Transition thinking – The Good Life 2.0

Davie Philip

We need to make an evolutionary leap in the way we do things if we are to make a controlled, planned transition to a post-industrial, low-carbon society. The initiatives developed by the nascent Transition Towns movement suggest that we are up to the challenge, and provide a model for how the more resilient communities needed for the future might be built.

The Emergency

As we slide deeper into an economic recession, one question we often hear is, “how long is this downturn going to last?” There is a commonly held belief that it is only a matter of time before we get back to ‘business as usual’. But what many fail to grasp is the severity of the problems we face and the ‘once-in-a-species’ opportunity that these challenges offer us.

The shape of the recovery is being hotly debated within economic circles, with three possibilities being mooted. One, the possibility of a ‘V’-shaped recovery in which the economy quickly bounces back, is falling out of favour, displaced by the idea that there will be a ‘double-dip’ — a rapid partial recovery followed by another sharp decline. Others still think that the recovery will be ‘U’-shaped — that growth will be restrained and that the economy will take a bit longer to recover. In a 2009 Post Carbon Institute posting, Richard Heinberg argued that the recovery will actually be ‘L’-shaped; that instead of returning to high levels of growth, society will have to get used a much lower level of economic activity. As economic growth is dependent on abundant and growing energy supplies, the expected constraints in global oil availability mean that a ‘V-‘ or ‘U’-shaped recovery is highly unlikely.

Of course, as well as attempting to ‘fix the economy,’ we will need to radically decrease our vulnerability to an over-dependence on oil, coal and gas. This means looking beyond the obvious, i.e. electricity supply or fuel, and rethinking our food, health and almost all other systems. Currently everything we do is dependent upon a non-renewable, climate-changing source of energy: oil. I was born in the year that global oil discovery peaked and in the 45 years since we’ve failed to discover more oil than we had back then. Today we consume four barrels of oil for every barrel discovered and have reached, or will soon reach, the peak in global oil production.

Not that it needs to be explained here, but ‘peak oil’ is the geological term used to describe the time when the amount of oil that can be extracted reaches its limit and begins to decline. Extracting oil after the peak becomes more difficult and expensive, and the amount of oil produced begins to decrease. The term ‘peak oil’ usually relates to worldwide production, but the majority of oil-producing countries have now reached the point where their oil production has peaked and is now declining. Before the recent economic crash, when oil was touching on close to $150 a barrel, awareness of the oil issue was high. With the price now around $80 a barrel, and with the economy collapsing, society seems to be forgetting all about the energy problem.

Climate change has also been slipping from our awareness recently, just as the urgency of taking appropriate responses has become more apparent. According to the Climate Safety Report published by the Public Interest Research Centre in 2008, climate change is accelerating more rapidly and dangerously than even the IPCC had expected. The earlier-than-predicted onset of ice-free Arctic summers will cause additional heating, greenhouse gas emissions and sea-level rise, over and above what has been predicted to date. The melting glaciers, the famine in Darfur, the changing monsoon patterns, the enduring drought in Australia and the widespread loss of species — these all illustrate the global nature of the crisis. Climate change is already impacting the majority of people on this planet, but despite apparent scientific consensus on the issue, the debate in the media, here in Ireland at least, still focuses on whether or not it is happening at all.

Some scientists have warned that the rapid disappearance of all kinds of life, from bacteria and insects to plants and animals, is as dangerous as climate change, and closely related to it. In a Eurobarometer survey taken in 2008, most Irish people said they did not know anything about the loss of biodiversity, despite up to half of all Europe’s birds, butterflies, fish and animals being threatened with extinction.

So it is clear that we are facing not a financial, energy, climate or even a biodiversity crisis per se, but a systemic crisis for which we are completely unprepared. We have now reached the long-predicted ‘limits to growth’ and find ourselves facing a convergence of challenges that are inextricably connected. Through over-population and over-consumption we have overshot Earth’s carrying capacity. We now urgently need to take an evolutionary leap in the way we do things and to design systems from the bottom up in a way that fits the planet’s carrying capacity. And we need to do this together.

The availability of cheap and easily available energy has led to an unprecedented time of individualism; now most of us know the characters of our favourite soap opera better than the people we live amongst. We might be the first generation who has no need for real neighbours, and that loss of community means a loss of resilience. Our global economy is designed to work without any need for community. Our food and energy come from halfway around the world and we have no relationship with the people who produce it. Very little is local and as Robert Putnam notes in Bowling Alone, social capital has been falling in the US and over the past 25 years, attendance at club meetings has fallen 58 percent, family dinners are down 33 percent and having friends visit has fallen 45 percent. It looks like just when we are going to have to have to depend a lot more on our neighbors, we are actually doing less and less together.

We’ve been aware of these unfolding crises for a long time. The “Limits to Growth” report was written over 35 years ago, climate change has been known about for over a century and resource depletion is an issue that many have understood and been trying to alert more people to for decades. The biggest difficulty we face is that the majority of the planet’s citizens still haven’t grasped that a problem exists at all. Or if they do, they can’t comprehend the scale of it.

What I want to explore is how we rise to the challenge of engaging as many people as possible in making the transition to a post-industrial society. How do we build sustainable communities that can survive and thrive in a future that will be characterised by change, uncertainty and surprise? Can we do this in a way that liberates the ingenuity of the human spirit and galvanizes our most powerful impulses to create and evolve? Can the new social movement called Transition Towns be a catalyst towards the development of low-carbon, resilient and healthy communities we need? Are the emerging Transition initiatives up to the challenge, and what more could this nascent movement be doing?

The Good Life 2.0

Web 2.0 is the term used to signify the new upgraded Internet, which is community-based, interactive and user-driven. As the emerging crisis is too overwhelming for individuals to face alone, I want to propose a ‘Good Life 2.0’ — a response to the challenges of the current era based on an “upgrade” of the ideas of the 1970s self-sufficiency movement and the values of community, together with everything we have learned in the 30 years since.

Do you remember The Good Life, the TV show that ran from 1975 to ’78? One of Britain’s favourite sit-coms, it popularised the notion of getting out of the rat race and being self-sufficient. Tom and Barbara, Richard Briers’ and Felicity Kendal’s characters, converted their suburban garden into a farm, kept pigs and chickens and grew their own food.

The first series was launched just after the first oil shock, amid one of the UK’s worst economic downturns. It was actually based on the writings of John Seymour, the father of self-sufficiency. His books give a comprehensive introduction to the ‘Good Life’, covering everything from growing your own crops, animal husbandry, wine making and bee keeping, to building, renewable energy and much, much more. John gained considerable experience living a self-sufficient life, first in Suffolk, then Pembrokeshire and then in Ireland, where he established the School of Self-Sufficiency in Co. Wexford. He also travelled around the world and wrote and made films exposing the unsustainability of the global industrial food system. Sadly, on the 14th of September 2004, John Seymour passed away at the ripe old age of 90.

Over the last five years of his life I had an opportunity to spend some time with John. We campaigned together to stop the planting of genetically engineered sugar beet, which culminated with seven of us in a New Ross court-house. But that’s another story.

Surprisingly, John once told me that he was actually wrong about self-sufficiency. On a visit to his smallholding in Wexford, he shared with me his conclusion that it would be too difficult to sustain the noble effort of living off-grid and providing for all your own needs on your own land. Self-sufficiency wasn’t enough. His new thinking was something he called co-sufficiency — self-reliant local communities that could provide the social relationships essential for facing an uncertain future, together. Seymour predicted that we would need strong, connected communities that could work together to meet their needs and make the transition to a post-industrial economy that is not dependent on fossil fuel.

If Tom and Barbara of The Good Life were striving to be self-sufficient today, they would probably have joined their local Transition Town group and be engaged in the building of food and energy security with their neighbours.
That’s ‘The Good Life 2.0’, a community approach to building local resilience, because, as Richard Heinberg writes in his book Powerdown, “personal survival depends on community survival.”

Making the Transition

At the heart of the Transition Towns movement is the building of relationships with our neighbours and working with them on projects of common interest. In the coming years we will need to live more locally and work co-operatively in our neighborhoods and towns. The process is taking root throughout the world, with thousands of communities now adopting the model. Even the fictional town of Ambridge in the Radio 4 programme The Archers has become a Transition Town.

Construction work at Cloughjordan ecovillage in early summer 2010. Photo: Albert Bates.

