Chapter 3. Henry George’s Property Rights Law, A Modern Technology Commons

The savings possible through the elimination of monopolization of land is multiplied by the savings possible through eliminating other monopolies. The original meaning of a patent was, “A grant made by a government that confers on an individual fee-simple title to public lands.” A land patent as the original meaning of title to land affirms our analysis that patent monopolies were patterned after aristocratic exclusive titles to land. Copying the legal design of land and patent monopolization, later monopolies were established through licenses.

Before the advent of title to social wealth through industrial capital and finance capital, all sustenance for life and all wealth were processed directly from land. Finance capital is the money symbol for industrial, distribution, and operating capital and these factories and distribution systems are only extremely efficient tools to process and distribute products from the land. So the monopolization of finance capital and industrial capital are only extensions of the monopolization of land. When wealth began to be produced by industrial capital as well as land, powerful people undertook to lay claim to, monopolize, those tools for the production of wealth just as historically they had laid claim to, monopolized, land.

If you claim technology is produced by labor and is not a part of nature, put yourself in the position of the rest of the world when denied its use even if independently invented. Or consider technology thousands of years old, patented within monopoly capitalism’s property rights laws, and denied its free use even to those who have used it for those millenniums.a

We addressed a money system as a social structure known for centuries so, unless it is monopolized to create a capitalized monopoly value, there is little there to own. All technologies are a part of nature waiting to be discovered and thus honest ownership can only be under conditions protecting the rights of all to its efficient production, distribution, and use.

Communication technologies are as much a part of nature as any other technology. Communication systems are a natural monopoly in the same sense as are sewers, water systems, electric systems, natural gas, roads, railroads, and garbage collections. It is well understood that their duplicated services and private ownership is highly wasteful economic nonsense.

To understand monopolization, it is important to remember that social technologies are also a part of nature and they too have been monopolized, primarily by license. We address secondary monopolies created by exclusive title licenses within a monopoly system in chapter four.

Systems of government are also social technologies and any thought of monopolizing governments would be ridiculed. Yet most governments are monopolized through power, witness the firm control of Western governments throughout history by the very monopolies we are exposing.

For centuries, as modern economies developed, the hidden hands of the alert and powerful were busy structuring property rights to gain, or retain, title to wealth-producing sectors of the economy. Patent laws and stock markets were simultaneously being structured to monopolize technology.

That stock markets are crucial to raising investment capital in a modern economy is a myth. Most stock traders have no contact with new issues of stock and those who do are primarily taking an already established private company public. Most corporate investment needs are financed from profits, liberal depreciation schedules, and borrowing. These are primarily investments in the monopoly structure of patents. They are not investments in production per se.

Expanding markets means increased profits capitalized into the value of a company’s stock and, with the potential for profits thoroughly analyzed by the market, those capitalized values are claimed before those profits are banked. “Behind the abstraction known as ‘the markets’ lurks a set of institutions designed to maximize the wealth and power of the most privileged group of people in the world, the creditor-rentier class of the first world and their junior partners in the third.”1 Restructuring exclusive patent laws to pay inventors well and place those patents in the public domain would erase those centuries of carefully crafted monopoly laws.

Under that simple legal change to conditional patent titles, the inventors are well paid and their patents placed in the pubic domain, the monopoly structure, offices and labor grinding up enormous wealth, disappears, the price of consumer products drop roughly by half and a large share of the capitalized values of stocks through which unearned wealth was appropriated is transposed into equally-shared use values through a 50%, or more, drop in product prices. Combining those social savings with free trade between equally developed regions, with managed trade between unequally developed regions, and dropping protections in step with the harmonization of previously unequal economies, would protect both labor and capital worldwide.2 The masochistic destruction of jobs and capital under current internal economies and world trade structure based on monopolization of technology and control of resources would be eliminated.

Capital Destroying Capital

Factories moving offshore for low-paid labor sharply reduce buying power. The profits from lower cost production sold on the high-priced markets of the imperial centers go into corporate coffers to be distributed to owners of stock, corporate managers, and stock traders. Those increased profits create higher capitalized values which—so long as there is broad ownership of stocks and an increase in taking in each other’s wash, cooking each other hamburgers, or giving each other heart transplants (service industries) so as to maintain the circulation of money—offsets labor’s loss of buying power.b

By expanding productive capacity without expanding equal buying power, capital destroys capital. It is unrealistic to assume this will be the first time in history those rising stock and real estate values that have been providing the consumer buying power will not go down and collapse the imperial center’s buying power.

Japan’s industrial capacity operated at 65.5% of capacity for 12 years and today, 2006, much of the industrialized world is producing at two-thirds capacity. Michael Moffit quotes Stanley J. Mihelick, executive vice-president for production at Goodyear:

Until we get real wage levels down much closer to those of Brazil’s and Korea’s, we cannot pass along productivity gains to wages and still be competitive.” With factory wages in Mexico and Korea averaging about $3 an hour, compared with U.S. wages of $14 or so, it looks as if we have a long way to go before U.S. wages will even be in the ball park with the competition. That the decline of U.S. industry is the natural and logical outcome of the evolution of the multinational corporate economy over the past twenty-five years has been a bitter pill to swallow and it will become increasingly distasteful as time goes on. One consequence will be a nasty decline in the standard of living in the United States…. [W]e have the outlines of a true vicious circle: the world economy is dependent on growth in the U.S. economy but the U.S. domestic economy is [now] skewed more towards consumption than production and investment, and this consumption is in turn sustained by borrowing—at home and abroad…. The deal with surplus countries essentially has been as follows: you can run a big trade surplus with us provided that you put the money back into our capital markets.3

The excessive accumulation of capital by stateless corporate imperialists and the denial of capital to the world’s powerless are two sides of the same coin. There is too little buying power among the dispossessed to purchase all the production of industrial capital. When there is already an excess, capital building more industry without developing more consumer buying power will destroy other capital:

So long as global productive capacity exceeds global demand by such extravagant margins, somebody somewhere in the world has to keep closing factories, old and new…. South Korea will be losing jobs to cheap labor in Thailand and even China may someday lose factories to Bangladesh.4

Ford motor’s U.S. factories lost $1.6 billion in 2005, in 2007-08 some are closing, yet its credit department and overseas factories brought the year’s profits to $2 billion. When China develops brand names and sells cars and other consumer products on the world market 40% below current prices, those overseas profits of Ford, other auto makers, and other consumer products will disappear. So will American and European jobs.

The world’s existing structure of manufacturing facilities, constantly being expanded on cheap labor and new technologies, can now turn out far more goods than the world’s consumers can afford to buy…. The auto industry is an uncomplicated example: Auto factories worldwide have the capacity to produce 45 million cars annually for a market that, in the best years, will buy no more than 35 million cars…. Somebody has to close his auto factory and stop producing.5

Labor Should Employ Capital

That capital is properly owned and employed by labor is recognized by Adam Smith. His bible of capitalism, Wealth of Nations, states: “Produce is the natural wages of labor. Originally the whole belonged to the labourer. If this had continued all things would have become cheaper, though in appearance many things might have become dearer.”6 The “appearance of becoming dearer” is because each worker would have been fully paid. Things would have been cheaper because purchasing power of those fully-paid workers would have advanced in step with productive capacity and those who once made their living through claiming a share of others’ labor would have to turn to productive labor. Those well-paid workers would have purchased more from other fully-paid workers and with that increased buying power others would produce more to take advantage of that market.

In short, purchasing power, which is so hard to generate under current monopoly rules, would have developed in step with the producing power of easily-built industrial technology. If monopolization could have been avoided, labor would have been fully paid and the world could have developed rapidly without destructive wars.

If labor owned the capital it produced, then labor would employ, rather than be employed by, capital. Once monopolized by exclusive title, capital’s use can be denied to labor at any time, and it will be denied if no profit is made. The natural order of labor employing tools (capital) is reversed. If land and capital, both industrial and financial, were not monopolized, land, labor, and capital could freely combine to produce social wealth, workers would receive their full wages from what they produced, and the owners of industry would receive full value for use of their capital. Elimination of the monopolization of technology under current stock market and patent structures would increase social efficiency equal to the invention of money.

As all people are stakeholders in their nation’s, and the world’s, economy, no economic sector should have excessive rights, monopolization, structured into property rights laws. Just as with land, we are accustomed to wealthy people claiming ownership of the nation’s industrial capital. We are taught this is the proper and most efficient social arrangement. Therefore we do not recognize the obvious, capital is social wealth. It is composed of all tools of production, it was produced by labor, capital is but stored labor, those technologies are only a part of nature that has been discovered, and all should be entitled to the opportunity of employing capital, or being employed by it, and receiving a fair share of what is produced.c

Capital, however, is often more productive under private ownership and, when this is so, private ownership is justified. In such cases, entrepreneurs, whose special talents lead to increased production, properly buy this capital, at a fair price, from those who produced it. A substantial share of society’s capital has been justly claimed in this manner. Capital that is obtained by means other than trading useful labor—physical, innovative, or special talent—is an unjust interception of wealth produced by others.

