The ability of asset ownership to generate cash flows from income, sale or borrowing is of fundamental importance. Wealth may produce cash in three ways:

1. Exchanging assets for cash through a sale.

3. Income arising from rent, fees, royalties or profits etc.

In modern affluent societies the cash flows generated by the first two methods, through the transformation and exchange of property rights and obligations, are of the same order of magnitude as the cash flows generated from the production and exchange of goods and services. Governments, however, only keep National Accounts of the latter cash flows.

The ability of wealth to produce cash flows is of fundamental economic, social and political importance for the structure and management of society. The ability of wealth to provide its owner with cash without work has profound importance for societies that wish to distribute economic benefits according to such social criteria as need, equity or justice. The distribution of wealth through the adoption of new rules for owning things provides a basis for redistributing cash benefits in society without government taxes and welfare.

While wealth may generate cash by way of income, sale or borrowing, it is important that the closely related concepts of income and wealth be differentiated. Wealth is determined by and is dependent upon the rules of owning things, income is determined by and is dependent upon the change in the ownership of things. Thus income is not wealth. It is the net flow of value (cash or other benefits) from one person, or legal entity, to another. The word net is important, for there can be a change in ownership without a change in value ¾ as occurs with a borrowing or a sale. This creates a cash flow but not an income flow. Income can produce wealth and wealth can produce income, but they are different concepts.

Income provides but one way of increasing the value of wealth. However, wealth may be changed in a number of other ways. As wealth is determined by the rules of asset ownership, it can be changed through the adoption of new rules. To quote John Stuart Mill in 1891, "The distribution of wealth, therefore depends on the laws and customs of society. The rules by which it is determined are what the opinions and feelings of the community make them, and are very different in different ages and countries; and might be still more different if mankind so chose." The question is if mankind will choose through anarchy and revolution, or by design and evolution.

To further social equity and economic efficiency, the rules and procedures for owning wealth need to be designed and tailored to the characteristics of the form in which wealth is held. The crucial economic characteristics are the life of the asset and its ability to generate income and/or appreciation in value. These characteristics are summarised in Table 1, which also indicates the new rules proposed for owning the various types of assets. These rules allow wealth to be distributed both equitably and efficiently.

The rules and their uses are:

3 The two-layer economic cake (Link to Contents)

Economists use the word wealth ambiguously and, more often than not, call income wealth. This confusion among economists has existed since 1776, when one of the founding fathers of their profession ¾ Adam Smith ¾ wrote a book called The Wealth of Nations. He was really discussing income. Economists and governments ever since have been concerning themselves with the distribution of National Income rather than National Wealth. Because so few economists study wealth, they can use the words wealth and income interchangeably with little danger of being misunderstood. It is only other people in government and those who elect governments that may be misled and confused.

When economists compile annual accounts of a country for its government, they only report on National Income and Expenditure, not on National Assets and Liabilities. Economic management without an accounting of assets and liabilities, as found in a balance sheet, would lead a businessman into financial mismanagement and insolvency. Businessmen find it difficult to accept that governments do not collect similar information for a country, until they consider the gross mismanagement of modern private-sector economies.

The conspiracy of silence among most economists, not to recognise and analyse asset ownership and the distribution of National Wealth, suits the political ambitions of the more extreme and opposing ideologies. These ideologies either oppose private ownership or oppose the more equitable sharing of private wealth. The distribution of wealth is more unequally shared in private-sector economies than the distribution of income. Indeed, in most countries the majority of citizens would have no significant wealth; with over 75% of private assets being owned by less than 20% of the people. As a result, wealth and the value of its benefits are beyond the practical experience of the majority of people. This permits socialists who wish to eliminate private wealth to obtain a political mandate, while the conspiracy of silence on the unequal distribution of wealth also suits the rich minority who do not wish to share their assets.

The small privileged minority of private-wealth holders who read this should not, however, be concerned that they will lose their assets by the adoption of the four proposals suggested in this book for distributing new wealth. The proposals are all concerned with the distribution of new wealth created in society ¾ not the taking away of old wealth held privately at present. Society would, by this means, obtain a greater incentive to make the economic cake bigger.

Economists who confuse income with wealth can only offer a single-layer cake. When the difference between wealth and income is identified, society can offer a two-layer economic cake. The bottom or foundation layer is represented by wealth and the top layer by income, with money providing the filling.

Many societies in the world offer only a one-layer cake. This may occur by accident or design. Individual rights to most types of property are eliminated by State ownership (socialism) and collective ownership (traditional communism). In these societies the problem of unequal shares of asset ownership has been solved in a very negative fashion, by not permitting any individual to have a slice. The constructive solution is not to eliminate the bottom layer, but to share it properly according to the rules designed by society. This option did not readily exist in the days of Karl Marx, because the rules of property rights had not been diversified and finely developed. The ability of creating corporations without a royal charter, for example, was introduced at about the same time he wrote the Manifesto of the Communist Party in 1847.

The size of the economic cake for an individual country may be increased only in either of two ways:

2. Increased output of goods and services by its workforce.

In a world economy there is only one way of increasing the share of the economic cake, or the material goods available to each person. This is through the increased productivity of the labour force. There are only two ways in which the productivity of labour can be increased:

However, once a man has climbed the learning curve for his particular job, there is not much a conscientious workman can do to improve his daily output. The only way his output can be increased is by providing him with more productive tools or machines. Beyond a certain point ¾ the point of becoming skilled at a particular operation ¾ labour productivity is static. It is man-made instruments that increase productivity and enable more to be produced. Labour, because it is limited by man's physical capacity, cannot become more productive. Productive instruments, because they engage the limitless capacity of the mind, increase productivity exponentially.

The only way that the world can increase its standard of living, in terms of the value of material goods available to each person, is through the use of more productive instruments. They allow more goods to be produced with less human labour. It is because of this unique and fundamental attribute that they are called procreative assets. They are the tools, machines, vehicles, factories and structures, which by the definition of being a procreative asset, allow society to make nature yield its resources more abundantly. That is, they provide more material goods per person. In the flip language of economists, they provide free lunches ¾ a possibility that practitioners of the dismal science like to deny.

Economists find it difficult to agree among themselves how such assets, that they call capital goods, should be defined or evaluated. The problem of recognising and measuring the value of such assets in practice has been avoided by not keeping National Accounts of asset ownership. Businessmen, on the other hand, are well practised in recognising and evaluating such assets as tools, machines and factories, which can make nature yield her resources more abundantly. Indeed, their skill in this regard is finely honed by competitive pressures to increase productivity and profits. Not only must businessmen recognise and evaluate procreative assets, but also design, build and operate them. To define and evaluate these assets, businessmen have developed techniques of cash-flow analysis.

In the language of the businessman, a procreative asset is one that produces sufficient income to become viable. The operation of a viable asset generates a value equal to its cost plus the interest earned by investing this cost (without risk) for the asset's expected life. In practice, the businessman will also require a suitable margin, to provide the incentive for accepting the risk of not having a guaranteed return. When there is no guaranteed return, a businessman calls the expenditure an equity investment and when there is a contractual return from the investment, he calls it a debt. A viable or procreative asset is one that is expected to return more cash from its operation than would be obtained from investing the same money for the same time in a debt investment without risk.