I often say that the Transition process was born in Ireland, a statement with some truth to it. Rob Hopkins, who is recognised as the founder of the Transition movement, lived in Ireland for 12 years and it was here that the seeds were sown. I first met Rob in 1997 at one of the Sustainable Earth Fairs at Maynooth University where I was studying. This was an early gathering of advocates of sustainability from around Ireland, and Rob’s passion for Permaculture and sustainability was infectious even then. It was around this time that Marcus McCabe, one of Ireland’s early adopters of Permaculture, held a meeting on the subject of eco-villages in Monaghan. He expected about 20 people to turn up but so many people arrived that it had to be relocated to a bigger venue. At this meeting Rob met Greg Allen and Gavin Harte and, with them, set up Baile Dulra, an idea for a sustainable community based on permaculture principles; they spent the next couple of years developing the idea and looking for land. This project was the precursor to the Hollies in West Cork and the Ecovillage in Cloughjordan, Co. Tipperary (where I now live).

Following an amicable parting of ways, Rob went on, with his partner Emma and Thomas & Ulrike Riedmuller, to found The Hollies, the centre for practical sustainability in West Cork, Ireland. From here Rob developed and taught on the two-year Permaculture course in Kinsale community college. In the years leading up to the development of the energy-descent action plan prototype by Rob and his students in Kinsale, FEASTA had held a number of events that introduced and popularised the ideas of peak oil and explored the ramifications for our economy and society. I remember seeing Colin Campbell speaking at a FEASTA event in Dublin in the year 2000 and just not getting the importance of the geological turning point of peak oil. It wasn’t until FEASTA’s landmark three-day conference in Thurles in 2002 that I got it. There, Richard Douthwaite, David Fleming, Colin Campbell and many other ‘early toppers’ really illuminated the issues at stake. Interestingly, the event was called Before the Wells Run Dry, Ireland’s Transition to Renewable Energy. Indeed, it was this conference, and of course Greg Green and Barry Silverstone’s now classic film The End Of Suburbia, that were responsible for many of Ireland’s sustainability advocates’ ‘peak oil moment’. Sustainability, seen through the lens of resource depletion, makes even more urgent the work of developing resilient communities, permaculture and systems thinking.

In Kinsale in 2004, on the first day of a new term, Rob Hopkins and his Permaculture 2nd-year students watched The End of Suburbia and heard a talk that followed by Colin Campbell. This “peak oil double bill” culminated in what Rob describes as a week of PPSD, post-petroleum stress disorder in the college, and led to the development of the Kinsale Energy Descent Action Plan as their end-of-year project. This document, and the landmark event that launched it in 2005, changed the landscape of peak-oil response forever. David Holmgren, Richard Heinberg and a host of others including our now Minister for Energy, Eamon Ryan, spent three days in West Cork planning how we would best manage our transition to a low-energy future. This event led in turn to the formation of a new group in the town driven by some of the students, local activists and residents of Kinsale. Known as Kinsale Transition Town, the group enjoyed some initial successes, but it wasn’t until Rob and Emma relocated from West Cork to Totnes in Devon, England, that the Transition process emerged. In Totnes, Rob began working with locals on what would become Transition Town Totnes, the Transition process and the Transition Network.

In a few short years, Transition culture has gone viral and an international network of Transition initiatives has rapidly grown as cities, islands, towns and rural villages sign up to the process. Thousands now exist, with communities setting out to radically reduce their carbon emissions while at the same time developing further their ability to cope with a future that is very uncertain. Transition is a process that offers pathways, new ways of thinking and a set of tools that could help us respond to the shocks that we will inevitably face.

The Transition model helps communities come together to develop the capability to provide most of its essential needs — food, energy, water and raw materials — from a number of local sources. The model ensures that in the event of a system failure, communities can look after themselves. The process comes with a ‘cheerful disclaimer’ that states that it is a social experiment on a massive scale; it is not known if it will work.

One of the most striking characteristics of ‘Transition’ communities is their positivity and creativity; the process is purposely designed to be non-threatening and engaging, so people feel at ease to explore different ideas and approaches. Its strength lies in its ability to bring all sorts of people together and to be greater than the sum of its parts. There is room for everyone.

Planning our energy descent

Through a loose process Transition initiatives set out to build the capacity of the community to plan its energy descent. The goal is to envision a desirable post–fossil fuel future and then “backcast” the incremental steps needed to realise that future. This is called an Energy Descent Action Plan, and is the process at the core of Transition thinking: planning how to wean ourselves off fossil-fuel energy and do a lot more for ourselves.

“The concept of energy descent, and of the Transition approach, is a simple one: that the future with less oil could be preferable to the present, but only if sufficient creativity and imagination are applied early enough in the design of this transition.” Rob Hopkins, The Transition Handbook

Underpinning the Transition process is a belief that life with less energy is inevitable and that it’s better to plan for it than be taken by surprise. This may sound like prudent advice, but it is surprisingly difficult for us to imagine the future and plan the transition needed to get there.

Instead of waiting for someone else, or some other agency, to do something about the emergency we face, the communities embarking on the Transition process are endeavoring to act for themselves, knowing that if they don’t do something, no-one will. Examples of Transition initiatives include starting community gardens and allotments, creating community-supported agriculture systems (CSAs), localising energy production, starting car clubs and “future proofing” their houses and public buildings. Some have even introduced local currencies to keep money circulating in their local area. All of these build community and offer the potential of an extraordinary transformation in our economic and social systems.

From vulnerability to resilience

Transition initiatives maintain that building local resilience will help us weather the fast-approaching storms. The flip-side of vulnerability, resilience is the ability of a system to hold together and function in the face of disruption and shock. This means having the capacity to deal with adversity and to find new ways of doing things when current approaches become redundant or fail. An authoritative definition is offered from a report commissioned by the International Council for Science (ICSU) in preparation for the 2002 World Summit on Sustainable Development (WSSD):

“Resilience, for social-economic-ecological systems, is related to

(a) the magnitude of novelty or shock that the system can absorb and remain within a given state

(b) the degree to which the system is capable of self-organization

(c) the degree to which the system can build capacity for learning and adaptation

When massive transformation is inevitable, resilient systems contain all of the necessary components for renewal and reorganization. Intentional management that builds resilience can sustain social-economic-ecological systems in the face of surprise, unpredictability and complexity.”

Because the possibility is rising fast of abrupt breakdown in our vital social, economic and environmental systems, we need to find ways to accelerate the building of resilient local communities.

We in Ireland are more reliant on imported oil for our energy requirements than almost every other European country. This leaves us very vulnerable to interruptions in supply. In response to this, Transition initiatives facilitate the design of a ‘powerdown’ strategy that helps us cope with such shocks and at the same time greatly increases our ‘well-being’ and resilience. Although debate about energy futures and the top-down strategies needed for a low-carbon economy has focused mainly on technology and supply-side replacements for fossil fuels, much work is underway by Transition initiatives on reducing our energy demand and exploring the prospects for community responses to this “new emergency”.

Going further

So, are Transition initiatives up to the challenge of building community resilience and preparing us for the new emergency? One problem that needs to be overcome is that, generally, the people attracted to Transition are the usual suspects, making it a case of preaching to the converted. This emerging social movement must therefore explore ways to move beyond the familiar demographic, get their message out to the ‘unconverted’ and bring much greater diversity into their initiatives.

Ecology is all about relationships; the more diverse a system, the better. In Transition initiatives in Ireland and the UK, I’ve noticed a predominance of greenies, slow foodies, and the middle-class, middle-aged, white, urban types. Where are the working classes, middle Ireland, the new ethnic communities, faith communities, the youth and the traditional left? If the movement fails to build diversity and get these sectors of society on board, prospects are poor for a gentle descent.

One barrier to getting more people involved in Transition may be a perception that it is full of “New Age” principles or ‘hippy dippy’ notions. Nothing turns some people off more than the thought of being asked to sit in a circle and share how they feel about the state of the world or, worse, themselves. No-one wants to feel uncomfortable, that they don’t know enough to participate or that it all might be some kind of cult. This constitutes a massive barrier to the building of resilient communities and the Transition movement needs to consider how to develop relationships with people that hold different values.

We need to live with those people in our communities with whom we don’t necessarily share the same worldview or values. We’re all in this together and we need to get through it together. Transition initiatives need to liaise with other local groups and networks as well as finding innovative ways of creating forums for bringing people together and maximising the opportunities to share ideas and freely express opinions. That in many respects it does so already is one of its strengths; the movement offers many examples of the bringing together of young and old, rich and poor, male and female, the business man and the activist — even the right and the left.