Capital which is more efficient under social ownership belongs to all society, with all citizens receiving the profits. For example, no profits are directly distributed from the increased wealth produced by highways, airports, harbors, or post offices. But the wealth society is able to produce and distribute through the common use of these natural monopolies is many times more than a normal interest charge on their construction cost. Just as each ones’ share of the use value of land in a modern commons is realized by all through society collecting resource rents, the efficiency gains of technology are, under the inclusive property rights laws we address, distributed to all silently and efficiently through cheaper production-distribution costs and no unearned wealth will have been claimed by monopolization.

Social capital,d “real” private capital, and “fictitious” capital are all currently lumped together and collectively treated as private capital. Ownership of capital is considered proof it was justly earned and that the owner deserves compensation for its use. Below we distinguish between social, private, and fictitious capital. Once identified, the proper owners can claim their capital and the profits it produces. Fictitious capital, like that in banking and land monopolization described above and others described below, can be eliminated altogether.

Efficient Socially-Owned Capital

The basic difference between what is properly social capital and private capital is that everybody uses social capital. It forms a natural monopoly, while proper private capital is used only to produce products or services for specific needs of specific people. Capital required for society’s basic infrastructure, which is by its nature a monopoly and used by all citizens, cannot justly be bought and sold as private property. It is properly part of a modern commons through a modern legal-social structure. This includes not only highways, airports, harbors, and post offices, but also railroads, electric power systems, community water systems, banking and WiFi (wireless fidelity) communications systems. Most will recognize these natural monopoly infrastructures should be socially owned.

Although such facilities and services are publicly held in most Western nations, U.S. citizens are unaccustomed to railroads, electric power systems, banking, and communications being socially owned. These are nothing less than natural monopolies, and all claims of efficiency under private ownership are rhetorical covers to hide the siphoning of the fruits of others’ labor to those who hold title to those economic crossroads.7

Almost 24% of America is served by consumer-owned electric utilities, 13.4% are publicly owned and 10.2% are rural cooperatives. Privately-owned companies charge 42.5% more for electricity than those publicly owned. Yet, since they serve population centers with the highest density of customers per mile, privately-owned electricity costs should be far lower. The difference in electricity costs between privately-owned and publicly-owned electric companies is even greater than these statistics show. Not only do they sell cheap electricity to private companies, the publicly-owned utilities provide enough profits for some of those communities to build swimming pools, stadiums, and parks.8

Matthew Josephson’s classic Robber Barons, Peter Lyon’s even more profound To Hell in a Day Coach, and Edward Winslow Martin’s History of the Grange Movement cover how the American railroads were built at public expense. As much as half the funds collected for building them were pocketed and over 9% of the land in the United States was deeded to these railroads. The pocketing of those funds, claiming title to these natural monopolies, and being deeded that land were little more than thefts of public wealth. Martin describes the building of the Union Pacific Railroad as perhaps the most flagrant example but the pattern was typical:

Who then was Crédit Mobilier? It was but another name for the Pacific Railroad ring. The members were in Congress; they were trustees for the bondholders; they were directors, they were stockholders, they were contractors; in Washington they voted subsidies, in New York they received them, upon the plains they expended them, and in the Crédit Mobilier they divided them. Ever-shifting characters, they were ubiquitous—now engineering a bill, and now a bridge—they received money into one hand as a corporation, and paid into the other as a contractor. As stockholders they owned the road, as mortgagees they had a lien upon it, as directors they contracted for its construction, and as members of Crédit Mobilier they built it…. Reduced to plain English, the story of the Crédit Mobilier is simply this: The men entrusted with the management of the Pacific road made a bargain with themselves to build the road for a sum equal to about twice its actual cost, and pocketed the profits, which have been estimated at about thirty millions of dollars—this immense sum coming out of the taxpayers of the United States.9

“By 1870 the states alone had given $228,500,000 in cash, while another $300,000,000 had been paid over by counties and municipalities.” Of course those millions of 19th century dollars would be hundreds of billions in inflated 21st century dollars. In the process of building those railroads, promoters skimmed off possibly one-half of this public investment and stockholders’ capital, while simultaneously claiming 9.3% of the nation’s land through land grants.10

With enforced privatizations through imposition of Reaganism- Thatcherism, the first heavy promoters of this philosophy, on the collapsed former Soviet Union, social wealth was being placed under exclusive private ownership in the 1990s at a rate that makes America’s robber barons of the late 19th and early 20th centuries look like country bumpkins. Those defeated nations were paid pennies on the dollar to give up title to their natural wealth, their banks, and their limited industrial capital. The citizenry, of course, had little to say. In many cases, if not most, one member of these less than honest groups, to put it mildly, would be signing as government agent and another was the buyer.

Obviously there is no savings to society from the private ownership of a natural monopoly such as railroads, electricity, post offices, power systems, sewers, water systems, communication systems, etc. And, as shown in the communications chapter, the true cost of low-frequency WiFi, when properly structured under a public authority and used in common, would be only pennies per dollar of current costs.

Roads, railroads, water systems, electricity, sewers, communications, etc, basic infrastructures are integral to a nation. Society is a machine; even though these basic facilities do not directly produce anything, a modern society cannot function without them. They are an integral part of production and are just as important to social efficiency as modern factories.

To demonstrate this, compare the labor costs of a society with an undeveloped infrastructure to those of a developed society. Vacation to any wilderness park, hike for a day, and calculate how efficient virtually any economic activity, such as sending and receiving mail, would be from there. In the 18th century, a letter traveling by U.S. mail from New York to Virginia, 400 miles, took four to eight weeks and cost 60 cents a page.11 Today it is 41 cents, possibly equal to less then a penny 200 years ago, for several pages anywhere in the nation and that letter normally arrives within one to three days. When China built a road into the almost inaccessible Tibet, the price of a box of matches dropped from one sheep to two pounds of wool.12

Efficient Privately-Owned Capital

Commercial activities producing for variable individual needs rather than everybody’s needs are properly privately owned. Thousands of personal preferences—clothes, furniture, jewelry, hobbies, recreational activities, etc—cannot be provided efficiently by a public authority. Such personal needs can only be assessed by perceptive and talented individuals close enough to recognize and fulfill those needs. The capital to provide such services is more productive under private ownership.

Most of the construction and production for basic social infrastructure operated under public authority is quite properly provided by tens of thousands of privately-owned industries. This free-enterprise, privately-owned capital can, under contract, accommodate the needs of public institutions. We see this every day in contracts to build that infrastructure.

Fictitious Capital

Few economists agree on exactly what constitutes capital. Most include all wealth that produces a profit, titles, stocks, bonds, etc. But, although the wealth this paper represents has a firm claim on part of society’s income, much of it was skimmed off and resurfaced in another investment. The skimmed off share of those first certificates of investment is properly defined as fictitious capital. Bonds used to construct harbors, deepen riverbeds, and build railroads represent true capital. But if 50% were pocketed and reinvested elsewhere, that leaves two dollars in claims against each dollar of value of the original infrastructure contract.

In the previous example of building the Union Pacific Railroad, half the money was used to build; the other half was pocketed and reinvested elsewhere. The share of those certificates having a claim on social production yet had produced nothing, were fraudulent. This fictitious capital may represent wealth to the owners, but it is not, on balance, wealth to society. Those debt instruments that build only half the industrial capital as promised are 50% fictitious capital.

There are three physical foundations to production, land, labor, and capital. Land commands rent, labor is paid wages, and honest interest can only be for the productive use of true capital. Patent monopolies capitalize stock values far above tangible values and those high values demand profits. Through those excess profits on unearned wealth, the production of others’ labor is siphoned from those who produce to those who produced nothing. The share of capital demanding payment when no labor value has been expended is properly labeled “fictitious capital.”

We have covered the wealth appropriated through unearned profits of banking and exclusive title to land and patents. Though that money buys and sells monopoly values in today’s monopolized economies, the property rights structure under which that wealth was appropriated was, and is, unequal. The same is true of the unearned wealth of monopolies we have yet to address. Restructure to a modern commons throughout the economy and those huge blocs of capital currently buying and selling those capitalized appropriated values are transformed into equally shared use values. The doubling in economic efficiency, proves those huge blocs of wealth need never have been appropriated from their proper owners.

Yes a large share of appropriated capital built industries, water systems, sewer systems, etc. But the problem is that it was unearned and we have thoroughly documented that, if there is a shortage of finance capital, a socially-owned banking system can create money for a nation’s infrastructure or any essential social services.