The expected return may not always be achieved. It could be more or less. For this reason, Table I shows a link between procreative assets and man-made durable assets. This indicates that, in practice, some assets that are constructed to meet the test of viability fail to do so. Unless there has been a gross miscalculation, the asset should still be income producing. In a diversified business, the whole enterprise could remain viable if its viable assets provided sufficient surplus to make up the shortfalls and/or the losses on the nonviable assets. Likewise, on a national scale a country could increase its standard of living if the values created by the viable enterprises provide sufficient surplus to make up the shortfalls and/or losses from the nonviable enterprises. A country also has the alternative of raising its living standard through international trade.

The classification of wealth into various types (in Table 1) does not make explicit the economic value of human knowledge¾ a value, which the economist refers to as human capital. This will be considered further in Chapter 6. At this stage, it is sufficient to note that the accumulated value of human knowledge is included in the values obtained by assets, especially those of a procreative nature.

4 Wealth ¾ its non-monetary value (Link to Contents)

Private wealth provides the only method for an individual to obtain economic independence. Economic independence is the ability of the individual to live without work or welfare ¾ stealing is but a form of work. The privilege of living without work provides the basis for the ultimate personal freedom.

A society in which individuals do not have economic independence does not have a means for providing its citizens with either social or political independence. The non-monetary value of wealth is that it has the potential for giving greater personal freedom, social choice and political democracy. While these objectives may not be produced by wealth, they may not be obtained without it.

Work takes away the freedom of an individual to spend his time doing those things that he wishes. State welfare makes his freedom subservient to the government ¾ if welfare is provided in goods and services, the freedom of choice is also lost; if it is provided in cash, resentments, disincentives and inequities, not to mention a bureaucracy, may be created. The acquisition of new wealth can also create problems if it is not acquired on a socially acceptable basis. These problems occur with the present rules of ownership. However, the inequities and injustices remain largely unnoticed because countries do not publish an account of wealth distribution.

The ownership of private wealth may not necessarily provide the holder with the means of obtaining cash without work or welfare. Wealth may be held in a form in which it does not provide income, or otherwise the owner is unable to raise cash from his wealth by selling or borrowing. These situations most commonly occur when assets are held by private corporations, trusts or governments. In these situations ownership may be completely separated from control. The controllers may not permit any income to be distributed to the owners nor allow them to sell or borrow against the value of their beneficial interest. Wealth holdings in life-assurance policies, publicly traded or listed corporations and trusts provide intermediate stages between absolute separation of ownership and access to the cash benefits of wealth.

Ownership without control or predetermined rights to distribution of profits and assets is an increasingly dominant feature of modern societies. It is occurring in both socialistic and capitalistic societies, which are thus beginning to share the same conflicts and inefficiencies that arise when ownership is separated from control. In affluent societies, it is the power, status and influence accruing from the control and use of assets, rather than their ownership, which provide the more persuasive incentive, reward and satisfactions.

Over the past hundred or so years there has developed a great multiplicity in the number of ways people may obtain property rights to things. Beside rights to ownership and control, there may be subjugated or separate rights to income, asset value, occupancy, naming, use etc. Each class of rights may have a separate identifiable value. The motivation for developing a multiplicity of rights is that different people value different things in different ways. By designing specific rights to meet the specific needs of different classes of people, the total value of all property rights to an asset (such as an office building) may exceed the total value of the building without such a multiplicity of rights. The ability to create more value from the same asset in such a manner is called financial synergy.

Both the monetary and non-monetary value of wealth is very much affected by the structure of the legal rules by which entitlements to assets are obtained. The structure of property rights may either increase or decrease the value of property. This is a vital factor that must be held in mind when evaluating alternative rules for holding wealth.

While value may be one criterion, more important criteria in designing new rules for holding assets are non-monetary considerations. These require that control be directly associated with ownership, to avoid conflicts and inefficiencies in the use and allocation of assets. If control becomes more closely associated with ownership, democratising the wealth of nations will also lead to democratising the control and management of their assets.

The ability of wealth to provide economic independence from the cash it can provide is dependent upon both its structure of ownership and its nature. A country may have great wealth in terms of assets, but its citizens will have little economic independence when the State controls most of the cash flows in the society. The situation may not be much better in some private-ownership economies, where the ownership and control of over 90% of the country's procreative assets is held by less than 5% of the population. This situation is the rule rather than the exception.

This is the most fundamental and damaging flaw in capitalistic societies; not only on the grounds of economic justice, but also those of efficiency and freedom. It has provided the justification and incentive for communism and socialism. Communist followers of Karl Marx believe that it provides the rationale for capitalism to destroy itself. They could be right.

However, the more assets that governments or their public institutions own or control, the fewer are the assets available for citizens to own privately. State ownership of private property thus reduces the economic, social and political independence of individuals. However, the converse need not be true, and usually is not. That is, private ownership of property need not produce greater economic and political freedom for the individual. The reason is that wealth may be highly concentrated in a small, privileged minority. This is the general rule in capitalistic societies.

Today, there is no country in the world where there is a popular political mandate for capitalism. Mandates can be obtained against socialism and communism, but not for capitalism. Capitalism has become a dirty word even among capitalists. This has arisen because of the basic injustices in contemporary private-property economic systems, a situation created by the heavy concentration of wealth and privilege in present-day market economies.

The self-destruct forces of market economies are being made increasingly obvious. They are rapidly spreading and growing in size. There is a growing sense of urgency to find new ways for managing advanced industrial societies. The need to remedy economic problems can be avoided by curing the cause. The cause of today's problems is the concentration of wealth. It has always been present in capitalistic societies, but rapidly growing affluence has greatly magnified the problems created by the inherent defects in the structure of present systems.

There are a number of intrinsic defects, many of them technical and some relatively superficial. The fundamental technical, social and political problem, from which many more superficial and induced problems flow, is the heavy concentration of wealth. As wealth can create income, wealth concentration creates an income concentration. The problem of income concentration is created by wealth concentration. It is a vicious self-perpetuating circle, which induces more and more government intervention. This increases transfer payments (taxes and welfare) and so also increases the bureaucracy associated with these programs.

Economists, governments and socialists concern themselves only with correcting the effect, not the cause. The problem with most economists is that they do not consider the ownership of wealth as being a subject of their profession. The problem with governments is that, up until the time Kelso developed the first capitalistic method for reducing the concentration of capital ownership, there was no non-socialist or democratic solution as an acceptable alternative.

There are now capitalistic evolutionary alternatives to the communistic revolutionary proposals of Karl Marx. The socialist solution to the inequality of wealth distribution was simply to eliminate all private wealth by vesting it with the State. By this means everybody became worse off! The new alternatives described in this book are complementary and symbiotic to Kelso's proposal. They offer a new capitalistic means to distribute wealth, not only within nations, but between nations.