Building a mass movement demands an understanding of where people are at. It means not turning people off before they hear what we have to say. For me, it highlights the need, above all, for flexibility and the ability to adapt the language and techniques we use. Discussing the potential for safe communities, warm homes and local jobs might be more palatable to traditional middle Ireland than attempting to, initially at least, discuss climate change and peak oil with them.

In 2008, Paul Chatterton and Alice Cutler of the Trapese Collective, a Popular Education non-profit organisation, wrote a critique of the Transition process called “The Rocky Road to a Real Transition.” They argued that unless we identify and confront the vested interests in the media, government and business, and reject all systems of control, we will be unable to make a real transition. This was an interesting critique as in my experience many people involved in Transition initiatives see themselves as activists and aren’t opposed to challenging power. As Rob Hopkins points out in his response to the paper, ‘I make no apologies for the Transition approach being designed to appeal as much to the Rotary Club and the Women’s Institute as to the authors of this report.’ One of the strengths of the Transition movement is the blame-free dialogue it encourages in this same spirit.

People involved in Transition tend not to dismiss global movements struggling for justice around the world and many, in their own capacity, do what they can to support the oppressed. However, the Transition process is more about coming together to demonstrate what is possible and what can be done rather than taking to the streets. Transition nurtures a common purpose: to facilitate the self-organisation needed to rebuild community and at the same time massively reduce our fossil-fuel dependency.

In response to the Trapese Collective’s argument that Transition shies away from confronting politics, Hopkins writes in his blog that, for him, ‘Transition is something that sits alongside and complements the more oppositional protest culture, but is distinctly different from it. It is a different tool. It’s designed in such a way as to come in under the radar.’

When you scratch the surface, Transition is highly subversive, but most of all it’s positive and can be fun. As Richard Heinberg says, ‘Transition is more like a party than a protest march.’ We can’t smash the system entirely as we are part of it. We need to short-circuit the system by building an alternative one that works.

I do think that the future will be rocky. And I understand, too, that while planning for a gentle transition is one thing, there’s a concern out there that the energy descent may not be as slow as the classic slope of Hubert’s curve suggests. For most, it seems, the future may be chaotic, confusing and violent. The nexus of challenges will probably lead to increases in criminal activity and, in many places in the world, to war or unrest, both civil and transnational. In some places, the new emergency will most likely bring with it a rise in extreme right-wing and religious fundamentalism. It is said that it is easier to slide down a slope rather than climb up it, but as we move into the unchartered waters of energy descent, we may find that preparing for civil disruption is just as important as building our local economies and growing our own food.

Emergency preparedness

I am often accused by some friends of being overly pessimistic and constantly told that things are not as bad as I think they are. Conversely, many colleagues accuse me of being overly optimistic and that things are a lot worse than I think they are. On top of the credit crunch, rising unemployment and the unfolding environmental crises, what if, as Feasta’s New Emergency conference suggests, we are actually on the cusp of collapse? Will the community building and bottom-up approaches of Transition be enough? At the 2009 Transition gathering in London, Richard Heinberg was beamed through the Internet to give a presentation titled “Emergency Preparedness.” In this session he introduced the idea of top-down emergency planning and the formation of disaster-management groups. He stressed that the development of these would not compete with Transition strategies; they would just be working at a different level.

While disaster-management groups don’t sound as much fun as Transition initiatives, this approach will be very much required as part of our response to the problems we face; the two are not mutually exclusive. Heinberg also stressed that we will all have to get ready for rapid and deep shocks and play a part in the development of short-term emergency plans for our communities, regions and nations. Emphasising the need for more preparedness for such rapid change, he proposed that Transition initiatives should form working groups to identify people and organisations with something to offer emergency planning. He suggested contacting mainstream organisations responsible for the systems needed in an emergency in our area, working with them to develop contingency plans and strategies for emergency preparedness in their own fields and helping them scale these up quickly.

Building resilient communities

For ten years I have been involved with a disparate group of people in a unique and innovative project that is striving to create a fresh blueprint for modern sustainable living in rural North Tipperary where resilience and community are very much to the fore.

I have moved into one of the first houses to be occupied in this innovative development, which is integrating with the existing town of Cloughjordan; this makes it a very different model to most established eco-villages. Work has started on over 30 eco-homes and 45 families from the project have now located to Cloughjordan. The development, which is being progressed by a community-owned educational charity, Sustainable Projects Ireland, is a lot more than an eco-housing estate and has many elements that will provide community resilience.

Homes will be surrounded by an edible landscape of fruit and nut trees, vegetables and herbs. A tree nursery has been established to nurture hundreds of trees for planting along the pathways and in the community gardens that are dispersed throughout the residential area. Larger community and personal allotments have been established to provide more space for growing food. The remaining eco-village land is dedicated to farming and woodland. The Cloughjordan Community Farm is located on 28 acres on the outskirts of the village and also utilises two fields on the eco-village land. This example of CSA, Community Supported Agriculture, has been a fantastic way to build a bridge between the residents of the new community and the old.

This paper has focused on the need to build community resilience in a world that is rapidly crashing around us. From its Irish roots the Transition process has taken off and provides a way to mainstream the ideas of sustainability and help us to revitalise our local economies. I believe that Transition, although still a young movement, can be a catalyst towards the development of low-carbon, resilient and healthy communities. Its strength will be its ability to share what is working and what is not through a global network of motivated and enthusiastic people who are learning how to cope and adapt to the challenges of these turbulent times.

There is an old African proverb, quoted by Al Gore in his Nobel Prize acceptance speech: “If you want to go quickly, go alone. If you want to go far, go together.” To make the transition, we need to go far and we need to go quickly. To maintain a good life in the 21st century we will need to rebuild our social, economic and environmental systems, localise our communities and most importantly, we will have to learn to do all this together.

Here are ten steps or action points that I think could help us to develop our personal and community resilience.

Understand the context – We need to understand where we are at and be observant of limits, both ecological and our own. Awareness of what the converging challenges facing us are and what the responses might be is an essential first step in developing our resilience to cope.

Take a helicopter view – We live in a complex living system so we have to be able to see systems at work. Being able to take a whole systems perspective is of the highest importance and it is fundamental to understand our human systems through the lens of living systems. Taking a Permaculture course will give us the tools to begin to apply this thinking to the development of local resilience.

Build community – Make social networks real, get to know your neighbours and develop a stronger sense of place. Focus on building relationships with others and developing trust. In these times it is vital that we break out of our specialist silos of interest, establish partnerships and strengthen the bonds with others pursuing similar objectives. Join or start a Transition Initiative.

Map your assets – As a community, identify and strengthen your physical, social and human assets. Value the tangible and the intangible, especially the skills and talents of local people.

Develop new skills – In a changing world new skills and knowledge will be needed. Identify what capacities you and your community need to build.

Powerdown – Do everything you can to reduce your dependency on fossil fuels. Future proof your homes and buildings and minimise your need to travel.

Eat locally – Learn to produce food, start a garden and build relationships with local food producers. Develop community food systems.

Lead – As a key aspect of resilience is the ability to self-organise; a leader in this context needs to help people move away from a culture of dependency and become leaders themselves. We need to equate leadership not with being in charge but rather with the ability to inspire initiative and new thinking with those around us.

Catalyse – The journey to resilience will be a challenging one. New capacities are required — ones that catalyse new thinking and action. The ability to kindle a shared vision or a common purpose is vital.

Keep learning – Education happens throughout life, formally and informally and reflecting on, and learning from, our collective experiences will build resilience.

The supply of money in an energy-scarce world

Richard Douthwaite

Money has no value unless it can be exchanged for goods and services but these cannot be supplied without the use of some form of energy. Consequently, if less energy is available in future, the existing stock of money can either lose its value gradually through inflation or, if inflation is resisted, be drastically reduced by the collapse of the banking system that created it. Many over-indebted countries face this choice at present — they cannot preserve both their banking systems and their currency’s value. To prevent this conflict in future, money needs to be issued in new, non-debt ways.

The crux of our present economic problems is that the relationship between energy and money has broken down. In the past, supplies of money and energy were closely linked. For example, I believe that a gold currency was essentially an energy currency because the amount of gold produced in a year was determined by the cost of the energy it took to extract it. If energy (perhaps in the form of slaves or horses rather than fossil fuel) was cheap and abundant, gold mining would prove profitable and, coined or not, more gold would go into circulation enabling more trading to be done. If the increased level of activity then drove the price of slaves or steam coal up, the flow of gold would decline, slowing the rate at which the economy grew. It was a neat, natural balancing mechanism between the money supply and the amount of trading which worked rather well.