That it is necessary to appropriate huge blocs of capital to finance infrastructure, industry, or any other aspect of an economy is a cover story to justify unearned wealth. If technology had been shared the past 300 years instead of monopolized, it would have spread rapidly across the world and there would have been little poverty and few wars.

Banking is only a social technology and that would have had to spread to the rest of the world right along with mechanical and other technologies. Being far more efficient, thus producing far more wealth, each technological leap can be financed by created money. The increased wealth backs the newly created money and that which circulates, together known as “the money supply.”

Invention, a Social Process

There is no isolated, self-sufficing individual. All production is, in fact, a production in and by the help of the community, and all wealth is such only in society. Within the human period of the race development, it is safe to say, no individual has fallen into industrial isolation, so as to produce any one useful article by his own independent effort alone. Even where there is no mechanical cooperation, men are always guided by the experience of others. —Thorstein Veblen

These words from one of America’s eminent philosophers are well spoken. The long march of technology leading up to the present sophisticated level is based upon thousands of earlier discoveries—fire, smelting, the wheel, lathe, and screw—and untold millions of improvements on those basic innovations.13 Many primitive, but revolutionary, technologies were discovered by Asian and Arab societies. Greek, Roman, and other cultures improved upon these methods, which were, in turn, used by later Western cultures. As a social process built upon the insights of others, Stuart Chase’s list of inventions of 5000 years ago barely touches the subject:

The generic Egyptian of 3,000 B.C., though unacquainted with iron, was an expert metallurgist in the less refractory metals. He could smelt them, draw them into wire, beat them into sheets, cast them into molds, emboss, chase, engrave, inlay, and enamel them. He had invented the lathe and the potter’s wheel and could glaze and enamel earthenware. He was an expert woodworker, joiner and carver. He was an admirable sculptor, draftsman and painter. He was, and is, the world’s mightiest architect in stone. He made sea-going ships. He had devised the loom, and knew how to weave cotton to such fineness that we can only distinguish it from silk by the microscope. His language was rich, and he engrossed it in the handsomest system of written characters ever produced. He made excellent paper, and upon it beautiful literature was written…. He had invented most of the hand tools now in existence…. He had worked out the rudiments of astronomy and mathematics.14

There were also wedges, drills, wheels, pulleys, and gears, all were necessary before modern machines were possible. There had to be countless earlier inventions, back to the control of fire, before the Egyptians could have reached even that level of technology.

Not only does every modern invention rest on millions of insights going back to antiquity, its development requires thousands of people with special talents. For example, a British scientist’s accidental discovery of penicillin has benefited almost every person in modern civilization. More people worked to develop and produce this antibiotic for the wounded in WWII than worked on the atomic bomb, and they were all funded with public money. Yet the drug was patented by an American who recognized if he obtained a patent he would have a monopoly with a capitalized value that would lay claim to vast wealth although he had neither created nor produced anything.15

Every innovation is a part of nature. Just like land, oil, coal, iron ore, or any of nature’s wealth, if something is to be discovered it had to have been there all the time. As technology is a part of nature that has been discovered, everybody should share its fruits. Inventions not only use the insights of millions of people throughout history and prehistory, they require the support and skills of millions of present workers as well. Stuart Chase estimated at least 5,000 people were involved in contributing data to the writing of his book and they depended on others for their knowledge.

These people provided tools, materials, and services: pencils, paper, graphite, rubber, lead, typewriters, telephones, cars, electricity, typing, printing presses, book distribution, banking, and so forth. The people directly involved in Chase’s knowledge required educators, authors of textbooks, and their educators, ad infinitum. Every one of these consumer items required the labor and skills of thousands of people, some in distant parts of the world, such as producers of rubber or tin. Though the labor charge of some is infinitesimal, each is real and definite. Collectively they accumulate a substantial, though incalculable, value.16

While the contribution of any one person to the pool of social knowledge is truly small, the wealth diverted to those who own the patents to social knowledge can be substantial. It has been estimated that, if the developing world were capitalized to the level of the developed world, the royalty claims would be $1 trillion a year. These royalties would normally be going to people who “own” these efficient technologies but neither invented anything nor labored productively for this wealth. They are designed commercial chokepoints structured into property rights law and the monopolization of these tools of production, technology, permits huge overcharges that siphon wealth produced by others to owners of patents.

Consider how expensive consumer products would be if the use of wheels, levers, gears, fire, and thousands of other early inventions required the payment of royalties. By our calculations, half the costs of consumer products operate the offices and staff overseeing the patent monopoly system, the stock market, or go to patent holders. Those huge overcharges create excessive stock market values which become the blocs of unearned wealth owned by monopolists that, through restructuring exclusive titles to nature’s wealth, patents in this case, to conditional titles, disappear as they are transformed into efficient, relatively equally-shared, use values.

Inventors rarely receive much reward for their discoveries and innovations. The few who are compensated receive but a small share of the tribute charged by those who own this social wealth. That a small number of powerful people monopolize inventions, and ever afterwards siphon to themselves the wealth produced by others, defies both decency and justice. This was well known to prominent inventors and industrialists such as Thomas A. Edison and Henry Ford. Both “agreed that all patent laws should be repealed since they benefit the manufacturer and not the inventor.”17

We disagree with patent laws being repealed. They should be redesigned to be a part of a modern commons within the inclusive property rights laws of Henry George in which any person can use that technology by society paying those inventors well and placing those patents in the public domain, see below.

Capitalizing Actual and Fictitious Values

Inventions are a “more or less costless store of knowledge [that] is captured by monopoly capital and protected in order to make it secret and a ‘rare and scarce commodity,’ for sale at monopoly price[s]. So far as inventions are concerned a price is put on them not because they are scarce but in order to make them scarce to those who want to use them.”18

The patent structure capitalizes value far above tangible values and, through those excess profits and without expenditure of their labor, intercepts wealth produced by others. Where inventions once went unchanged for decades or even centuries, many, if not most, patents are now obsolete before their 20 year life expires. By the time a key patent has run out, newer patents are able to boost efficiency yet more. As many of the earlier technologies are still essential to production, the owners of the latest patents control both the latest technologies and the expired patents of support technologies. Honda’s exclusive ownership of patents on the stratified charge engine, even though the basic principles for this crucial technology were invented 100 years ago, makes all this quite evident.

Corporations are in such powerful bargaining positions that only occasionally will a new invention pose a threat to them. As corporate control of other critical patents limits the inventor’s options, these patents are bought for a fraction of their true value, or they are patented around and the inventor receives nothing. Controlling markets is integral to controlling patents:

Any move by the neo-colonial state to revoke the patent law as a defensive measure would have very limited results since the market belongs to the monopolies. This becomes quite clear when it is realized that the other markets to which such products would be exported would still have such legislation protecting the same patents, and the transnational corporation would be in a position to require compliance. The mere ownership without the actual know-how which is guarded by the monopoly at headquarters would be useless. This is the whole point about monopoly. The world imperialist monopoly market would not exist if such a system of market control were not in operation.19

We view the inventions of 400 to 1100 years ago as primitive, yet in their time these simple inventions could produce, with less labor, both more and better products. Someone powerful enough to control these new techniques could trade one day’s work for two, three, five, ten or as many days’ production of other people’s labor as the efficiency of his invention and political power allowed.

For example, if the invention of the windmill could have been monopolized, its owners could siphon to themselves the production of large amounts of others’ labor. This potential created a dispute between the nobles, priests, and emperor “as to which one the wind belonged.”20 A 17th century French patent granted such a right to selected owners of windmills.”21

However hard they tried, claiming ownership of the wind was quite difficult. But it was not so with other technologies. The water mill, first used in Europe during the 10th century, permitted one worker to replace as many as 10 others. A stone planer eliminated seven workers out of eight. One worker with an Owens bottle machine could do the work of 18 hand blowers.22 Modern technology has created even greater efficiency gains. Many credit the steam engine with the greatest single increase in productive efficiency, but Stuart Chase cites a study by C.M. Ripley of work costing $230 done by hand labor that would cost only $5 using electric power.23 Modern electric furnaces and continuous casting have brought the direct labor expended in the steel industry down to only 1.8 hours per ton of steel produced.24

The owner of that first water mill was able to trade his single day’s work, grinding grain, for seven days’ labor of a woodworker or blacksmith. In effect he was paid for seven days while working one. The owner of a patented stone planer would likely gain five days’ value for only one of his own. Owning a patented Owens bottle machine could probably have claimed 12 days’ pay for each day’s labor. If the manufacturer in Ripley’s study had been able to patent that efficiency, he could have charged 20 to 30-times the labor value in his product. However, just like claiming ownership of the wind, it would be difficult to claim exclusive title to electricity and accounts for the drop in costs in Ripley’s study.