The four novel capitalistic proposals for distributing wealth correct many of the structural defects of modern capitalism. The just and efficient distribution of income can then be achieved through the just and efficient distribution of asset ownership. This eliminates the need for the government to make transfer payments to redistribute income. It also substantially reduces the associated inflationary ineffiencies and disincentives of transfer taxes and welfare, and so reduces the need for government itself.

The advantages arising from distributing the National Income are, in themselves, sufficient reason for seeking the asset ownership. The greater sharing of asset ownership may also be sought for reasons of economic equity and efficiency. All these reasons provide complementary motives to the political appeal of spreading the non-monetary value of wealth. That is, to provide individual freedom and independence, and to democratise the control of society. Without private-property ownership and control, society also loses a means of checking and balancing political control by the State.

We may conclude that the State ownership of property has the following effects:

On the other hand, private -property ownership may offer little or no advantage if wealth is almost as highly concentrated as it would be in a socialist society. This situation is generally found in contemporary capitalistic societies ¾ it is created by the inherent defects in the legal rules of modern market economies for how people should own assets. The means by which these defects operate and how they can be corrected is considered in later chapters.

5 Leisure production (Link to Contents)

As noted in Chapter 2, the potential for citizens of a country to live without work is dependent upon the exportability of their natural resources and upon their stock of procreative assets. On a global basis, the leisure hours per person can only be increased by increasing the value of procreative assets per person – this is the ultimate source of leisure production. Thus, leisure is produced as the result of productivity increases that create unemployment. A practical reason for democratising the wealth of nations is to allow more people to afford being unemployed and so enjoy their leisure.

If a country was sufficiently rich in exportable natural resources, it would be possible for all citizens to live without work. Such a possibility may seem far-fetched, but this situation has now existed for some years in some minor states like Nauru, which exports phosphate, and some of the less-populated Middle-East oil states. Nor is this phenomenon restricted to countries with small populations; some of the Middle-East oil countries with many millions of people are rapidly approaching the economic possibility of maintaining a comfortable living standard without work.

Leisure is one of the most important non-monetary values of wealth. One of the greatest ironies of the industrial revolution is that it reduced the total leisure hours per person in industrial societies. Economists and governments of all ideologies – be they capitalistic, socialistic or communistic – are all obsessed with the employment rate. Many of the individuals in such societies, however, are obsessed with the leisure rate, a statistic not collected. Such is the conditioning and acceptance of conventional wisdom in society that the fundamental objective for economic management is so little questioned. This is especially surprising when productivity increases can, in aggregate, only produce two results: more leisure and/or goods per person.

Pre-industrial and primitive societies had higher leisure rates than are now available in some industrial countries. For over 1,000 years during the middle ages, the working year in Europe was reduced by over 150 Saints days and 52 Sundays, leaving less than 160 working days. Agricultural communities were exempted from the religious holidays during sowing and harvesting; but their average economic activity over the year would be no greater. It was because primitive societies had so much time for non-economic activities that they could afford to build pyramids and temples, and frequently go to war.

The number of religious holidays gradually decreased during the dawn of the industrial revolution in the 17th century, until men and even children worked 12 hours a day, 6 days a week, 52 weeks a year. This resulted in 43% of the hours in the year being occupied in work, leaving a leisure rate of 57%. As about 30% of man's time is spent sleeping, the conscious leisure rate would be only 27%. The annual work rate of the employed in industrialised societies over the past 200 years has now dropped back from 43% to less than 20%. This has occurred due to the increased output of material goods per person, and has produced a far higher living standard. This has been achieved entirely through the use of more productive machines.

With the productivity of men's minds and machines increasing exponentially, it will soon be possible for industrial countries to reduce their work rate from 20% to 10%. Society should now be consciously deciding how this will be achieved. Two alternatives are possible:

The latter choice would, in conventional terms, result in a 50% unemployment rate. There could be a combination of both alternatives but, either way, there will be greater leisure produced.

The enjoyment of high unemployment or leisure rates is, however, dependent upon heads of families obtaining cash without work. This can be achieved either through wealth or welfare. The first methods for distributing wealth rather than welfare are the four techniques described in this book. These techniques provide a new approach for structuring society and for giving individuals the access to wealth, leisure and personal fulfilment.

Most people select jobs that they like, so work is a satisfying occupation to many. Indeed, fulfilment from employment is more likely to be the rule than the exception. However, the option of fulfilment from unemployment could also be provided in many affluent societies, if there was an appropriate distribution of National Wealth. It is, of course, already possible in many of the more affluent societies for citizens to live on welfare without work or great hardship. More and more countries are reaching this level of affluence in providing welfare for their unemployed, old, sick and incapacitated.

Welfare benefits are also exploited by the lazy, or by those who already have other sources of income. Because the exploitation of welfare is possible in many affluent countries, it is now practical for people in these societies to live without working if they so choose. However, a substantial majority does choose to work; indeed, the available evidence indicates that the wealthiest people, who have no need to work at all, work all the more conscientiously. This behaviour is consistent with people in free societies selecting vocations that satisfy them most.

The value of the economic independence obtained from wealth is that it increases the choice of vocations and lifestyle. A problem of definition can then occur, when one man's work becomes another man's recreation or leisure activity. Leisure may be productive. Some people will spend their money to undertake activities that would provide employment for others. Wealth provides an added dimension of freedom and allows the organisation of society so that the vocational satisfaction of all its citizens may be increased. Universal private wealth allows society to replace the traditional objective of full employment with the objective of fulfilment (which can be either in employment or unemployment). The means by which economic equilibrium might be achieved, in terms of the production of adequate goods and services, in a society with this goal is considered in Chapter 13.

Individuals can only afford the luxury of unemployment or greater leisure through private wealth. This option is not available in societies that do not allow private wealth. There are several societies that could well afford to provide such a choice to many of their citizens, but do not do so for ideological reasons. Other societies prefer to avoid the social discontent that can occur when the privilege of private wealth is obtained in socially undesirable ways. The possibility of increasing one's wealth in such ways is shown to be the rule, rather than the exception, in private-property market economies (Chapters 7, 8 and 9).

The highly unequal distribution of private wealth in market economies results from the present defects in the rules of asset ownership, which create injustices, inequities and barriers. The concentration of wealth means that the majority of individuals in the affluent societies cannot afford the luxury of greater leisure and unemployment.

The present rules of asset ownership force people to work or live from welfare. As a result, governments are forced to provide welfare or work, and must levy taxes for this purpose. These taxes must be paid by the productive for the unproductive. Taxes thus create disincentives for production and incentives for non-production. Everybody becomes a loser, both in economic terms and in the non-economic terms of fulfilment and freedom.

Governments maintain soul-destroying programs to maintain employment. Yet at the same time they seek greater economic productivity which, by definition, must result in less human labour to produce the same amount of goods. Policies of full employment and increasing productivity produce an internal economic haemorrhage, which is conventionally doctored by bleeding the productive sector with more taxes, so as to provide more welfare for the additional people put out of work by the greater productivity.