In fact, the only time it broke down seriously was when the Spanish conquistadors got gold for very little energy — by stealing it from the Aztecs and the Incas. That damaged the Spanish economy for many years because it meant that wealthy Spaniards could afford to buy from abroad rather than using the skills of their own people, which consequently did not develop. It was an early example of “the curse of oil” or the “paradox of plenty,” the paradox being that that countries with an abundance of non-renewable resources tend to develop less than countries with fewer natural resources. Britain suffered from this curse when North Sea oil began to come ashore, distorting the exchange rate and putting many previously sound firms out of business.

19th-century gold rushes were all about the conversion of human energy into money as the thousands of ordinary 21st-century people now mining alluvial deposits in the Amazon basin show. Obviously, if supplies of food, clothing and shelter were precarious, a society would never devote its energies to finding something that its members could neither eat, nor live in, and which would not keep them warm. In other words, gold supplies swelled in the past whenever a culture had the energy to produce a surplus. Once there was more gold available, its use as money made more trading possible, enabling a society’s resources to be converted more easily into buildings, clothes and other needs.

Other ways of converting human energy into money have been used besides mining gold and silver. For example, the inhabitants of Yap, a cluster of ten small islands in the Pacific Ocean, converted theirs into carved stones to use as money. They quarried the stones on Palau, some 260 miles away and ferried them back on rafts pulled by canoes, but once on Yap, the heavy stones were rarely moved, just as no gold has apparently left Fort Knox for many years. According to Glyn Davies’ mammoth study, The History of Money, the Yap used their stone money until the 1960s.

Wampum, the belts made from black and white shells by several Native American tribes on the New England coast, is a 17th-century example of human-energy money. Originally, the supply of belts was limited by the enormous amount of time required to collect the shells and assemble them, particularly as holes had to be made in the shells with Stone Age technology – drills tipped with quartz. The currency was devalued when steel drill bits enabled less time to be used and the last workshop drilling the shells and putting them on strings for use as money closed in 1860.

The last fixed, formal link between money and gold was broken on August 15, 1971, when President Nixon ordered the US Treasury to abandon the gold exchange standard and stop delivering one ounce of gold for every $35 that other countries paid in return. This link between the dollar and energy was replaced by an agreement that the US then made with OPEC through the US-Saudi Arabian Joint Commission on Economic Cooperation that “backed” the dollar with oil. [1] OPEC agreed to quote the global oil price in dollars and, in return, the US promised to protect the oil-rich kingdoms in the Persian Gulf against threat of invasion or domestic coups. This arrangement is currently breaking down.

The most important link between energy and money today is the consumer price index. The central banks of every country in the world keep a close eye on how much their currency is worth in terms of the prices of the things the users of that currency purchase. Energy bills, interest payments and labour costs are key components of those prices. If a currency shows signs of losing its purchasing power, the central bank responsible for managing it will reduce the amount in circulation by restricting the lending the commercial banks are able to do. This means that, if energy prices are going up because energy is getting scarcer, the amount of money in circulation needs to become scarcer too if it is to maintain its energy-purchasing power.

A scarcer money supply is a serious matter because the money we use was created by someone somewhere going into debt, and if there is less money about, interest payments make those debts harder to repay. Money and debt are co-created in the following way. If a bank approves a loan to buy a car, the moment the purchaser’s cheque is deposited in the car dealer’s account, more money — the price of the car — comes into existence, an amount balanced by the extra debt in the purchaser’s bank account. Consequently, in the current monetary system, the amount of money and the amount of debt are almost equal and opposite. I say “almost” as borrowers have more debt imposed on them every year because of the interest they have to pay. If any of that interest is not spent back into the economy by the banks but is retained by them to boost their capital reserves, there will be more debt than money.

Until recently, if the banks approved more loans and the amount of money in circulation increased, more energy could be produced from fossil-fuel sources to give value to that money. Between 1949 and 1969 — the heyday of the gold exchange standard under which the dollar was linked to gold and other currencies had exchange rates with the dollar — the price of oil was remarkably stable in dollar terms. But when the energy supply was suddenly restricted by OPEC in 1973, two years after the US broke the gold-dollar link, and again in 1979, the price of energy went up. There was just too much money in circulation for it to retain its value in relation to the reduced supply of oil.

The current “credit crunch” came about because of a huge increase in the price of energy. World oil output was almost flat between September 2004 and July 2008 for the simple reason that the output from major oil fields was declining as fast the production from new, smaller fields was growing. Consequently, as more money was lent into circulation, oil’s price went up and up, taking the prices of gas, coal, food and other commodities with it. The rich world’s central bankers were blasé about these price increases because the overall cost of living was stable. In part, this was because lots of cheap manufactured imports were pouring into rich-country economies from China and elsewhere, but the main reason was that a lot of the money being created by the commercial banks’ lending was being spent on assets such as property and shares that did not feature in the consumer price indices they were watching. As a result, they allowed the bank lending to go on and the money supply — and debt — to increase and increase. The only inflation to result was in the price of assets and most people felt good about that as it seemed they were getting richer, on paper at least. The commercial banks liked it too because their lending was being backed by increasingly valuable collateral. What the central banks did not realise, however, was that their failure to rein in their lending meant that they had broken the crucial link between the supply of energy and that of money.

This break damaged the economic system severely. The rapid increase in energy and commodity prices that resulted from the unrestricted money supply meant that more and more money had to leave the consumer-countries to pay for them. The problem with this was that a lot of the money being spent was not returned to the countries that spent it in the form in which it left. It went out as income and came back as capital. I’ll explain. If I buy petrol for my car and part of the price goes to Saudi Arabia, I can only buy petrol again year after year if that money is returned year after year to the economy from which my income comes. This can happen in two ways, one of which is sustainable, the other not. The sustainable way is that the Saudis spend it back by buying goods and services from Ireland, or from countries from which Ireland does not import more than it exports. If they do, the money returns to Ireland as income. The unsustainable way is that the Saudis lend it back, returning it as capital. This enables Ireland to continue buying oil but only by getting deeper and deeper into debt.

As commodity prices rose, the flow of money to the energy and mineral producers increased so rapidly that there was no way that the countries concerned could spend it all back. Nor did they wish to do so. They knew that their exports were being taken from declining resources and that they should invest as much of their income as possible in order to provide an income for future generations when the resources were gone. So they set up sovereign wealth funds to invest their money, very often in their customers’ countries. Or they simply put their funds on deposit in rich-country banks.

The net result was that a lot of the massive increase in the flow of income from the customers’ economies became capital and was lent or invested in the commodity consumers’ economies rather than being spent back in them. This was exactly what had happened after the oil price increases in 1973 and 1979. The loans meant that, before the money became available again for people to spend on petrol or other commodities, at least one person had to borrow it and spend it in a way that converted it back to income.

This applied even if a sovereign wealth fund invested its money in buying assets in a consumer economy. Suppose, for example, the fund bought a company’s outstanding shares rather than a new issue. The sellers of the shares would certainly not spend the entire amount they received as income. They would place most of their money on deposit in a bank, at least for a little while before they bought other assets, and people other than the vendors would have to borrow that money if it was going to be spent as income. As a result, it often took quite a lot of borrowing transactions before the total sum arrived back in people’s pockets.

For example, loans to buy existing houses are not particularly good at creating incomes whereas loans to build new houses are. This is because most of the loan for an existing house will go to the person selling it, although a little will go as income to the estate agent and to the lawyers. The vendor may put the money on deposit in a bank and it will have to be lent out again for more of it to become income. Or it may be invested in another existing property, so someone else gets the capital sum and gives it to a bank to lend. A loan for a new house, by contrast, finances all the wages paid during its construction so a lot of it turns into income. The building boom in Ireland was therefore a very effective way of getting the money the country was over-spending overseas and then borrowing back converted into incomes in people’s pockets. Direct foreign borrowing by governments to spend on public sector salaries is an even more effective way of converting a capital inflow into income.

We can conclude from this that a country that runs a deficit on its trade in goods and services for several years, as Ireland did, will find that its firms and people get heavily in debt because a dense web of debt has to be created within that country to get the purchasing power, lost as a result of the deficit, back into everyone’s hands. This is exactly why the UK and United States are experiencing debt crises too. The US has only had a trade surplus for one year — and that was a tiny one — since 1982 and the UK has not had one at all since 1983.