Whether a market is in land or corporate stock what is being bought and sold under current property rights are primarily values produced by nature, or an aspect of nature, properly belonging to all in relatively equal shares. That value has been confiscated by the cunning and powerful through exclusive title to the various aspects of nature’s wealth and those unearned values then capitalized in the markets by a factor of 10 to 30 times.

Royalty Conferring Monopoly Trading Rights is the Origin of Patent Royalties

That the owners of patents are entitled to royalties exposes the feudal origin of the term. Patent rights to land and inventions were conferred upon favorites by kings and queens, with the understanding that the person so favored would share the earnings, royalties. In short, the origin of patents is indistinguishable from paying bribes for the privilege of doing business. Such bribes were the precursors of today’s patent royalties.25 Exclusive title to patents, as opposed to conditional title, Henry George’s concept though he may have rarely used that term, is the remnant of feudal patent law which must be restructured to attain full rights, a social right or even a human right, for all to the benefits of ever-more-efficient technology.

The Ever-Increasing Efficiencies of Technology

In a final analysis, the foundation of most law is power expressed through military strength. Long before governments protected patents, they were protected by violence. “The struggle against rural trading and against rural handicrafts lasted at least seven or eight hundred years…. All through the fourteenth century regular armed expeditions were sent out against all the villages in the neighborhood and looms or fulling vats were broken or carried away.”26 Those early claims to technology, enforced by violence, were the forerunners of today’s industrial patents. Those who would control technology have just become more sophisticated. They encode these exclusive rights in legal titles. Today, being accustomed to it, and unaware of society’s large losses, we accept this as normal.

The growing efficiency of textile machinery started the Industrial Revolution. Primitive looms were improved upon by inventions such as Kay’s flying shuttle, Hargreave’s spinning jenny, Crompton’s “mule,” and the power loom. Between 1773 and 1795, the labor time to process 100 pounds of cotton went from 50,000 hours to 300 hours, an efficiency gain of 16,666%.27 That efficiency gain within a time span of only 22 years exposes how the owners of these technologies quickly dominated world trade. Quite simply, technology was not shared. It was monopolized through restricting the rights of production to the owners of patents.

The widespread use of machine weaving came about only because the technology was copied and the patents ignored. That 16,666% gain in 22 years is dwarfed by 150 power looms in Formosa weaving 24 hours a day under the watchful eyes of only one agile female operator on roller skates.28 This is a gain of hundreds of thousands, if not millions, of times in efficiency. The labor component in the price of a yard of cloth produced by modern industry is small. This includes the labor to smelt the ore and fabricate the machines which is stored in that capital.

The economically powerful will say they are not claiming the production of anyone else’s labor as there is hardly any labor involved. But this is exactly how wealth is siphoned to those who monopolize the tools of production. The price charged for those products is far above the cost of production and others are forced to trade large amounts of their labor for what was produced with that small amount of labor.

All society is denied the full benefit of cheap industrial goods when labor is charged more than they are paid to produce that product. If a product requires one hour’s labor to produce and distribute, and then sells for three hours’ labor value, it effectively siphons away the value produced by two hours of labor. If production is traded to a country where equally-productive labor is paid one-third as much to produce the product, it siphons away nine hours of labor.29 Standard economics and accounting do not measure this overcharge because it shows up in stock prices far beyond intrinsic value. If that cloth were priced relative to the price paid labor to produce it, including fair interest for the stored labor value represented by that machinery, then it would be priced within reach of the world’s low-paid labor.

A bushel of wheat required three hours to produce in 1830 but only 10 minutes in 1900.30 A call to Montana State University in Bozeman revealed that in 1986 it took only 3.2 minutes of labor to produce one bushel of dryland Montana wheat. Other crops have similar efficiency gains.

Railroad labor costs per ton-mile in 2008 are roughly only 2% that required 70 years earlier, and that 500% efficiency gain is dwarfed by the five million percent gain in transportation efficiency over the horse and wagon only 180 years earlier.

The public did receive a large share of the labor savings in textiles, agriculture, transportation, and other technologies. With the common people’s newly won rights, the U.S. Constitution and Bill of Rights, and with the enormously wealthy and sparsely inhabited lands of the Americas, the gains were just too great for the powerful to claim them all. However, due to the failure to increase the buying power of all labor in step with the productivity of capital, there is much more production forgone and wasted than that which society so gratefully receives.

Patent laws evolved specifically to claim title to the gains of technology. With multiple patents and occasionally with only one key patent controlling markets, the owners of technology siphon to themselves large amounts of the production of others’ labor.

Ownership of a key technology, the telephone, was Bell Telephone’s advantage when that monopoly was established. Inventions not controlled by Bell, such as the dial phone, were suppressed for many years. The telegraph and telephone reduced communication costs by an amount comparable to the savings created by new technology in textiles and transportation. These efficiency gains of technology, protected by patents, produced the monopoly profits that established Bell Telephone, a corporation larger than any in textiles or transportation. At 10 times the capacity for 10% the cost, 1% the cost per unit of capacity, today’s WiFi technology, assuming powerful spectrums able to pass through mountains are reserved for social use, has the potential of increasing communications efficiency far more than those early gains. Under those efficiencies, still advancing rapidly, the whole world has the potential of gaining their freedom.

Henry Ford’s assembly line was a milestone in industrial technology rapidly picking up the pace of the Industrial Revolution:

The factory is not a new tool but an organization of production that eliminates the periods of idleness in the use of tools, machines, and human beings that are characteristic of agrarian and artisan production. In the artisan’s shop the saw, chisel, file, and so forth are idle while the hammer is being used. In the factory all the tools are simultaneously in use in the hands of specialized workers; production is “in line” rather than “in series.” But production in line requires a large scale of total output before it becomes feasible. The division of labor is limited by the extent of the market, as Adam Smith told us. But transportation, urbanization, and international trade provided a market of sufficient scale.31

During 1913 alone, the time required to assemble an automobile dropped from 728 minutes to 93. Until that year, the wage rate averaged $2.50 for a 10-hour day. Ford doubled the daily wages of his workers and reduced their hours from ten to eight, all while lowering the price of his cars.32 This was unheard of in those times and drew much criticism from business and the press.

What Ford knew, and others did not, was the profits were so large that, with that 800% efficiency gain, the wages could have been increased to almost $20 per day. Ford was strongly opposed by his managers and other investors. But Emerson had reached Ford on the morality of not maximizing the profit potential of his monopoly.

Attempts were made to monopolize the emerging auto industry. George Baldwin Seldon, a patent lawyer, understood that, as the law was structured, patents laid claim to wealth produced by others. In 1899,

he set his mind to working out the precise legal definition and wording of a patent that would give him the sole right to license and charge royalties on future automobile development in America…. Seldon had gone into partnership with a group of Wall Street investors who saw their chance to cut themselves in on the profits of the growing American car industry.33

The near success of Seldon and his partners in patenting the automobile illustrates the basic injustice of the current patent structure. Neither Seldon nor these investors had anything to do with the invention of automobiles. The first ones had been built in Europe 14 years earlier and virtually hundreds of auto companies were already in existence. Yet, if anyone had succeeded in patenting the process of building automobiles, every purchaser of an automobile would have had a part of the production of his or her labor siphoned to the owners of that patent who had invented nothing and had done no productive work.

Seldon’s attempt at patenting the principle of the automobile is being successfully accomplished today in the patenting of processes. Corporations are being formed to patent embryo transfers, gene splicing, other advanced medical procedures, even title to human genes and genes of plants domesticated by primitive societies thousands of years ago. Any doctor who wishes to use these new procedures and any farmer who grows a patented plant has to obtain a license and pay a royalty.34

The current race to patent human genes clearly outlines the monopoly cost of patent laws. There are thousands of human genes directly affecting human health. As patent laws now stand, some corporation is going to have a patent on, so they own, each gene. Let us say that there are 300 genes to be studied in a standard gene test and the royalty to be paid to each patent holder only $1 per gene. If a couple wishes to test themselves for defective genes before conception or their unborn child shortly after conception, the cost would be $300 Sixty minutes, July 29, 2001, suggested the possibility of $1,000 royalties.

This added tax, though common to medical equipment and drugs, has not previously been added to the cost of an operation or food crops. If ownership of procedures and food plants had been established years ago, every bill for an operation and the cost for every plate of food would have had royalties added. Only those licensed by the patent holder could perform operations or raise crops and the added charges would siphon wealth to whoever owned the patent rights. Every future improvement in patented surgical procedures or improved crop strains would also be patented and, as technological improvement is ongoing, the patent’s monopoly would never run out. Thus Microsoft’s tens of billions of dollars of software overcharges, all built from purchasing the DOS computer operating system for $3,000 and patenting it, led to later patents eventually valuing Microsoft at hundreds of billions of dollars. The cost to society can be imagined if each producer or service provider had to pay a patent holder for the use of fire, wheels, wedges, levers, and gears. Inversely, the savings are evident in their free use when in the public domain.