An alternative remedy for avoiding leisure production, resulting from productivity increases, is to encourage everybody to acquire more and more goods. This generates more jobs and more pollution; also more environmental destruction, as nature is made to yield more of her resources.

A very effective, tried-and -tested method for generating more and more goods is to have a war. This doubles the destructive effects on the environment. Firstly, from the production of new materials and secondly, by the use to which the materials are put. On both counts, the best way (for the environment) to create employment is to explore space. Very few material goods are used, but extensive labour is required, of a type that is both intellectual and satisfying.

If the puritan work ethic of western societies cannot be transcended, then exploring space could provide a cultural cause for the future, that building pyramids, temples and churches provided in the past. This would give one way of distributing income, but it would not, in itself, be a way to distribute wealth and leisure. If the sharing of wealth and leisure is not matched with a change of values in western industrialised societies, then the non-monetary value of wealth may not be produced. The puritan work ethic must, therefore, be replaced with new values and new sources of fulfilment, such as those found in Eastern, Latin-American and ancient cultures. These new values could be both dependent upon and created by democratising the wealth of asset-rich nations.

A man may earn money by his own individual physical or intellectual efforts, but it is no longer possible for him to become relatively rich by his personal exertion in a modern private ownership society. This statement is also true for socialistic or communistic societies. Much of the incentive, for employees and the professional class of self-employed to support a capitalistic society, may be dependent upon their opportunity for becoming property owners. A political mandate for a free market economy is thus dependent upon democratising the wealth of nations.

The ability of an individual to accumulate wealth from the gross income generated by his personal efforts is limited by two factors:

Each factor places a limit on the potential for an individual to accumulate wealth. The most limiting factor is the hourly rate of earning income. Competition from other individuals to provide their services will always place an upper limit on income-earning rates. Certain individuals in entertainment and sport may earn relatively high incomes, but usually this is for relatively short time periods and so restricts their ability to accumulate wealth. However, even in the exceptional situations where high income-earning ability may be sustained, progressive personal taxes in societies that support such gifted individuals will substantially reduce their ability to accumulate wealth.

As will be discussed more fully in Chapter 11, there is no human limit to the wealth that can be accumulated from owning property. The accumulation of wealth from property is limited only by the total value of all the wealth in the world, and by the pre-emptive monopolistic claims to property by other property owners. In affluent market societies, it is the wealth owned by an individual that can make the most money for him, not his labour.

Property can make money more effectively than labour, because increases in wealth from property ownership are taxed at a lower rate than increases produced by an individual's labour. Countries that have a capital-gains tax generally levy it at a lower rate than personal-income tax. However, capital gains taxes provide, in themselves, a means and an incentive for property owners to get richer (discussed in Chapters 8 and 9). As the tax is only incurred on the transfer of property, it creates disincentive for transfers. This encourages hoarding and inefficiencies in the allocation of resources.

In some countries there may exist a wealth tax, to reduce the equities and inefficiencies of a capital-gains tax. Wealth taxes are expensive and difficult to apply and, at best, only provide a compromise solution for avoiding inequities and inefficiencies. The four methods for distributing new wealth by ownership sharing, described in this book, create new solutions. Both equity and economic efficiency are obtained from the superior ability of property, relative to labour, to create wealth.

Corporations provide one of the most subtle and pervasive mechanisms of employees staying poor and the rich getting richer. The influence of corporations is so general in modern industrialised societies that their private sectors might well be described as their corporate sectors. The pervasiveness of corporations extends not only within non-communist nations, but also between these nations. The ability of corporations to keep employees poor and make the rich richer thus extends on a global basis. The development, growth and spread of the transnational corporations has created a new means foe making rich individuals and the countries of their residence richer, while keeping the employees and the countries of their residence relatively poor.

There are many biases within the rules of owning property through corporations; they operate to concentrate wealth both within and between nations. Only the two most important ones will be discussed. One is the ability of the rules to attract, sort, filter, coalesce and so concentrate human knowledge in a form to create wealth. The other, which will be discussed more fully in the next chapter, is their ability to channel any windfall future cash flows to shareholders rather than employees.

The most difficult concept to identify, measure and commercially evaluate is the accumulated aggregate of intellectual human knowledge. Economists refer to this as human capital. It is with the input of human creativity, enthusiasm, enterprise, knowledge and skills that man-made assets are created. When these human inputs make the asset commercially viable, we call it procreative. The ability of an asset to become procreative depends upon various types of human inputs involved in its design, construction and management.

Man-made assets are the material coalescence and commercial manifestation of intangible human inputs. Such assets provide an empirical, objective currency for recognising the commercial value of human intellect. There is another means of recognition – individuals may be paid directly for their care, skill and knowledge as employees or professional workers. However, their payments represent income, not wealth. The embodiment of human inputs into material assets, which constitute wealth, are a means for aggregating, expanding, multiplying and preserving the commercial value of the intangible attributes of many separate individuals.

The income paid to individual employees and professionals is determined by the market value of their services. For instance, when their services are used to design, build and operate the world's first nuclear power station, they are paid according to the current market value of their services. They are not paid according to the long-term value of their contribution to society, which may exist for an indefinite time into the future. Only in exceptional cases will an individual obtain a continued share in the commercial value of his contribution. The design, construction and operation of subsequent devices will benefit by the human inputs of the pathfinders. This occurs in many technological and commercial developments.

Corporations provide a means for capturing, on a continuous basis or on a larger scale, some of the future value that arises from exploiting new knowledge. The employees obtain only transient benefit, from the income provided for their services, while the owners of the corporation obtain any additional values that accrue from the human inputs of the employees, managers and directors. But even corporations do not capture all the new values they create, since much of the new technology is dispersed and shared both within and between countries.

The degree by which corporations concentrate wealth within or between nations cannot be measured at any given point in time. A suitable analogy is that an instantaneous snapshot of a runner cannot determine his speed or the time period he requires to cover a given amount of ground. To determine the rate of acquiring wealth from cash flows, measurements must be taken over a time period.

However, as already noted in Chapter 3, there is much confusion among economists about the nature and measures of wealth. The few that are interested in measuring wealth in the commercial sense, as used in this book, do not appear to have made sufficiently accurate observations for identifying the contribution made by corporations in wealth concentration. In any event, if observations are made over a time period, it is difficult to isolate the contribution that one or more corporations may make in concentrating wealth. There are many other processes operating in affluent societies in this regard, as will be discussed in Chapters 8 and 9.

The process by which corporations concentrate wealth in the hands of the shareholders, not the employees, is hidden from business analysis. This is due to the limitations in the various methods used by accountants to estimate profits earned by labour and assets. (Profits earned by assets must be an estimate, because there is no certain cash-flow return.) Accountants, and economists who use their data, are unable to either observe or measure the means or degree of this wealth concentration. just as the economist has many (and sometimes conflicting) notions concerning wealth, so the accountant has many (and sometimes conflicting) notions concerning profit. Accountants determine corporate profits according to many alternative conventions and practices. Very different levels of profit can be reported according to the set of accepted conventions and practices chosen.