Table 1: The worst external debtors per $1,000 of GDP in 2006





United Kingdom


























DEFINITION: Total public and private debt owed to non-residents repayable in foreign currency, goods, or services. Per $ GDP figures expressed per 1,000 $ gross domestic product.
Source: CIA World Factbooks 18 December 2003 to 18 December 2008

Table 2: Ireland’s gross external debt triples over five years

CSO data for the final quarter of each year (m)

















Table 3: The world’s biggest balance of payments deficits at the height of the boom in 2007

Deficit, millions

Ranking of absolute size of deficit

Population, millions

Deficit per head





















United States










United Kingdom

























South Africa










It is notable that all the eurozone countries experiencing a debt crisis — the “PIIGS” Portugal, Ireland, Italy, Greece and Spain — appear in this table and that the three worst deficits on a per capita basis are those of Greece, Spain and Ireland. The countries in italics have their own currencies and are thus better able to correct their situations.

Source: CIA World Factbook, 18 December 2008, with calculations by the author.

The debts incurred by the current account–deficit countries were of two types: the original ones owed abroad and the much greater value of successor ones owed at home as loans based on the foreign debt were converted to income. Internal debt — that is, debt owed by the state or the private sector to residents of the same country — is much less of a burden than foreign debt but it still harms a country by damaging its competitiveness. It does this despite the fact that paying interest on the debt involves a much smaller real cost to the country since most of the payment is merely a transfer from one resident to another. (The remainder of the payment is taken in fees by the financial services sector and the increase in indebtedness has underwritten a lot of its recent growth.)

Internal debt is damaging because a country with a higher level of internal debt in relation to its GDP than a competing country will have higher costs. This is because, if the rate of interest is the same in both countries, businesses in the more heavily indebted one will have to allow for higher interest charges per unit of output than the other when calculating their operating costs and prices. These additional costs affect its national competitiveness in exactly the same way as higher wages. Indeed, they are the wages of what a Marxist would call the rentier class, a class to which belongs anyone who, directly or indirectly, has interest-bearing savings. A country’s central bank should therefore issue annual figures for the internal-debt to national income ratio.

While internal debt slows a country up, external debt can cause it to default. In their book This Time Is Different, Carmen Reinhart and Ken Rogoff consider external debt in two ways — in relation to a country’s GNP and in relation to the value of its annual exports.

Table 4: How oil imports commandeered an increased share of Ireland’s foreign earnings.

Mineral fuel imports


Fuel cost as % of GNP


Fuel cost as % of export earnings

















































Source: CSO data with calculations by the author.

The second ratio is the more revealing because exports are ultimately the only means by which the country can earn the money it needs to pay the interest on its overseas borrowings. (A country’s external debt need never be repaid. As its loans become due to be repaid they can be replaced with new ones if its creditors are confident that it can continue to afford to pay the interest.) The book examines 36 sovereign defaults by 30 middle-income countries and finds that, on average, a country was forced to default when its total public and private external debt reached 69.3% of GNP and 230% of its exports.

Poorer countries lend to the world’s richest ones

Graph 2: Rich countries have borrowed massively from “developing” and “transition” countries over the past ten years. This graph shows the net flow of capital. The funds borrowed came predominantly from energy and commodity export earnings. Source: World Situation and Prospects, 2010, published by the UN.

Table 5: The most over-indebted countries at the height of the boom in 2007


Total state & private external debt, billions


earnings billions



external debt to exports





external debt to GDP


United Kingdom














United States





































































Countries that exceed the average level at which countries in the Reinhart and Rogoff study defaulted are marked in a darker shade.

As Table 5 shows, almost a dozen rich countries are in danger of default by the Reinhart-Rogoff criteria. The total amount of debt in the world in 2010 is roughly 2.5 times what it was ten years ago in large part as a result of the spend-and-borrow-back process. This means that there is 2.5 times as much money about, but not, of course, 2.5 times as much energy. If much of that new money was ever used to buy energy, the price of energy would soar. In other words, money would be devalued massively as the money-energy balance was restored. The central banks are determined to prevent this happening, as we will discuss in a little while.

World debt more than doubles in ten years

Graph 3: Rich-country debt has grown remarkably in the past ten years because of the amount of lending generated by capital flows from fossil energy– and commodity-producing nations was used to inflate asset bubbles. The emerging economies, by contrast, invested borrowed money in increasing production. As a result, their debt/GDP ratio declined. Source: The Economist.

Most of the world’s increased debt is concentrated in richer countries. Their debt-to-GDP ratio has more than doubled whereas in the so-called “emerging economies” the debt-to-GDP ratio has declined. This difference can be explained by adapting an example given by Peter Warburton in his 1999 book, Debt and Delusion. Suppose I draw 1,000 on my overdraft facility at my bank to buy a dining table and chairs. The furniture store uses most of its margin on the sale to pay its staff, rent, light and heat. Say 250 goes this way. It uses most of the rest of my payment to buy new stock, say, 700. The factory from which it orders it then purchases wood and pays its costs and wages. Perhaps 650 goes this way, but since the wood is from overseas, 100 of the 650 leaks out of my country’s economy. And so I could go on, following each payment back and looking at how it was spent and re-spent until all the euros I paid finally go overseas. The payments which were made to Irish resident firms and people as a result of my 1,000 loan contribute to Irish national income. If we add up only those I’ve mentioned here — 1,000 + 250 + 700 + 550 — we can see that Irish GDP has increased by 2,500 as a result of the 1,000 debt that I took on. In other words, the debt-to-GDP ratio was 40%.

As debt increases, US economy grows by less and less

Graph 4: Because borrowings have been invested predominantly in purchasing assets rather than in production capacity, each increase in borrowing in the US has raised national income by less and less. The most recent bout of borrowing — to rescue the banking system — actually achieved negative returns because it failed to stop the economy contracting. Graph prepared by Christopher Rupe and Nathan Martin with US Treasury figures dated 11 March 2010. Source:

Now suppose that rather than buying furniture, I invest my borrowed money in buying shares from someone who holds them already, rather than a new issue. Of the 1,000 I pay, only the broker’s commission and the taxes end up as anyone’s income. Let’s say those amount to 100. If so, the debt-to-GDP ratio is 1000%.

So one reason why the debt burden has grown in “rich” countries and fallen in “emerging” ones is the way the debt was used. A very much higher proportion of the money borrowed in some richer countries went to buying up assets, and thus bidding up their prices, than it did in the poorer ones. After a certain point in the asset-buying countries, it was the rising price of assets that made their purchase attractive, rather than the income that could be earned from them. Rents became inadequate to pay the interest on a property’s notional market value, while in the stock market, the price-earnings ratio rose higher and higher.

Only a small proportion of the money created when the banks lent money to buy assets was spent in what we might call the real economy, the one in which everyday needs are produced and sold. The rest stayed as what the money reform activist David J. Weston called “stratospheric money” in his contribution to the New Economics Foundation’s 1986 book The Living Economy; in other words, money that moves from bank account to bank account in payment for assets, with very little of it coming down to earth. The fraction that does flow down to the real economy each year is normally balanced — and sometimes exceeded — by flows in the other direction such as pension contributions and other forms of asset-based saving. The flows in the two directions are highly unstable, however, not least because those who own stratospheric assets know that they can only convert them to real-world spending power at anything like their current paper value if other people want to buy them. If they see trouble coming, they need to sell their assets before everyone else sees the trouble too and refuses to buy. This creates nervousness and an incentive to dump and run.

If all asset holders lost all faith in the future and wanted to sell, prices would fall to zero and the loans that the banks had secured on their value would never be repaid. The banks would become insolvent, unable to pay their depositors, so the huge amounts of money that were created when the asset-backed loans were approved would disappear, along with the deposits created by loans given out to finance activities in the real economy. In such a situation, the deposit guarantees given by governments would be of no avail. The sums they would need to borrow to honour their obligations would be beyond their capacity to secure, particularly as all banks everywhere would be in the same situation.

No-one wants such a situation so, since a decline in asset values could easily spiral downwards out of control, the only safe course is to keep the flow of money going into the stratosphere greater than that coming out. This keeps asset prices going up and removes any reason for investors to panic and sell. The problem is, however, that maintaining a positive flow of money into the stratosphere depends on having a growing economy. If the economy shrinks, or a greater proportion of income has to be spent on buying fuel and food because their prices go up, then less money can go up into the stratosphere in investments, rents and mortgage repayments. This causes asset values to fall and could possibly precipitate an investors’ stampede to get into cash.