About 7,000 patents worldwide are based upon indigenous knowledge of India. After spending millions to get one plagiarized patent invalidated, India is creating a 30-million-page Traditional Knowledge Data Library (TKDL) to be available to every patent office in the world.35

There is one recent and remarkable exception to this rule. In parts of Africa, “as many as sixty percent of the people over age fifty-five were partly or completely blind” from becoming infected with a parasitic worm. Possibly 18 million people were affected. The pharmaceutical corporation Merck and Company owned the patent on a drug, Ivermectin, used to kill worms in animals. In October 1987, Merck announced they would provide this drug free of charge for Africans afflicted with this parasite. The company chairman, Dr. P. Roy Vagelos, noted, “It became apparent that people in need were unable to purchase it.”36 Here the loss to society from exclusive title was so obvious and devastating these corporate executives made a moral decision to save the sight of millions of people. The cost to them was negligible; the gain to society was beyond measure.

Cuba’s plan to restore vision to 4.5 million treatable blind Latin Americans over the next 10 years and Cuban doctors at work in many impoverished areas of the world, Cuban education equaling the best in the world, and Venezuela and Bolivia in the early stages of copying Cuban successes are further examples of how cooperation can quickly alleviate poverty while monopolizations only entrench it deeper.

An intense battle was fought over life saving drugs for AIDS victims. These drugs can be produced for a tiny fraction of the monopoly prices currently asked. Even at that fractional price few in the impoverished world can afford those essential drugs and at the monopolized price almost no one can afford them. Drug companies have reneged on agreements to lower prices for Aids victims in Africa and that struggle for what is obviously a human right is still on-going (2008).

There is a loss to society from exclusive control of any technology, but it is usually not as obvious as in these dramatic examples, where the patent rules of exclusive use were abandoned. These examples demonstrate the original morality of the medical community when “to patent an essential medicine was considered morally indefensible.”37 It is also morally indefensible for other inventions crucial to society. The Gaviotas community, regenerating the primeval Amazon forest of Colombia’s barren Los Llanos plains while building a model community using modern production methods to live off the land, does not believe in patenting technology. Its inventions, such as a cheap, 100-pound, wind-mill driven water pump and cost-free, maintenance free air conditioning spreading throughout Latin America.38

Innovation and technology thus create large reductions in labor costs in all segments of the economy. Most are more modest than the previous examples, but reductions of 90% are common and “from 1945 to 1970, the average increase in efficiency output per hour was 34-40% per decade.”39 Such savings do not exert the immediate shock to the economy these numbers suggest. It takes time to retool industries and these corporations are in no hurry to destroy the value of their old production and distribution complexes.

This subchapter alerts us that, if technology had been shared instead of monopolized, the entire world could have industrialized in step with the increased efficiencies of technology. Throughout those centuries, assuming equal rights to the fruits of nature had been taught as opposed to the teachings of Adam Smith, there would have been little poverty and few wars. With each enjoying full and equal use rights, the world would have been, at all times, many times richer in the form of use values than they were under monopolized values.

Most wars and poverty throughout the world today have their origins in the millions of laws the past 700-plus years through which the powerful monopolized technology. The two most obvious were: 1) Kaiser Wilhelm buying technology wholesale from his grandmother, England’s Queen Victoria and cousin, King George V.40 That breach of monopolist’s absolute rule to never transfer technology to any other nation was the direct cause of WWI and WWII. 2) The massive suppression of the world’s breaks for freedom the past 65 years. That this is conscious policy is again proven by providing technology to the defeated nations, Germany and Japan, and to Southeast Asia so as to halt fast expanding socialism with their opposing property rights laws. That accident of history, technology allowed to develop outside the imperial centers of capital, again threatens to collapse the monopoly system.

The overcharges of the monopoly system cannot exist if labor is fully paid for their work. It only appears proper because people are accustomed to a subsistence wage for most labor, equally accustomed to all increased profits going to owners and management, and unaware of how rapidly technology would spread around the world if capital were accumulated along the guidelines in this treatise, conditional patent titles, labor fully and equally paid, and productive jobs shared by all. Under those restructured rights, workers would have buying power, and technology would be regionally available to produce desired products, capital will have been accumulated to finance it all simply through the creation of money and the developing world being fully paid for their resources and labor.

A Nation’s Wealth is Measured by, and Siphoned to Titleholders Through, Capitalized Values

Shares in corporations are sold with the price based on how profitable they are expected to be, their capitalized value. This idea proved to be a real bonanza. Where conservative business people typically estimated the capitalized value of the company at 10 times the yearly profit, the stock markets, anticipating future increases in profits, capitalized these values far higher, frequently 20 to 30 times annual profits and occasionally even more. It is not uncommon for the price of stock going public, called IPOs (initial price offerings), to jump 500% the first week. This capital accumulation bonanza initially claims a share of a nation’s loans and, when success is sustained, becomes a value backing its share of the money supply.

All in one stroke, an individual or group could lay claim to the efficiency of a technology through capitalizing its value and selling shares to investors. This siphoning of the production of others’ labor, through the mechanism of capitalizing values of technology, concentrated wealth produced by the many into the hands of a few, was christened accumulated capital, and gave capitalism its name.

Through carefully structured laws laying claim to the wealth produced by nature and through technology, which is a part of nature utilized to increase the efficiencies of labor, the hidden hand of the wealthy and powerful kept claiming an ever-larger share of the wealth produced.

Labor, just as naturally, tried to retain or reclaim what they produced. The rights gained in the American Revolution and enshrined in its Constitution, and the natural justice of those rights, eventually increased the power and income of labor. This and the expansion of unnecessary labor as summarized in the next chapter led to more people retaining a greater share of society’s wealth.e With these savings more broadly distributed, there evolved the present diversified markets to sell shares in industry and concentrate money capital.

Most of the wealth measured by capitalized values is claimed by the various monopolies we are exposing. If these excessive rights of property were replaced by the rights of society to collect resource rents and the right for any person to use any technology through paying inventors well and placing patents in the public domain, a modern technology commons, if all had full and equal rights to socially-created money and finance capital, if productive jobs were shared, and if productive labor were fully paid, all society would be wealthier even though monetized, capitalized, wealth would be far lower.

By removing these monopolizations, sharing the resultant fully-productive jobs, and paying labor fully for what it produces, measured values (the price of consumer products) would equal the rental value of resources, the labor, and the capital (stored labor) producing that wealth.

The Financial Structure to Harvest the Profits of Monopolized Patents

As that is where the profits from exclusive titles to patents are collected, the battle for corporate ownership is centered in the stock market. Millions of hours are spent by speculators, they call themselves investors, trying to figure out which company is going to increase its capitalized value. The game is calculating profits that will translate into capitalized value. It is viewed as a simple method of keeping score. But claiming wealth properly belonging to others as technology continually replaces labor is the underlying theme.

Values, properly shared by all through lower prices, are claimed by the shareowners of industrial technology. Value claimed by monopolists is capitalized, sold or borrowed against, and that multiple of annual wealth appropriation becomes finance capital. Through restructuring exclusive titles to patents to conditional titles, creating a modern technology commons, those monopolized values and huge blocs of finance capital are, in the form of lower prices, transposed into relatively equally-shared use values.

Lester Thurow explains that the impoverishment of many while wealth is accumulated by a lucky few is due to “the process of capitalizing disequilibrium”—distortions of trade, either internal or external, and thus distortions of values—and that “patient savings and reinvestment has little or nothing” to do with generating large fortunes:41

[A]t any moment in time, the highly skewed distribution of wealth is the product of two approximately equal factors—instant fortunes and inherited wealth. Inherited fortunes, however, were themselves created in a process of instant wealth in an earlier generation. These instant fortunes occur because new long-term disequilibriums (sic) in the real capital market are capitalized in the financial markets…. Those who are lucky and end up owning the stocks that are capitalized at high multiples win large fortunes in the random walk. Once fortunes are created, they are husbanded, augmented, and passed on, not because of “homo economicus” [economic man] desires to store up future consumption but because of desires for power within the family, economy, or society.42

Of course, the small fortunes accumulated by the upper middle class are from these same disequilibria in the value of land and capital. Except by violence or trickery, those exclusive titles to the resources and technologies of nature, how else can wealth beyond what one produces be accumulated? The income demanded by those appropriated values is a private tax upon the rest of society, and quite accurately labeled air. “By reducing air to vendability, scarcity could be capitalized. Business would be richer, and every man, woman and child in the country would be poorer.”43

A study of the market over a full boom and bust cycle will find these fictitious values developing in most stocks. The reasons given may be many but the underlying cause is clear: the steady rise in the nation’s efficiency is captured by, and mirrored in, stock and land values created through appropriating wealth which should have been, and under a modern commons would have been, relatively equally distributed to all.