The profit calculated for tax purposes in one country, by a subsidiary of a transnational corporation, may be quite different from that calculated in the same subsidiary by the parent company. This need not in any way suggest some undesirable manipulation by corporate management. Such inconsistencies are commonly forced upon transnational corporations, simply by different countries having different definitions of taxable profit. The host country of the parent corporation calculates tax on the profit of all subsidiaries integrated on a world basis. This underlines the point that there is no absolute agreement on how to determine profit.

The profit reported for management purposes of a subsidiary company could well be different again from the profit determined for tax purposes (for either the host country of the subsidiary, or the host country of its parent company). The parent company might, in turn, report a different profit of the subsidiary when making a report to its shareholders. This indicates that there can be a general agreement that profits will increase wealth, without there being a general agreement – either within or between the accountants and economists – on the precise nature of the relationship.

The more specific the sample and the shorter the time period of a profit analysis, then the greater become the disagreements. A similar phenomenon in the physical sciences is known as Hiensenberg's uncertainty principle. Differences decrease when the sample of enterprises being evaluated is enlarged and the time period is increased. The greatest agreements are obtained over long-term national totals, rather than over short-term analyses of specific enterprises. One reason for this is that modern techniques of financial analysis discount any differences in cash values received in the long-term future. Any value today of cash received in the long-term future approaches zero. In modern financial analysis, this is referred to as the time value of money. A dollar received today is worth more than a dollar received next year, because interest can be earned on the dollar received immediately. In corporate analysis the alternative use for cash may not be interest, but the cash flow available from some other investment. Such alternative investments would commonly provide a better investment than interest earned at 10%.

If 10% could be earned on money over fifty years, then a dollar received today would be worth less than one cent (0.852 cent) in fifty years time. The man who has to wait fifty years to receive his dollar is losing the opportunity to earn interest at 10% over this period. He can determine the value of receiving a dollar in fifty years time by calculating the amount he needs to deposit at the bank today that will grow with certainty to a dollar during those fifty years.

By the definition of an equity investment, there is no guarantee of receiving a return in the future – nor is there any certainty that the bank, or other alternative investment opportunities, would continue to yield 10% per annum. Because of these uncertainties, the value of any cash that may be obtained in the distant future would be ignored – especially if some alternative investment may produce the same value sooner. Ignoring values in the long term results in all evaluations for future dollars having the same zero value. In practice, it is difficult to estimate, with much reliability, future cash flows of most equity investments for longer than fifteen to twenty years. Prices, costs, business conditions, technology, markets, governments and society are ever changing, making any distant projection to future cash flows hazardous at best.

The calculation of the value of cash received in the future is referred to by professional analysts as Present Value (PV) or Discounted Cash Flow (DCF) analysis. The test for determining a viable or procreative asset, described in Chapter 2, is based on the concept of the time value of money. This type of analysis, however, cannot show how corporations concentrate wealth over a time period, because the analysis is insensitive to different cash-flow values when their value in the more distant future approaches the same zero value. This will be discussed more fully in Chapter 7, which considers the bias in corporations that acts subtly over time to make the employees and their country of residence relatively poor and the shareholders and their country of residence richer.

7 Corporate wealth concentration (Link to Contents)

One way in which corporations favour asset formation by their shareholders, rather than by their employees, can be most clearly illustrated in international corporate investments. When a corporation sets up a subsidiary in another country, it will obtain rights to all future profits in the subsidiary, for as long as the subsidiary exists and creates profits. While the parent company may hope that the subsidiary will exist forever and always make a profit, the justification for making an equity investment is not made on such a basis. Indeed, because of the time value of money in equity investments and returns, any cash flow expected after fifteen to twenty years has very little, if any, significance in equity investment analysis.

Even if the expected returns in fifteen to twenty years can be estimated, the risk remains that no returns may be received at that time. The risks involved in obtaining returns from international investment are greater than those in domestic investment, because of the opportunity to lose value from foreign-exchange variations and political actions. In practice, fifteen years is the upper time horizon for equity investment analysis; although longer periods may be considered for strategic reasons, such as access to raw materials and markets.

The political, social and technological changes in many areas of the world mean that the basic criterion for investment is the time required to return cash flows. These cash flows must return the investment cost with a competitive profit to cover money costs and risks. The time horizon required for making an investment is, in practice, less than seven or eight years sometimes less than four years. However, the investment will be made, no matter what may happen after the chosen time horizon.

Some investments will, of course, not return cash flows as large as expected, with some not even meeting the test of being viable. This is the reason for equity investments requiring a cash-flow return margin for risk greater than that required for a viable investment. The premium sought and obtained on the successful investments provides a surplus, which compensates for those investments that do not perform to expectations. So long as a company obtains sufficient premium value from the successful investments to cover the shortfall in value from the nonviable investments, the whole company will remain viable.

The cash-flow premiums sought to cover the under-performance of some operations of the company are not, however, determined or sought for periods beyond the time horizon chosen. So any cash flow obtained after the time horizon desired to justify the investment will provide a surplus above expectations. By this means, uncalculated, unexpected and unnecessary surplus cash flows can accumulate for the shareholders, rather than for the employees.

When the company continues for an unlimited time, the value of the surplus cash flow accruing to the parent company can continue for an unlimited time, and accumulate to unknown and unlimited levels. By this means, the host country of any subsidiary company incurs an unlimited, and so unknown, foreign liability for both its foreign exchange and balance of payments. In actual practice, the surplus payments and liabilities of the subsidiary to the parent company can be hundreds of times greater than the value required by the parent company to justify making the original investment.

Since the host country of the subsidiary incurs foreign costs and liabilities in excess of those required to attract foreign cash and know-how, the host country is paying more than is needed. The basic premise of a competitive economic system is that one should not pay more than is required to obtain the goods and services desired. This fundamental rule is being neglected by countries that accept foreign investment without limits on the time during which the investor may obtain rights to profits.

Some countries now place time limits on the rights of foreigners to future profits. Provided that such limits are beyond the time horizons desired by the investor to provide him with sufficient incentive to make the investment, they will not introduce any economic disincentive for the foreign investor. There may be, however, non-economic inhibitions, such as those from the ego identification of those in management who wish to create a personal monument or power base for their executive initiatives and careers. Such non-commercial motives are another reason for corporations and their host countries gaining benefits from the discipline of limited time horizons, in which to perform to their mutual expectations. The acceptance of foreign investment without such time limits on cash-flow returns can categorically and unequivocally be described as undesirable. Indeed, it may be highly regressive to the economic development of the host country due to the unnecessarily greater liabilities of foreign exchange and balance of payments.

The unequivocal critical judgement that can be made on foreign investment is based on the terms of accepting investment – not on whether it should be accepted or not. The classical economic arguments, controversies and political actions about foreign investment are usually confined to the question of whether foreign investment should be accepted. The question is evaluated on costs and benefits, by using techniques that become increasingly insensitive for identifying differences in values over the long term, as referred to earlier. As a result, it becomes difficult to arrive at a decisive view when evaluating the costs and benefits of accepting foreign investment.