In effect, the money circulating in the stratosphere is another currency — one that has only an indirect relationship with energy availability and which people use for saving rather than to buy and sell. Because there is a fixed one-to-one exchange rate between the atmospheric currency and the real-world one, the price of assets has to change for inflows and outflows to be kept in balance. As we’ve just discussed, the banking system will collapse if asset values fall too far, so governments are making heroic efforts to ensure that they do not. As 20% of the assets involved are owned by 1% of the population in Britain and Ireland (the figure is 38% in the US), this means that governments are cutting the services they deliver to all their citizens in order to keep the debt-money system going in an effort to preserve the wealth of the better-off.

In 2007, the burden imposed on the real economy by the need to support the stratospheric economy became too great. The richer countries that had been running balance of payments deficits on their current accounts found that paying the high energy and commodity prices, plus the interest on their increased amount of external debt, plus the transfer payments required on their internal ones, was just too much. The weakest borrowers — those with sub-prime mortgages in the US — found themselves unable to pay the higher energy charges and service their loans. And, since many of these loans had been securitised and sold off to banks around the world, their value as assets was called into question. Banks feared that payments that they were due from other banks might not come through as the other banks might suddenly be declared insolvent because of their losses on these doubtful assets. This made inter-bank payments difficult and the international money-transfer system almost broke down.

All asset values plunged in the panic that followed. Figures from the world’s stock markets show that the FTSE-100 lost 43% between October 2007 and February 2009 and that the Nikkei and the S&P 500 lost 56% and 52% respectively between May-June 2007 and their bottom, which was also in February 2009. All three indices have since recovered some of their previous value but this is only because investors feel that incomes are about to recover and increase the flow of funds into the stratosphere to support higher levels. They would be much less optimistic about future prices if they recognised that, in the medium term at least, a growing shortage of energy means that incomes are going to fall rather than rise.

This analysis of the origins of the current crisis leads to four thoughts that are relevant to planning the flight from Vesuvius:

  1. It is dangerous and destabilising for any country, firm or individual to borrow from abroad, even if they are borrowing their own national currency. Net capital movements between countries should be prohibited.
  2. An inflation is the best way of relieving the current debt crisis. An attempt to return the debt-GNP ratio to a supportable level by restricting lending would be a serious mistake. Instead, money incomes should be increased.
  3. A debt-based method of creating money cannot work if less and less energy is going to be available. New ways of issuing money will therefore need to be found.
  4. New ways of borrowing and financing are going to be required too, since, as incomes shrink because less energy can be used, fixed interest rates will impose an increasing burden.

We will discuss these in turn.

1. Borrowing from abroad

We have already discussed the problems that servicing foreign debt can create and, in view of these, it is hard to see why any country should ever borrow abroad at all. Foreign capital creates problems when it enters a country and further problems when it leaves. When it comes in, it boosts the country’s exchange rate, thus hurting firms producing for the home market by making imports cheaper than they would otherwise be. It also hurts exporters, reducing their overseas earnings when they convert them into their national currency. As a result, when the loan has to be repaid, the country is in a weaker position to do so than it was when it took the loan on — its imports are higher and its exports reduced. Foreign borrowing is so damaging that it has even been claimed that the Chinese policy of pegging its currency to the dollar at a rate which makes its exports very attractive and keeping that rate by lending a lot of the dollars it earns back was designed by military strategists to destroy America’s manufacturing base. [2] The strategists are said to have argued that no superpower can maintain its position without a strong industrial sector, so lending back the dollars China earned was a handy way to destroy the US ability to fight a major war.

For a country with its own currency, the alternative to borrowing abroad is to allow the value of its currency to float so that its exports and imports are always in balance and it never need worry about its competitiveness again. As eurozone countries no longer have this option, they have very few tools to keep exports and imports in balance. Indeed, it’s hard to know what they should do to deter foreign borrowing because, while the state may not borrow abroad itself, its private sector may be doing so. In Ireland, for example, the net indebtedness of Irish banks to the rest of the world jumped from 10% of GDP in 2003 to over 60% four years later, despite the fact that some of the state’s own borrowings were repaid during these years. All the state could have done to stop this borrowing would have been to restrict lending that was based on the overseas money. For example, it could have placed a limit on the proportion of its loans that a bank could make to the property sector, or stipulated that mortgages should not exceed, say, 90% of the purchase price and three times the borrower’s income. This would have dampened down the construction boom and limited the growth of incomes and thus import demand. But such indirect methods of control are not nearly as potent as allowing the market to achieve balance automatically. Their weakness is a very powerful argument for breaking up the eurozone.

Although one might accept that borrowing abroad for income purposes comes at the cost of undermining its domestic economy, it could be argued that capital inflows for use as capital will allow a country develop faster than would otherwise be the case. Let’s see if this argument stands up.

The danger with bringing capital into a country with its own currency is that part of it will become income in the ways we discussed and thus boost the exchange rate and undermine the domestic economy. So, if we restrict the capital inflow to the actual cost of the goods that the project will need to import, is that all right? Well, yes, it might be. It depends on the terms on which the capital is obtained, and whether the project will be able to earn (or save) the foreign exchange required to pay the investors. If the world economy shrinks as we expect, it is going to be harder to sell the product and its price may fall. This might mean that interest payments took a greater share of the project’s revenue than was expected, causing hardship for everyone else. So, as we will discuss later, the only safe approach is for the foreign investor to agree to take a fixed portion of the project’s foreign revenue, whatever that is, rather than a fixed sum of money based on the interest rate. This would ensure that the project never imposed a foreign exchange burden on the country as a whole. The foreign capital would be closer to share capital than a loan. This should be the only basis that any country should allow foreign capital in.

At present, however, so much foreign capital is moving around that its flow might need to be limited to prevent destabilising speculation. As Reinhart and Rogoff point out, “Periods of high international capital mobility have repeatedly produced international banking crises, not only famously as they did in the 1990s, but historically.” One solution to this, again for countries with their own currencies, is to have two exchange rates; one for capital flows, the other for current (i.e. trading) flows. This would mean that people could only move their capital out of a country if others wanted to move theirs in. Rapid, speculative flows would therefore be impossible. Ireland had this system when it was part of the Sterling Area after World War 2 until Britain abandoned it around 1979. It was known as the dollar premium. South Africa had a capital currency, “the financial rand,” which gave it financial stability throughout the apartheid period. It dropped it in 1995.

Keeping capital and current flows apart would greatly reduce the power of the financial sector. After they were divided, no-one would ever say as James Carville, President Clinton’s adviser, did about the bond markets in the early 1990s when he realised the power they had over the government, that they “can intimidate everybody.”

Of course, the threat to its power will mean that the financial sector opposes capital-flow currencies tooth and nail. Yet its power, and income, must be reduced, especially if incomes in other sectors of the economy are going fall. According to the OECD, the share of GDP taken by the financial sector (defined as “financial intermediation, real-estate, renting and business activities”) in the United States increased from 23% to 31% between 1990 to 2006. The increase in the UK was over 10% to about 32% and around 6% in both France and Germany.

The rise in the sector’s share of corporate profits was even more striking. In the United States, for example, it was around 10% in the early 1980s but peaked at 40% in 2007. Mentioning these figures, Már Gudmundsson, the deputy head of the Monetary and Economic Department of the Bank for International Settlements, told a conference in the US in 2008 that the financial sector needed to become smaller and less leveraged: “That is the only way the sector can be returned to soundness and profitability in the environment that is likely to prevail in the post-crisis period.” I would put it much more strongly. The British sector’s income is bigger than those of agriculture, mining, manufacturing, electricity generation, construction and transport put together, and the sector’s dominance in other economies is similar. It is a monstrous global parasite that needs to be cut down to size.

The financial tail wags the societal dog

Graph 5: The financial sector in five rich-country economies, the US, Japan, the UK, France and Germany, has been taking an increasing share of national income over the past twenty years, in part because of the increasing debt burden. The sector is now bigger in each country than all the productive sectors put together. Source OECD.

2. Allowing inflation to correct the debt-income imbalance

As the amount of energy in a litre of petrol is equivalent to three weeks’ hard manual work, having power at one’s disposal can make one much more productive. A country’s income is consequently largely determined by its direct and indirect energy use. So, whenever less energy is available, incomes fall and debt becomes harder to service unless an inflation is allowed to increase money incomes and reduce the real burden imposed by the debt.

This has been demonstrated by two real-world experiments. After OPEC’s first oil-supply restriction in 1973, the world’s central banks allowed the inflation created by the higher oil prices to go ahead. By reducing the burden of existing debt, this made room for the commercial banks to lend out the money that the oil producers were unable to spend. The US came out of the recession quickly and Britain did not have one at all. Developing countries did well too even though they were paying more for their oil, because the prices of their commodity-exports increased more rapidly than the rate of interest they were being charged on their external debts and, although they borrowed from abroad, their debt-export ratio stayed constant.