Every speculator dreams of becoming wealthy by owning some of these stocks or land. The powerful and cunning, with better than even odds, buy and sell in rhythm with the inflation and deflation of stock and land prices to lay claim to much of this new wealth.

Those who win the gamble on who will own the world’s land and industrial and distributive technology are freed from the necessity of laboring for their living. This is not a contradiction. Their speculative efforts are certainly labor, however, when unnecessary, that labor is fictitious and such earnings are first appropriations of wealth properly distributed to all and later they are the winnings of bets as some win and some lose in the gambling casinos called stock markets.

Capitalizing values is necessary to decide the sale price of a business. However, not only should everyone involved receive proper compensation for his or her labor, innovations, and risk; society should receive its share. Society not only provided tens of thousands of necessary preceding innovations; it also provided the schools, skills, tools, labor, markets, and infrastructure. Nature provided the resources, including the inventions waiting to be discovered. Thus conditional titles to patents are extensions of Henry George’s concept of conditional title to land.

There is a necessity for a stock market. However, that the stock market’s primary purpose is financing the nation’s business is pure fiction; trades in the stock market have little to do with capital investment:

Buying a stock from a broker does not add one red cent to the corporate treasury and provides no investment capital except if the stock is newly issued. But new issues by major corporations are fairly rare because issuing new stock dilutes equity and depresses stock prices. As a result, the bulk of shares now traded on the stock markets were issued twenty or fifty years ago. Since then the shares have passed through many hands, and their prices have fluctuated over a wide range. Yet all these transactions have been strictly between the buyers and sellers of stocks, aided and abetted by stockbrokers trying to eke out a modest living…. [S]peculators are not really interested in the company whose stock they temporarily own. They want to take their profits and get out. They are not investing in the proper sense of the word; they are simply gambling. Ownership of corporations has become largely a game of chance in which the individual players try to guess what the other players will do.44

Market Bubbles and Crashes

Speculators are unaware that their gains are unearned. If the market wipes them out, they feel they have lost earnings when actually it was just the odds of the gamble and their turn to lose. Like the casinos they are, the stock markets are primarily a mechanism for the redistribution of wealth, not its production. It is a gambling game in which the rest of society’s members are spectators, spectators who continually have their share of the nation’s increased wealth thrown on the table of a game of chance they are not playing. The danger of gambling with the nation’s wealth was addressed by Business Week’s cover story, “Playing with Fire”:

By stoking a persuasive desire to beat the game, innovation and deregulation have tilted the axis of the financial system away from investment toward speculation. The U.S. has evolved into what Lord Keynes might have called a “casino society”—a nation obsessively devoted to high-stakes financial maneuvering as a shortcut to wealth…. “Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a byproduct of the activities of a casino, the job is likely to be ill-done.”45

What is normally spoken of as a market “bubble” is only the claiming of wealth produced by others through exclusive titles to nature’s wealth which has gotten out of hand. History is replete with examples. Charles Mackay, in Extraordinary Popular Delusions and the Madness of Crowds, describes the tulip craze that broke out in Europe in the 17th century. Before that insanity dissipated, one particular tulip bulb cost “two lasts of wheat, four lasts of rye, four fat oxen, eight fat swine, twelve fat sheep, two hogsheads of wine, four tuns of butter, one thousand lbs. of cheese, a complete bed, a suit of clothes and a silver drinking cup.”46

One wonders at the variety of commodities traded for that one flower bulb, but their total value of 2,500 florins serves as a guideline to the money value paid for other bulbs. During this period, prices ranged from 2,000 florins for an inferior bulb to 5,500 florins for the choicest varieties. “Many persons were known to invest a fortune of 100,000 florins in the purchase of 40 roots.”47 Although tulips are not stocks, the principle is the same.

At the turn of the 18th century, John Law implemented a plan to sell stock in enterprises in the Mississippi wilderness to pay off the huge debt of the French government. Though this scheme was seriously flawed, Law’s banking reforms were quite sound and the French economy prospered. The plan went awry when the money rolled in. Those selling paper were so busy getting rich they neglected to invest in production anywhere; they merely reinvested in more paper. In a speculative frenzy, fortunes changed hands as people sold, and then bought back, nothing but paper.

The stock in this Mississippi scheme had no value because there was no investment and thus no production. Law’s scheme was borrowed from the cunning financiers in England who a few years earlier sold stock in a South Seas venture, known as the “South Sea Bubble.” Although Spain controlled most of South America, stock companies were set up to trade within this territory. Visions of wealth stirred up a speculative fever, companies were formed for very unlikely endeavors, and the money rolled in as speculators dreamed of getting rich. Soon, so many joined the game that it got out of hand and the government had to call a halt to new issues. The intention of most of these promoters can be summed up by one audacious proposal. This promoter touted “a company for carrying on an undertaking of great advantage, but nobody to know what it is.”48

Since the organizers of these companies had no intention of producing anything, their capital was 100% fictitious. Proof that this capital was not real was when the speculative bubble collapsed. There were no tangible assets, production, or services to back the value of the stock; there was only the transferring of wealth from the naive to the cunning or lucky.

When wild speculation breaks loose, there is no relationship between value and price. Even when the stock market behaves normally, there are always stocks whose prices defy logic. This activity can only be attributed to crowd psychology, as described by Mackay, although sly promoters pull strings at every opportunity.f

Options, Futures, other Derivatives, and Hedge funds are Gambling Chips in a Worldwide Casino

The markets for stocks, bonds, commodities, futures, options, currencies, mortgages, money markets, in fact virtually every exchange market anywhere in the world, are now one huge market. Options, futures, swaps, forwards, other derivatives, all tools of hedge funds, are only the buyer betting that something will go up and the seller that it will go down; neither has a stake beyond the gamble. They appear to have a legitimate purpose in takeover schemes, but in that role, until a bubble tops out, they are not even gambles. The psychology of the market almost guarantees the stock price will rise when word gets out a takeover is in progress. This increase in valuation backs the money required for the takeover.

The historic speculations in options, futures, and other simple bets are dwarfed by the derivative markets of the late 20th to early 21st century which evolved to bypass the market’s margin limitations. Long-Term Capital Management’s bankruptcy crisis in 1998 uncovered the unsettling reality that “this small hedge fund with a capital base of only $2 billion had over $1 trillion in bets in the derivatives markets, betting primarily on the Russian Ruble which had collapsed. This was a margin of only 0.02% and many of the estimated 400 other hedge funds then operating would have similar slim margins bet on similarly volatile currencies.”

By 2007 derivatives bets by the then 10,000 hedge funds created a $415 trillion house of cards, eight times the GDP of the world economy, and the nation’s largest banks are also facing insolvency. To avoid throwing “the world’s financial markets into turmoil … bankrupt hundreds of hedge funds … wipe out the profits of big-name financial institutions … sabotage the investments of pension funds … and scramble the portfolios of millions of average investors,” the world’s central banks will soon have pushed over a trillion dollars at the financial markets. The world holds their breath as to whether they collectively can keep them from gridlocking (Google the above quoted phrases). All aspects of the markets “have become chips in a casino game, played for high stakes by people who produce nothing, invent nothing, grow nothing and service nothing.”

In early 2007, the evening news alerted us that “One-third of the cost of oil was due to the buying and selling of oil contracts. That, and similar trading practices in other markets, is a form of harvesting unearned profits. Sharp traders have leveraged world markets with stock and currency options, futures on options, meaning options on options, futures on interest rates, warrants, a form of option, and thousands of other similar subdivisions of instruments designed to lay claim to wealth called “derivatives”.

Hedge funds betting on which way everything in the markets, and sometimes outside the market (weather for example) will go, leveraging those bets up to 35 times, doing so on borrowed money, and doing all this to the tune of $415 trillion worth of derivative bets is what has all markets of the world holding their breath.

The heart of the problem is the huge housing and stock market bubbles in America. Interest rates were kept low, borrowers with poor credit or no credit were loaned money on houses that were rapidly appreciating in value due to those lax standards. Speculators were borrowing against their homes to buy expensive homes and condominiums which were rising 10 to 20% a year in price. Most of those speculators started out with good credit. But when the rise in home prices topped out and the bubble burst they could not sell for the quick profit planned, and were stuck paying two mortgages.

Those who could not really afford to pay for their newly-purchased homes and those who will drop into the insolvent class due to the value collapse of their speculations may eventually be somewhere between 35 and 50% of the homes sold.