The uncertainties of analysis, introduced by traditional approaches for evaluating the acceptance of foreign investment, only add to the controversies and emotive opinion on the subject. These uncertainties can be avoided by the simple pragmatic approach of considering the time horizon required by the investors. There is no need to provide investors with a cash flow after this time horizon. This cash flow, that investors do not recognise when making their investments, can create a very excessive and unnecessary cost to the host country.

This point is illustrated in Table 2. The value to an investor of the right to receive one dollar dividend every year for the years nominated is tabulated. The investor has alternative investment opportunities of 10%, 15% and 20%, representing the time value of money. The total dividend received over a time period is, in every case, simply the number of years for which the one dollar dividend is received. The time value of receiving future money today in the form of dividends has been divided by the total dividends to give the value fade-out.

Table 3 shows the cost in dollars today that makes good the rights of the foreign investor to all future dividends, after he has received 90% of his maximum expected value. It indicates the premium dividend that the investor needs to receive in the first year to compensate for missing the right to all future dividends (after he has received 90% of the maximum value expected with certainty). It will be noted that both the years and the premium required decrease as the time value of money increases.

Value today of a future one dollar dividend

*Maximum possible expected value.

A double dividend in the first year is worth more to the investor than all the dividends available after twenty-five years, when money can be invested elsewhere at 10%. As the time value of money increases, the time period to capture 90% of the maximum possible value decreases. The initial premium dividend required to capture the remaining 10% of value also decreases. With money valued at 20% per annum, a 50% bigger dividend in the first year is worth more to the investor than all the dividends available with certainty after thirteen years.

When considerations of risk and uncertainty are introduced, as they must be with equity expenditures, the rational investor will always prefer the dollar today, rather than the dollar in the future. Table 2 indicates how host countries can limit both their foreign payments and liabilities. They can arrange the acceptance of foreign investment so that the investor can make a bigger profit today in return for giving up an uncertain profit in the future. This will make no difference to today's value of the enterprise. A more detailed analysis is presented in the Appendix.

It is this principle that provides the rationale for two of the novel methods for distributing new wealth. Both the Ownership Transfer Corporation (OTC) and Producer-Consumer Cooperative (PCC) have property rights that change with time, and so eliminate excessive profits over time to those who contribute only cash. It is this principle that allows the OTC to attract new foreign investment to a country, while at the same time reducing foreign ownership. This facility, for allowing both investor and host country to have their cake and eat it, is available to either established foreign enterprises or new ones.

The concept of time-limited investment cash flows is the rule, rather than the exception in commerce, since most man-made, productive assets have a limited life. Patent rights have a limited life, as did the original form of the corporation that was developed under common law (for purely commercial reasons) in Europe during the 18th and 19th centuries. The English civil-law development of the corporation set the precedents for unlimited life. This commercially unnecessary attribute was created to further the imperial political ambitions of the English sovereign, who wished to colonise East India and the Hudson Bay by using corporate charters.

Mineral and oil exploitation is a commercial operation with a limited life, when the proven reserves are limited. The most widespread example of limited-life investments is real estate, because of the use of limited-life leases. Buildings and structures of very substantial value are built on leasehold land, so the investor has no rights to either cash flow or residual value of his development at the expiry of the lease.

The behaviour of equity investors is similar to that of a gambler. The chances of obtaining a return are evaluated and compared with the value of the return expected. If the value of the return expected is commensurate with the risk that can be accepted, then the investment is made. The gambler, like the business investor, requires that his original stake be returned with a margin for risk. Because a commercial investor may have to wait for some years to receive his return, he also requires a margin for the time value of money. This is to cover the interest he could have earned by placing his investment money in the bank to obtain a return with certainty.

A gambler betting on a horse race has to risk a new stake for each race. This is similar to a businessman who invests in a series of limited-life assets. The man who invests in a company with unlimited life is like the gambler who bets on one race and obtains a bet on every subsequent event without a new investment! In this way, corporations provide the means for shareholders to accumulate assets at rates greater than they require to provide them with sufficient initial incentive to invest.

As already noted, it is difficult, at any point in time, to detect these windfall profits accruing to shareholders. (These difficulties are compounded by the various accounting conventions for measuring profit.) While they might be detected over a time period, this becomes impractical when shares in corporations are publicly traded. The rights to the excessive windfall profits are passed on to different individuals. The accumulation of windfall wealth created by corporations is concentrated in the shareholding class of the community, rather than the managers and directors who were responsible for its creation. The problem is overcome by the new type of OTC proposed.

8 How the rich get richer (Link to Contents)

The rich get richer from the characteristics and nature of their asset holding, and also from the means by which they acquire ownership. The means for acquiring an asset may also require the incurring of a liability to pay for the purchase.

Take, for example, an individual who has no assets or liabilities and so no wealth. He purchases a block of land valued at $1 million with 100% vendor finance. The individual still has no wealth, as the value of his assets equals his liabilities. Let us suppose that the land is a parking lot in a choice downtown area, and the purchaser procures permission to build a high-rise office block. The new use of the land may now make it worth $5 million, so that the owner is now worth $4 million. It might take a man two or three centuries to earn the same value through the value of his own labour. Such is the power of property to make the rich richer. It also shows how those without wealth may create considerable wealth through financing themselves into asset ownership of the right type at the right time.

The manner in which the financing arrangements of purchasing an asset may greatly multiply an individual's wealth is illustrated in Table 4. This table shows that the most effective way to get rich is not by using one's own money, but Other People's Money (OPM). The more OPM that can be borrowed, the greater number of times one's wealth can be multiplied, if the right kind of asset is purchased at the right time. The process of borrowing to multiply increases in wealth is referred to by financiers as gearing or leverage.

Leverage also increases the risk of bankruptcy or insolvency, at the same exponentially increasing rate that it can multiply gains in new values and wealth. Bankruptcy or insolvency occurs when the value of liabilities exceeds assets, as discussed in Chapter 2. This situation can occur when the value of the asset decreases and/or the interest cost on OPM increases at a greater rate than the income produced by the asset. The odium of personal bankruptcy can be avoided by making highly levered purchases through limited-liability, closed or private companies.

How the rich get richer without work

Purchase deposit	0%	10%	20%	50%	100%
Initial wealth of purchaser = deposit ($M)	0.00	0.10	0.20	0.50	1.00
Money borrowed to finance purchase ($M)	1.00	0.90	0.80	0.50	0.00
Purchase cost of land as car park ($M)	1.00	1.00	1.00	1.00	1.00
Value of land for High-rise office ($M)	5.00	5.00	5.00	5.00	5.00
Final wealth of purchaser ($M)	4.00	4.10	4.20	4.50	5.00
New wealth ($M)	4.00	4.00	4.00	4.00	4.00
Number of times wealth increased ($M)	Infinite	40	20	8	4

Insolvency of a company usually carries considerably less odium than personal bankruptcy and need not personally involve the shareholders. The problem of using a limited-liability private company is the ability to borrow large sums of money without personal guarantees and covenants. This problem is often overcome by the shareholders of the private company having some control or influence over public corporations and institutions that can provide or facilitate access to OPM.