After the 1979 restriction, however, the story was different. This time, the central banks resolved to maintain the purchasing power of their monies in relation to energy and they did all they could to fight the inflation. In Britain, an ultra-tight fiscal and monetary policy was adopted. Interest rates were set at 17% and government spending cuts of £3.5bn were announced for the following year. The result was the “Winter of Discontent” with 29m working days lost through strikes, the largest annual total since the General Strike in 1926. In the US, the prime rate reached 20% in January 1981. Unemployment, which had dropped steadily from 1975 to 1979, began to rise sharply as the deflationary measures were put into effect.

The OPEC countries themselves moved from a small balance of payments deficit of $700 million in 1978 to a surplus of $100 billion in 1980. They put most of this money on deposit in US and British banks. But what were the banks to do with it, since none of their rich-country customers wished to borrow at the prevailing interest rates, especially as their domestic economies had been thrown into recession by the central banks’ policies? The answer was to lend it to the developing countries, since the loans made to these countries after 1973 had worked out well.

The result was the Third World Debt Crisis. In 1970, before it began, the 15 countries which it would affect most severely — Algeria, Argentina, Bolivia, Brazil, Bulgaria, Congo, Cote d’Ivoire, Ecuador, Mexico, Morocco, Nicaragua, Peru, Poland, Syria and Venezuela — had a manageable collective external public debt. It amounted to 9.8% of their collective GNP and took 12.4% of their export income to service. [3] By 1987, these same nations’ external public debt was 47.5% of their GNP and servicing it took 24.9% of their export earnings. This doubling had come about because they had borrowed abroad to avoid inflicting drastic spending cuts on their people like those made in the US and the UK. They could, of course, have avoided borrowing and tried to manage on their reduced overseas earnings but this would have forced them to devalue, which would have itself increased their foreign debt-to-GDP ratio. They really had very few options.

Just how deep the commodity-producing countries devaluations would have had to have been is indicated by the decline in net farm incomes in the US. In 1973, these reached a record high of $92.1 billion but by 1980 they had dropped back to $22.8 billion, largely because of a decline in overseas demand, and by 1983 they were only $8.2 billion. Not surprisingly in view of the high interest rates, many US farmers went bankrupt. In 1985, 62 agricultural banks failed, accounting for over half of the nation’s bank failures that year. The high interest rates were also a factor a few years later when 747 US mortgage lenders, the savings and loans or “thrifts” had to be bailed out. The cost was around $160 billion, of which about $125 billion was paid by the US government.

Money’s exchange rate with energy fell in both 1973 and 1979 because there was too much of it in circulation in relation to the amount of oil available. In 1973, the inflation removed the surplus money by requiring more of it to be used for every purchase. The results were generally satisfactory. In 1979, by contrast, an attempt was made to pull back the price of oil by jacking up interest rates to reduce the amount of money going into circulation and thus, over a period of years, bring down the “excessive” money stock. The higher rates caused immense hardship because they ignored the other side of the money=debt equation, the debt that was already there. So, by setting their faces against allowing money to be devalued in relation to energy, the central banks’ policies meant that a lot of the debt had to be written off. Their policy hurt them as well as everyone else. Yet the same policy is being used again today.

So which policy should be adopted instead to remove the current surplus stratospheric money? Incomes in the real economy need to be increased so that they can support current asset values in the stratosphere and, since there is insufficient energy to allow growth to increase them, inflation has to be used instead. Attempts to use 1979-type methods such as those being promoted by the Germans for use in the eurozone will only depress incomes, thus making the debt load heavier. A lot of the debt would then have to be written off, causing the banking system to implode. Even if this could be avoided, such a policy can never work because the money is being taken from the real economy rather than the stratospheric one.

The choice is therefore between allowing inflation to reduce the debt burden gradually, or trying to stop it and having the banking system collapse, overwhelmed by bad debts and slashed asset values. In such a situation, account holders’ money would not lose its value gradually. It could all disappear overnight.

The inflation we need cannot be generated with debt-based money as it was in 1973 because in today’s circumstances that would increase debts more rapidly than it raised incomes. As Graph 4 shows, each $100 borrowed in 2006-7 in the US only increased incomes by around $30 whereas in 1973, the return was higher and the level of debt the country was carrying in relation to its income was about half what it is today. The same applies to most other OECD countries; their public and private sectors are already struggling with too much debt and do not wish to take on more.

The solution is to have central banks create money out of nothing and to give it to their governments either to spend into use, or to pay off their debts, or give to their people to spend. In the eurozone, this would mean that the European Central Bank would give governments debt-free euros according to the size of their populations. The governments would decide what to do with these funds. If they were borrowing to make up a budget deficit — and all 16 of them were in mid-2010, the smallest deficit being Luxembourg’s at 4.2% — they would use part of the ECB money to stop having to borrow.

They would give the balance to their people on an equal-per-capita basis so that they could reduce their debts, or not incur new ones, because private indebtedness needs to be reduced too. If someone was not in debt, they would get their money anyway as compensation for the loss they were likely to suffer in the real value of their money-denominated savings. Without this, the scheme would be very unpopular. The ECB could issue new money in this way each quarter until the overall, public and private, debt in the eurozone had been brought sufficiently down for employment to be restored to a satisfactory level.

The former Irish Green Party senator, Deirdre de Burca, has improved on this idea. She points out that (1) we don’t want to restore the economy that has just crashed and (2) that politicians don’t like giving away money for nothing. Her suggestion is that the money being given to ordinary citizens should not just be lodged in their bank accounts but should be sent to them as special credits which could only be used either to pay off debt or, if all their debts were cleared, to be invested in projects linked to the achievement of an ultra-low-carbon Europe. These could range from improving the energy-efficiency of one’s house to investing in an offshore wind farm or a community district heating system.

Creating money to induce an inflation may seem rather odd to those who advocate buying gold because they fear that all the debt-based money that has been created recently by quantitative easing will prove inflationary by itself. What they have failed to recognise is that most of the money they are worried about is in the stratosphere and has very few ways of leaking down. It is in the accounts of financial institutions and provides the liquidity for their trading. The only way it can reach people who will actually spend it rather than investing it again is if it is given out as loans but, as we saw, that is not happening. Even paying it out to an institution’s staff as wages and bonuses won’t work too well as most are already spending as much as they can and would use any extra to buy more assets, thus keeping it stratospheric.

A common argument against using inflation to reduce debts is bound to be trotted out in response to this idea. It is that, if an inflation is expected, lenders simply increase their interest rates by the amount they expect their money to fall in value during the period of the loan, thus preventing the inflation reducing the debt burden. However, the argument assumes that new loans would still be needed to the same extent once the debt-free money creation process had started. I think that is incorrect. Less lending would be needed, the investors’ bargaining position would be very weak and interest rates should stay down. Incomes, on the other hand, would rise. As a result, if the debtors continued to devote the same proportion of their incomes to paying off any new or remaining loans, they would be free of debt much more quickly.

3. The end of debt-based money

Output in today’s economy gets a massive boost from the high level of energy use. If less and less energy is going to be available in future, the average amount each person will be able to produce will decline and real incomes will fall. These shrinking incomes will make debts progressively harder to repay, creating a reluctance both to lend and to borrow. For a few years into the energy decline, the money supply will contract as previous years’ debts are paid off more rapidly than new ones are taken on, destroying the money the old debts created when they were issued. This will make it increasingly difficult for businesses to trade and to pay employees. Firms will also have more problems paying taxes and servicing their debts. Bad debts and bankruptcies will abound and the money economy will break down.

Governments will try to head the breakdown off with the tool they used during the current credit crunch — producing money out of nothing by quantitative easing. So far, the QE money they have released, which could have been distributed debt-free, has been lent to the banks at very low interest rates in the hope that they will resume lending to the real economy. This is not happening on any scale because of the high degree of uncertainty — is there any part of that economy in which people can invest borrowed money and be sure of being able to pay it back?

Some better way of getting non-debt money into the real economy is going to have to be found. In designing such a system, the first question that needs to be asked is “Are governments the right people to create it?” The value of any currency, even those backed by gold or some other commodity, is created by its users. This is because I will only agree to accept money from you if I know that someone else will accept it from me. The more people who will accept that money and the wider range of goods and services they will provide in return, the more useful and acceptable it is. If a government and its agencies accept it, that increases its value a lot.