Those subprime loans were sold to Fannie Mae and Freddie Mac, the primary financing for home loans. The two FMs packaged those subprime loans in with prime loans, gave them a triple A rating, and sold those bundled debt instruments, called collateralized debt obligations (CDOs), on the markets. With surplus dollars all over the world, those CDOs were bought by Germans, the governments of Japan and China, and others worldwide.

Problems first developed when the word leaked out that many of the debts within those CDOs were uncollectable. Quickly the markets started to seize up. Subsidiaries of banks and hedge funds which had those toxic CDOs in their system—Fannie Mae, Freddie Mac, and others—caught in the middle did not dare put the paper they held on the market. If they did there would be no bids, this would force them to mark down those values on their books, and many, or most, would be insolvent.

Betting on everything that moved, the $415 trillion derivatives market got caught in the squeeze and their leveraged positions started to unwind. To prevent the markets of the world from unwinding, central banks around the world printed money and handed it to the biggest banks in the world whose hedge fund subsidiaries were caught short on their bets.

Banks started hoarding cash so as to support those subsidiaries. Rumors are flying as this book goes to press but no one knows whether this storm can be weathered or whether those markets will unwind. With 10,000 hedge funds out there, it is very doubtful if central banks will, or even can, come to the rescue of them all.

There are several precedents for supporting today’s market upheavals. While the world economy staggered, the world market in paper symbols of wealth missed a few beats on the worldwide stock market collapses of October 19, 1987, the earlier savings and loan and banking crisis in the United States in 1982, the collapse of Japan’s stock and land markets which lasted 15 years, the 1997-98 financial meltdown of Southeast Asia engineered by the imperial centers, and the 2000-2003 40% stock value collapse in the U.S. Traders are now holding their breaths in 2007-08 as they struggle to unload packaged debt instruments loaded with potential defaulting debts and getting no bids.

Wall Street bankers used derivative tools to crash the Japanese land and market bubbles and vulture funds bought up Southeast Asian properties, the purpose of those engineered crashes. By printing ¥35 trillion in 2003-04, equaling $50 for each person on earth, which was converted to dollars to buy US treasuries, Japan evened the score.49

We have yet to see if the enormous sums of accumulated capital in the imperial centers of capital will weather this latest storm, bid the limited available stocks to further atmospheric heights and then crash, whether it will be used to build even more industrial capacity to service a shrunken world consumer market and crash from that excess capacity, or whether a fascist financial and military fix will protect the current monopolizers of capital, or whether the oppressed will break free as the ongoing worldwide populist revolution builds strength.

Bringing the World’s Markets under Control

Buying and selling investments is the legitimate purpose of stock markets; any activity beyond that is gambling. Eliminating monopolization through restructuring primary monopolies—money, land, technology, and communications—into a modern commons and eliminating secondary monopolies, next chapter, through full and equal rights for all would eliminate all need for derivatives and other wasteful speculations. Though the ethereal world of high finance will have disappeared, economic efficiency will have doubled and poverty will be history.

Restructuring Patent Laws Restructures Both Markets & Money

The importance of societies retaining and furthering technical knowledge is demonstrated by China having the basic knowledge required for an industrial revolution at least 800 years before Europe invented and used these technologies. A millennium ago the Chinese were producing massive amounts of iron and steel, including stainless steel. They had invented the compass and rudders for large ships. They had paper, movable type, and the printing press. They built suspension bridges. They had matches, wheelbarrows, wheeled metal plows, mechanical seeders, horse collars, rotary threshing machines and a drill to tap into natural gas. They knew the decimal system, negative numbers, and the concept of zero. And they once knew how to produce primary tools of world conquest, gunpowder and large ships.50 But that technological knowledge was forgotten because of disuse and the lack of a recording system such as today’s patents.

Inventions and innovations are the cornerstones of prosperity. To establish them in social memory and reward the inventors and innovators, those technologies must be recorded, be used, and those inventors and innovators must be well paid. It is necessary to reward both those who had the original innovative ideas and those who first put them to work.

The present policy of restricting access to technology should be changed to one of easy access with proper compensation for inventors, developers, and producers while returning the maximum savings to society.

The patent system could be far simpler and administration costs lowered to almost nothing by evaluating the value of a patent, paying inventors and developers a reasonable capitalized value, and placing their innovations in the public domain. This creates a modern technology commons as per Henry George’s conditional titles to nature’s wealth. The inventors and developers would be well paid, all would be free to use the inventions, and there would be no cost for accounting or for disbursing royalties. The patent’s value will be capitalized with the inventor and the entire society sharing in the gains relatively equally as opposed to the current complex process of capitalization of wealth produced by others and appropriated by monopolists through exclusive titles to nature’s technologies.

Most inventors would want their inventions to have maximum use and opt for instant cash and free use by all. Inventions not originally recognized as valuable, a frequent occurrence, would be proved by developers who would then file development patents, each would be paid a capitalized value, that patent would be released to the public domain, and both inventor and developer would be well paid.

Because producers can use the most efficient technology to remain competitive, businesses and communities would no longer have to shut down because their market was overwhelmed by a competitor with a patent monopoly, capital destroying capital. With feudal exclusive title to nature’s wealth restructured to conditional titles, the world’s communities would be quite secure as all gained maximum benefits from the newest technologies.

The expense and risk involved in product development and market penetration are normally greater than those associated with invention. Through a development patent, developers of technologies should be well paid for their risks.

Under this mutual support structure, new inventions would be available for all to use. The inventors, developers, and producers would be adequately paid for their ideas, capital, labor, and risk. And society would be paid through low-priced products and services.

Again we will point out: “Whether a market is in land or corporate stock roughly 60% of what is being bought and sold under current property rights laws are values produced by nature or a technology of nature, properly belonging to all in relatively equal shares, which have been claimed by monopolists through exclusive titles to nature’s wealth and those appropriated values capitalized by a factor of 10 to 30 times.”

By restructuring the current monopolized patent titles-stock markets to a modern technology commons, pay inventors well and all have equal rights to use any technology, those huge blocs of finance capital owned by monopolists, currently buying and selling monopoly values on the markets, are transposed into relatively equally-shared use values. Assuming all other monopolies and their huge accumulations of what is properly others’ wealth were eliminated, economic efficiency would double and, since each would have full and equal rights and thus obtain their share, poverty would quickly disappear.

Patent monopoly profits are collected through the stock market. With each having full and equal rights to the fruits of nature, the need for 80 to 85% of the offices and staff overseeing, and the businesses and labor servicing, the patent-stock market industry disappear.

Economic efficiency gains from these relatively small changes, but huge effects, in property rights establishing a modern technology commons would, assuming buying power is protected through sharing the remaining productive jobs, equal the invention of electricity.51 Such massive economic efficiency gains require democratic, communitarian oversight to prevent stripping the earth’s resources and to protect the environment.

Again it must be pointed out that wealth appropriated from truly productive labor through exclusive title to nature’s technologies is invested; through taxes or overpriced products and services that principal, plus interest, is paid for by those from whom it was first appropriated; it is again reinvested; and it is again paid for. That impoverishing cycle continues into perpetuity and is broken only by economic collapses as the wealth is concentrated into too few hands, leaving the majority without adequate buying power. The elimination of those huge blocs of appropriated wealth and resultant large increase in economic efficiency and elimination of poverty is the essence of Henry George’s inclusive property rights laws.

Patent marketing rights (monopolization) has been replaced by a social right, the right of all to use any technology. Privately imposed monopoly costs are transposed into equally shared use values costing only 50%, or less, that of previous monopolized values.

Before we address the 4th primary monopoly, communications, through which our rights can be reclaimed, we will address secondary monopolies.