Corporations are but a set of rules for owning assets. They can provide the means for an individual to create more wealth in one transaction than he could earn personally from working for two or three centuries. The opportunity and incentive for both inequities and malpractice are obvious, when the returns can be so high and the cost of failure so low. These problems are created by the rules of corporations and the rules and practices of land ownership. The problems can be eliminated by changing the rules for owning things. The challenge is to devise new rules which do not eliminate incentive, or reduce the economic independence of individuals and their socio-political freedom.

The opportunity for inequity and malpractice could be reduced by changing the use and rules of corporations. This would involve a mass of detailed and specific considerations, which will not be attempted in this discussion. The underlying opportunity and incentive for injustice and malpractice arises from the system of land tenure and the procedures for changing its use. These underlying problems could be considerably reduced by changing the tenure system to the Land Bank concept described in Chapter 12.

From Table 1 in Chapter 2, it will be noted that there are two ways in which new wealth can be obtained from owning property. The rich can become richer without work or welfare by:

2. Creation of income from an asset by either its use or by its production of goods and services. (However, income-producing assets need not necessarily be procreative, as discussed in Chapter 8.)

The appreciation in the value of ownership may or may not be related to the ability of the asset to generate an income. Whatever the reason for the appreciation in value, it will be dependent upon and created by two means:

2. The interest or competition among the non-owners to purchase the asset.

New values may be created in other ways – for instance, when an individual simply desires ownership without competition. However, the important mechanism for the creation of new values is competition existing for ownership. Not only is this important because of the magnitude of the values created, but also because it can be a source of confusion in economic analyses. This confusion arises from the association of competition with a means for reducing prices, rather than a means for increasing prices. But, as any auctioneer knows, the more people who attend an auction, the greater the chance that a higher price will be obtained.

Competition will reduce prices when there are alternative suppliers of goods and services, who can produce them with less cost and/or are willing to dispose of them with less profit. Such opportunities may not be readily available with assets that have a quality of uniqueness and/or exclusiveness. The opportunity for increasing prices by competition commonly occurs through the rules by which society permits ownership of natural resources, such as land, minerals and forests.

Increase in prices may also occur to a greater or lesser extent with man-made objects, like houses, buildings, structures and machines. Except for the work of artists, most man-made objects in common use can be reproduced. This facility will place limits on the appreciation in their ownership value – any great increase in value will provide an incentive for others to make duplicates.

Both the appreciation in value and the incentive for the duplication of man-made objects are dependent upon the exclusiveness of possession, according to the rules of ownership created by society. Rules are required that provide incentive; not inequities, injustices and regressive economic consequences. The opportunity for such inefficiencies and consequences most commonly arises with the rules of owning natural resources that cannot be duplicated, such as land and minerals.

Appreciation in the value of man-made assets is limited by both the life of the asset and the ability of non-owners to make duplicates or copies that serve much the same purpose. With a procreative asset, man's inventiveness is likely to produce a more productive duplicate asset. As a result, the original or older procreative asset may no longer remain viable. This process is called technological obsolescence. Another reason for appreciation of procreative assets being unlikely is that, in carrying out their unique function of making nature yield its resources more abundantly, they wear out. Table I thus indicates that procreative assets only rarely enjoy appreciation in value.

Table 1 also shows that appreciation in value is not so rare for other man-made durable assets. The reason is that non-procreative and less productive assets may last for considerably longer periods. In some countries man-made durables, like houses and office buildings, may commonly enjoy substantial increases in value. However, most appreciation in value is either due to inflation increasing their replacement value or the underlying value of their land. Neither of these mechanisms for appreciation is inherent in the characteristics of the assets. For this reason they have been excluded from Table 1, where appreciation in value is not considered usual.

Appreciation in land values are discounted, because of the proposal to collect these in a redeemable form by using a new system of Land Bank tenure. The owner of any structures built on the land will obtain tenure only to the volume of space occupied by the structure, similar to a strata or condominium title (or perpetual lease). The appreciation from inflation presents both special opportunities for acquiring new wealth and for losing current wealth; this is considered in the following chapter.

9 Wealth from inflation (Link to Contents)

The traditional concern is that inflation affects absolute and relative income levels. This is consistent with the concern shown by most economists for only the income layer of the economic cake. The effect of inflation on the asset layer of the economic cake can be even more dramatic. These effects, however, go largely unnoticed, since little information is collected on the wealth holdings of individuals on a national basis.

The dramatic effect of inflation on changing and distributing the wealth of nations can be illustrated by considering the purchaser of a block of land valued at $1 million. Table 5 indicates that inflation, combined with financial leverage, can increase wealth measured in current dollars and constant dollars.

How inflation increases wealth

Purchase deposit	0%	10%	20%	50%	100%
Initial wealth of purchaser = deposit ($M)	0.00	0.10	0.20	0.50	1.00
Borrowings ($M)	1.00	0.90	0.80	0.50	0.00
Value of land (year 0) ($M)	1.00	1.00	1.00	1.00	1.00
Value of land (year 5) after 15% inflation*($M)	2.00	2.00	2.00	2.00	2.00
Wealth in current $ of year 5 ($M)	1.00	1.10	1.20	1.50	2.00
Wealth in constant $ of year 0 ($M)	0.50	0.55	0.60	0.75	1.00
Wealth gain in constant $ (%)	Infinite	500	300	150	0
Initial leverage = borrowings/value (%)	100	90	80	50	0
Final leverage (%)	50	45	40	25	0

* A dollar approximately doubles its value over 5 years when appreciating at 15% per annum.

For simplicity, Table 5 assumes that the interest cost of the borrowings is exactly covered by the net rental produced by the land. Usually, it is nearly always possible to borrow up to 50% of OPM on income-producing property. So even if the land only yielded a net rental on its initial value of 5% it would cover a 10% -interest cost, on 50% of its value. With 80% borrowings and 10% -interest cost, the total interest payable per annum would be 8% of the initial value. The owner would then be making a loss of 3% per annum on the original value, unless his rents also increased.

Many people engineer their affairs to make a loss that provides them with a tax deduction for any other income that they may receive. One of the great advantages of asset ownership is that it can provide tax relief in many and varied ways.

Even if the owner did not have another income to make up the 3% per annum deficit, he would not be unduly perturbed. His wealth would still be increasing, in either current or constant dollars, by the combined effect of inflation and leverage illustrated in Table 5. In practice, a 15% -inflation rate would also increase his rental income - it could be expected to double in current dollars over the five years and maintain its equivalent real value. Also, in practice, the interest cost would most likely be fixed and not change as part of the contractual borrowing arrangements, so an additional advantage is thus obtained from inflation.

The significance of the last two lines of Table 5 may easily be overlooked. They indicate that inflation reduces leverage, or the ratio of liabilities to assets. The significance of this effect is that it allows the owner to replace an original loan of $0.5 million with a new loan five years later of $1 million, and still not exceed his initial leverage ratio of 50%. Our property owner is thus in a very privileged position - he obtains $0.5 million cash for spending on the luxuries of life. He can still expect further increases in real wealth and spending money when he refinances his property in another five years!