Footnotes

1. Henry George points out that “we must treat the elements of nature as common property.” Protection or Free Trade, p. 280. On pp. 306-08 he speaks of many of the monopolies we cover as just forming. Back to text
2. Forty years ago the United States economy was 30% services and 70% industrial. In 2005, it was 20% industrial and 80% services. We have yet to find out what happens to the world economy when its primary market, a service economy, collapses into a depression. As this is the first service economy, that will be a historical first. Back to text
3. This thesis is easily tested. Factories are only a series of tools. Without tools you must pay a shop to repair anything. Most homes have those simple tools and carry out simple repairs in a few minutes at no cost. Monopolize those tools in the same manner as industrial technology is monopolized and you have to pay someone else to do those repairs. Likewise, eliminate the monopolization of technology through the patent process and other communities and societies can produce their own consumer products. Two monopolizations have been eliminated, that preventing others’ use of a technology and the superstructure—the unneeded share of stock markets—managing that monopoly. This first is proven by the rest of the world quickly industrializing and the second by the roughly 50% drop in price of consumer products that would occur. Back to text
4. “Social capital,” as used here, refers to the physical products of labor that benefits all (roads, schools, airports, harbors, etc). The term is also used by some scholars to refer to the unquantified—but real—value of social interconnections that aid the functioning of society, typically meaning a higher education level. Back to text
5. A large share of the massive wealth distributed had been appropriated from the periphery of empire by imposed inequalities in trade and outright theft. That world trade story is told in the simultaneously published Economic Democracy: A Grand Strategy for World Peace and Prosperity, 2nd edition, by this author. Back to text
6. The first three years of the collapse leading into the Great Depression market values dropped 89%. During the dot.com crash, the market dropped 40% in three years. Creating an enormous bubble in the housing market provided enough buying power to carry the economy above its original high. That bubble started to collapse and as this goes to press central banks all over the world are printing money to shore up the markets and prevent their collapse (follow Democracy Now, Free Speech TV, Link TV, .informationclearinghouse.info, commondreams.org, globalnet news, globalresearch.ca/, and europac.net/). Back to text

Endnotes

1. Doug Henwood, Wall Street (New York: Verso, 1997), p. 7. Back to text
2. J.W. Smith, Economic Democracy: A Grand Strategy for World Peace and Prosperity (Fayetteville, PA: The Institute for Economic Democracy, 2008), chapter 1. Back to text
3. Michael Moffitt, “Shocks, Deadlocks, and Scorched Earth,” World Policy Journal (Fall, 1987), pp. 560-61, 572-73. Back to text
4. William Greider, Who Will Tell the People? (New York: Simon and Schuster, 1992), pp. 378-79, 399-400. Back to text
5. Greider, Who Will Tell the People, p. 399. Back to text
6. Adam Smith, Wealth of Nations (New York: Random House, 1965), p. 64. Back to text
7. John D. Donahue, The Privatization Decision: (New York: Basic Books, 1989). Back to text
8. Public Power Directory and Statistics for 1983 (Washington, DC: American Public Power Association, 1983); Jeanie Kilmer, “Public Power Costs Less.” Public Power Magazine, May/June 1985, pp. 28-31; the late Montana Senator Lee Metcalf and Vic Reinemer, Overcharge (New York: David McKay, 1967). Back to text
9. Edward Winslow Martin, History of the Grange Movement (New York: Burt Franklin, 1967), pp. 62, 70. Back to text
10. Matthew Josephson, Robber Barons (New York: Harcourt Brace Jovanovich, 1962), p. 92; Joe E. Feagin, The Urban RealEstate Game (Englewood Cliffs, NJ: Prentice-Hall, 1983), pp. 57-8; Peter Lyon, To Hell in a Day Coach (New York: J.B. Lippincott, 1968), p. 6; see also Martin, Grange Movement. Back to text
11. Wilfred Owen, Strategy for Mobility (Westport, CT: Greenwood Press, 1978), p. 23. Back to text
12. John Prados, The Presidents’ Secret Wars (New York: William Morrow, 1986), p. 152. Back to text
13. Lewis Mumford, Pentagon of Power (New York: Harcourt Brace Jovanovich, 1964), pp. 134, 139; Stuart Chase, Men and Machines (New York: Macmillan, 1929), chapters 3-4. Back to text
14. Chase, Men and Machines, pp. 42-43. Back to text
15. PBS, Nova (September 2, 1986). Back to text
16. Stuart Chase, The Economy of Abundance (New York: Macmillan, 1934), chapter 8. Back to text
17. Phil Grant, The Wonderful Wealth Machine (New York: Devon-Adair Co., 1953), pp. 301-06. Back to text
18. Dan Nadudere, The Political Economy of Imperialism (London: Zed Books, 1977), p. 251, quoting in part from E. Penrose, The International Patent System, 1951, p. 29. Back to text
19. Ibid, pp. 186, 255. Back to text
20. Karl Marx, Capital (New York: International Publishers, 1967), volume 1, p. 375, footnote 2. Back to text
21. Nadudere, Political Economy of Imperialism, p. 38, quoting Leo Huberman, Man’s Worldly Goods, pp. 128-29. Back to text
22. Lewis Mumford, Technics and Civilization (New York: Harcourt Brace Jovanovich, 1963), pp. 227-28, 438. Read also Nadudere, Political Economy of Imperialism, pp. 51-55. Back to text
23. Chase, Economy of Abundance, p. 166. Back to text
24. Lester Thurow, Head to Head: The Coming Economic Battle Among Japan, Europe, and America (New York: William Morrow, 1992), p. 187. Back to text
25. Grant, Wonderful Wealth Machine, pp. 301-306. Back to text
26. Karl Polanyi, The Great Transformation (Boston: Beacon Press, 1957), p. 277, quoting from Pirenne, Medieval Cities, p. 211. Back to text
27. Marx, Capital, volume 1, pp. 372-74, 428, 435, 562; Eric R. Wolf, Europe and the People Without History (Berkeley: University of California Press, 1982), pp. 273-74, 279. Back to text
28. Richard Barnet, The Lean Years (New York: Simon and Schuster, 1980), p. 260. Back to text
29. J.W. Smith, Economic Democracy: A Grand Strategy for World Peace and Prosperity (Fayetteville, PA, 2nd edition, The Institute for Economic Democracy, 2008), chapter 1. Back to text
30. Howard Zinn, A People’s History of the United States (New York: Harper Colophon Books, 1980), p. 277. Back to text
31. Herman E. Daly, John B. Cobb, Jr., For the Common Good (Boston: Beacon Press, 1989), p. 11. Back to text
32. Robert Lacey, Ford (New York: Ballantine Books, 1986), pp. 118-40; also Juliet Schor, The Overworked American (New York: Basic Books, 1991), p. 61. Back to text
33. Lacey, Ford, pp. 105-06; Brian Tokar, Redesigning Life? The Worldwide Challenge to Genetic Engineering (London: Zed Books, 2001). Back to text
34. Tokar, Redesigning Life?; Stanley Wohl, Medical-Industrial Complex (New York: Harmony Books, 1984), pp. 69-71; Ivan Illich, Medical Nemesis (New York: Bantam Books, 1979), p. 245. Back to text
35. “India Protects its Heritage Against Privatization Theft,” COMER (February 2006), p. 8. Taken from Globe and Mail (December 12, 2005) Back to text
36. Stephen Budiansky, “An Act of Vision for the Developing World,” U.S. News and World Report (November 2, 1987), p. 14. Back to text
37. Jean-Pierre Berlan, “The Commodification of Life,” Monthly Review (Dec. 1989), p. 24. Back to text
38. Alan Weisman, “Columbia’s Modern City,” In Context, No. 42, 1995, pp. 6-8; Los Angeles Times Sunday Magazine, September 25, 1994. Back to text
39. E.K. Hunt, Howard Sherman, Economics (New York: Harper and Row, 1990), p. 166. Back to text
40. Kurt Rudolph Mirow, Harry Maurer, Webs of Power (Boston: Houghton Mifflin Co., 1982), p. 16. Back to text
41. Thurow, Generating Inequality, p. 149. Back to text
42. Ibid, p. 154, (emphasis added). Back to text
43. Chase, Economy of Abundance, p. 165. Back to text
44. Rolf H. Wild, Management by Compulsion (Boston: Houghton Mifflin, 1978), pp. 92, 94-95. Back to text
45. Anthony Banco, “Playing With Fire,” Business Week (September 16, 1987), p. 78. Back to text
46. Charles Mackay, Extraordinary Delusions and Madness of Crowds (New York: Farrar, Straus and Giroux, 1932), pp. 90-97. Back to text
47. Ibid, pp. 1-45; Lester Thurow, The Future of Capitalism: How Today’s Economic Forces Shape Tomorrow’s World (England: Penguin Books, 1996), p. 221; John Train, Famous Financial Fiascoes (New York: Clarkson N. Potter, 1985), pp. 33-41, 108-89. Back to text
48. Mackay, Delusions, pp. 46-88; see also Train, Fiascoes, pp. 88-95; Charles P. Kindleberger, Manias, Panics, and Crashes (New York: Basic Books, 1978), pp. 220-21. Back to text
49. Ellen Hodgson Brown, Web of Debt (Baton Rouge, Third Millennium Press, 2007) pp. 253-54, 387-89, primarily on the crash in Japan and Southeast Asia. Back to text
50. Lester Thurow, The Future of Capitalism: How Today’s Economic Forces Shape Tomorrow’s World (England: Penguin Books, 1996) p. 15; Lester Thurow, Building Wealth: The New Rules for Individuals, Companies, and Nations in a knowledge-Based Economy (New York: HarperCollins, 2000), pp. 85, 102. Back to text
51. For another study see Vandana Shiva’s Protect or Plunder: Understanding Intellectual Property Rights. Back to text

This is a chapter from the book, Money; A Mirror Image Of The Economy. Visit that link for more information about the book.