Not all people spend the cash they obtain by such means on luxuries. Some may have to use part of their cash surplus to cover any deficits between net income and interest. Others may use their new source of cash to buy new properties and other assets. This is called pyramiding - it provides the formula for accumulating immense wealth with OPM. Some people's greed for wealth, power, status and influence is so great that they will seek highly levered positions, which could cause the pyramid to collapse if asset values decrease and become equal or less than the liabilities.

The excess of liabilities over assets is referred to as negative wealth. Strangely enough, in modern market societies it does not necessarily mean that a financial collapse will result. The social and political repercussions may be so significant and awkward, that the leaders and controllers of the financial system may informally change the rules of insolvency. For the purpose of commercial law and to avoid any inference of a conspiracy, these informal changes are referred to as something less than a gentlemen's agreement or implicit understanding. Success in big business can become more an activity of establishing political obligations and involvements, than one of creating goods and services.

The inflation rate of 15% that is used in Table 5 may seem high for some countries. There are, however, mechanisms other than inflation that can result in land values sustaining such levels of appreciation. The increase in value may occur without any change in its use, as assumed in the example in Table 4. The value of land may increase by the improvement of community services (such as roads, transport, services, schools, water, sewerage and power).

Values may also increase from private developments, such as shopping and entertainment centres, new residential facilities and the like. The new values are created by nonowners of the land - yet under the present system of private ownership these values accrue to the owners, who may not make any contribution to the creation of new property values in the community. The Land Bank system of tenure, whereby new values are shared collectively, allows most of the new wealth created to accrue to those who contributed to its creation.

The inequity, injustices and regressive economic effects of present tenure systems on natural resources can become even greater for depletable deposits of minerals, oil and gas. Because of the enduring nature of such assets, as compared with forests, demand for their use can provide an incentive to withhold supply. At certain times for certain resources, there can exist the opportunity for enhancing asset values by withholding access to them from the market place. The incentive may exist for either individuals and/or countries to adopt such an approach.

One may question the practicality for an individual to withhold the sale of such assets. The argument is that he needs the cash flow to cover his living expenses and/or borrowing costs. But, as already noted, cash may still be obtained from increasing the borrowings secured by the asset. On the premise that scarcity creates value, it will be in the interest of many owners (at least in the short term) not to sell. The scarcity value so created provides a new increment of asset value, against which new borrowings can be secured. The present rules for owning assets can create a self-reinforcing rationale for creating and sustaining inflationary price increases in these situations.

There is also an incentive from taxation considerations for withholding an asset from sale. On the sale of the asset, capital-gains or income tax may become payable. This is avoided by not selling and it could well be that more cash becomes available. The cash available from borrowing against new increases in value could well produce more net cash to the owner than would be available from a sale. Indeed, it could well be possible in some situations for a sale to result in a net cash drain. This can occur when loans have been secured against newly acquired values of an asset. Consider the case of a block of land purchased for $1 million, against which $4 million was borrowed as 75% of its newly acquired value of $5 million. If the tax rate on the disposal of the asset was 50%, then the tax payable would be $2 million. As the $4 - million loan would need to be paid back on resale, the total cash pay out by the owner would be $6 million. This is $1 million more than the proceeds of the sale. In such circumstances the owner might not be able to afford either the sale or its profit! It is a lock-in situation.

In some situations the owner may have no choice but to withhold the asset from sale. Countries, however, may withhold natural resources for strategic purposes in order to maximise value or national security. In some very special situations, the withholding of vital assets (like oil) could well jeopardise national security. One of the objectives of the Producer-Consumer Co-operative (PCC) is to share the scarcity value of natural resources on an interdependent, international basis. Not only could this produce mutual political independence, but also economic interdependence. Economic interdependence could be achieved both in terms of continuity of cash flows and access to raw materials and markets.

The rapidly increasing exploitation of the world's accessible natural resources raises the possibility that price increases through scarcity will make inflation inevitable. The argument as to whether the resources are being depleted in an absolute sense or not, does not change the fact that the most easily accessible resources are being exhausted. As a result, the costs of extraction and/or recycling are increasing. Alternatively, greater expenditure on technology is required to create man-made substitutes. There would appear to be a number of ways of reducing the inflationary price increases that are induced by demand for natural resources. The possibilities include: stablising and/or reducing the world's population, reducing the demand per person for material goods, and increasing the productivity of procreative assets. These possibilities are dependent upon human values and skills, rather than upon economic management in the traditional sense.

If assets and liabilities of nations were more evenly distributed, then the human cost and inequities of inflation would be shared on a far more equitable basis. Indeed, inflation could prove a most effective and powerful means for redistributing wealth from the rich to the poor. This would occur if the poor borrowed from the rich. In countries with a large percentage of home ownership, this occurs to a large extent.

Unfortunately, not all the money used to finance poor people into home purchases is provided by the rich. Much is contributed by the savings and pension funds of the elderly, who are relatively poor and have no means to replenish their wealth with the present system of asset ownership. This could be rectified with the new systems proposed. New wealth would accrue to individuals not only from their contributions to the production of goods and services, but also according to their consumption of goods and services. The rationale for giving value to consumers is that new wealth can be created by demand for natural resources and some man-made durables. The novel methods for distributing new increments in wealth allow such increments to be shared by those who participated in the creation of these values by demand.

10 Wealth from production (Link to Contents)

The classical method for accumulating wealth was from income created by the employment of labour for the production of goods and services. The traditional concern of economic and political philosophers has been for the employment of people, rather than for the employment of machines, structures and other productive assets. Production was dependent upon employment and wealth was dependent upon income. Historically, human labour contributed the principal source of both energy and skill in the production of goods and services. The development and accumulation of machine power and skill in the production process is a relatively recent development over the past two centuries.

Before the industrial revolution, the availability of ownership value was not only inhibited by the lack of productive assets, but also by the primitive legal rules of ownership. Major assets, such as land and buildings, were owned by the sovereign, the church or the local lord. Unless wealth was due to an inheritance, changes in ownership of fixed assets were more likely to be accomplished by social force or by political fiat. The concept of a capital market, with ownership transfers negotiated between willing sellers and willing buyers, grew out of changes in ownership of trading ventures and their means of transport.

Trading ventures and activities concerned with the production and exchange of goods and services still provide the principal field of study for economists. They have left the theory and practice of obtaining wealth, from the transformation and exchange of assets and liabilities, to businessmen and financiers. This leaves a very major difficulty for economists in understanding the practical operation and management of asset-rich societies.

One problem, arising from governments limiting their interest to only the income layer of the economic cake, is that the analysis of both fiscal and monetary policies is restricted to their effects in this top layer. Not only is the bottom layer neglected, but its intimate interaction with the income layer through cash flows is ignored. The exchange of assets and liabilities in advanced industrial societies can generate cash flows of the same order of magnitude as those produced by the National Income. Thus, economic policy prescriptions that ignore these bottom-layer cash