As the users give a money its value, it follows that it should be issued to them and the money system run on their behalf. The government would be an important user but the currency should not be run entirely in its interest, even though it will naturally claim to be acting on behalf of society, and thus the users, as a whole. Past experience with government-issued currencies is not encouraging because money-creation-and-spend has always seemed politically preferable to tax-and-spend and some spectacular inflations that have undermined a currency’s usefulness have been the result. At the very least, an independent currency authority would need to be set up to determine how much money a government should be allowed to create and spend into circulation from month to month and, in that case, the commission’s terms of reference could easily include a clause to the effect that it had to consider the interests of all the users in taking its decisions.

This raises two more design questions. The first is “Should the government benefit from all the seignorage, the gain that comes from putting additional money into circulation, or should it be shared on some basis amongst all the users?” and the second is “Should the new money circulate throughout the whole national territory or would it be better to have a number of regional systems?” I am agnostic about the seignorage gains. My answer depends on the circumstances. If the new money is being issued to run in parallel with an existing currency, giving some of the gains to reward users who have helped to develop the system by increasing their turnover could be an important tool during the set-up process. On the other hand, if the new money was being issued to replace a collapsed debt-based system, giving units to users on the basis of their previous debt-money turnover would just bolster the position of the better off. It would be better to allow the state to have all the new units to spend into use in a more socially targeted way.

A more definite answer can be given to the second question. Different parts of every country are going to fare quite differently as energy use declines. Some will be able to use their local energy resources to maintain a level of prosperity while others will find they have few energy sources of their own and that the cost of buying their energy in from outside leaves them impoverished. If both types of region are harnessed to the same money, the poorer ones will find themselves unable to devalue to improve their exports and lower their imports. Their poverty will persist, just as it has done in Eastern Germany where the problems created by the political decision to scrap the ostmark and deny the East Germans the flexibility they needed to align their economy with the western one has left scars to this day.

If regional currencies had been in operation in Britain in the 1980s when London boomed while the North of England’s economy suffered after the closure of its coal mines and most of its heavy industries, then the North-South gap which developed might have been prevented. The North of England pound could have been allowed to fall in value compared with the London one, saving many of the businesses that were forced to close. Similarly, had Ireland introduced regional currencies during the brief period it had monetary sovereignty, a Connacht punt would have created more business opportunities west of the Shannon if it had had a lower value than its Leinster counterpart.

Non-debt currencies should not therefore be planned on a national basis or, worse, a multinational one like the euro. The EU recognises 271 regions, each with a population of between 800,000 and 3 million, in its 27 member states. If all these had their own currency, the island of Ireland would have three and Britain 36, each of which could have a floating exchange rate with a common European reference currency and thus with each other. If it was thought desirable for the euro to continue so that it could act as a reference currency for all the regional ones, its independent currency authority could be the ECB. In this case, the euro would cease to be the single currency. It would simply be a shared one instead.

The advantages from the regional currencies would be huge:

  1. As each currency would be created by its users rather than having to be earned or borrowed in from outside, there should always be sufficient liquidity for a high level of trading to go on within that region. This would dilute the effects of monetary problems elsewhere.
  2. Regional trade would be favoured because the money required for it would be easier to obtain. A strong, integrated regional economy would develop, thus building the region’s resilience to shocks from outside.
  3. As the amount of regional trade grew, seignorage would provide the regional authority with additional spending power. Ideally, this would be used for capital projects.
  4. The debt levels in the region would be lower, giving it a lower cost structure, as much of the money it used would be created debt free.

In addition to the regional currencies, we can also expect user-created currencies to be set up more locally to provide a way for people to exchange their time, human energy, skills and other resources without having to earn their regional currency first. One of the best-known and most successful models is Ithaca Hours, a pioneering money system set up by Paul Glover in Ithaca, New York, in 1991 in response to the recession at that time. Ithaca Hours is mainly a non-debt currency since most of its paper money is given or earned into circulation but some small zero-interest business loans are also made. A committee controls the amount of money going into use. At present, new entrants pay $10 to join and have an advertisement appear in the system’s directory. They are also given two one-Hour notes – each Hour is normally accepted as being equivalent to $10 – and are paid more when they renew their membership each year as a reward for their continued support. The system has about 900 members and about 100,000 Hours in circulation, a far cry from the days when thousands of individuals and over 500 businesses participated. Its decline dates from Glover’s departure for Philadelphia in 2005, a move which cost the system its full-time development worker.

Hours has no mechanism for taking money out of use should the volume of trading fall, nor can it reward its most active members for helping to build the system up. It would have to track all transactions for that to be possible and that would require it to abandon its paper notes and go electronic. The result would be something very similar to the Liquidity Network system that Graham Barnes describes in the next article.

New variants of another type of user-created currency, the Local Exchange and Trading System (LETS) started by Michael Linton in the Comox Valley in British Columbia in the early 1990s, are likely to be launched. Hundreds of LETS were set up around the world because of the recession at that time but unfortunately, most of the start-ups collapsed after about two years. This was because of a defect in their design: they were based on debt but, unlike the present money system, had no mechanism for controlling the amount of debt members took on or for ensuring that debts were repaid within an agreed time. Any new LETS-type systems that emerge are likely to be web based and thus better able to control the debts their members take on. As these debts will be for very short periods, they should not be incompatible with a shrinking national economy.

Complementary currencies have been used to good effect in times of economic turmoil in the past. Some worked so well in the US in the 1930s that Professor Russell Sprague of Harvard University advised President Roosevelt to close them down because the American monetary system was being “democratized out of [the government’s] hands.” The same thing happened to currencies spent into circulation by provincial governments in Argentina in 2001 when the peso got very scarce because a lot of money was being taken out of the country. These monies made up around 20% of the money supply at their peak and prevented a great deal of hardship but they were withdrawn in mid-2003 for two main reasons. One was pressure from the IMF, which felt that Argentina would be unable to control its money supply and hence its exchange rate and rate of inflation if the provinces continued to issue their own monies. The other, more powerful, reason was that the federal government felt that the currencies gave the provinces too much autonomy and might even lead to the break-up of the country.

4. New ways to borrow and finance

The regional monies mentioned above will not be backed by anything since a promise to pay something specific in exchange for them implies a debt. Moreover, if promises are given, someone has to stand over them and that means that whoever does so not only has to control the currency’s issue but also has to have the resources to make good the promise should that be required. In other words, the promiser would have to play the role that the banks currently perform with debt-based money. Such backed monies would not therefore spread financial power. Instead, they could lead to its concentration.

Even so, some future types of currency will be backed by promises. Some may promise to deliver real things, like kilowatt hours of electricity, just as the pound sterling and the US dollar were once backed by promises to deliver gold. Others may be bonds backed by entitlements to a share an income stream, rather than a share of profits, as Chris Cook describes in his article in this book. Both these types of money will be used for saving rather than buying and selling. People will buy them with their regional currency and either hold them until maturity if they are bonds, or sell them for regional money at whatever the exchange rate happens to be when they need to spend.

These savings currencies could work like this. Suppose a community wanted to set up an energy supply company (ESCo) to install and run a combined heat and power plant supplying hot water for central heating and electricity to its local area. The regional currency required to purchase the equipment could be raised by selling energy “bonds” which promise to pay the bearer the price of a specific number of kWh on the day they mature. For example, someone could buy a bond worth whatever the price of 10,000 kWh was when that bond matured in five years. The money to redeem that bond would come from the payments made by people buying energy from the plant in its fifth year. The ESCo would also offer other bonds with different maturity dates and, as they were gradually redeemed, those buying power from the ESCo would, in fact, be taking ownership of the ESCo themselves.

These energy bonds will probably be issued in large denominations for sale to purchasers both inside and outside the community and will not circulate as money. However, once the ESCo is supplying power, the managing committee could turn it into a bank. It could issue notes for, say, 50 and 100 kWh which locals could use for buying and selling, secure in the knowledge that the note had real value as it could always be used to pay their energy bills. Then, once its notes had gained acceptance, the ESCo could open accounts for people so that the full range of money-moving services was available to those using the energy-backed units. An ESCo would be unlikely to do this, though, if people were happy with the way their regional currency was being run. Only if the regional unit was rapidly losing its value in energy terms would its users migrate to one which was not.


Up to now, those who allocated a society’s money supply by determining who could borrow, for what and how much determined what got done. In the future, that role will pass to those who supply its energy. Only this group will have, quite literally, the power to do anything. Money once bought energy. Now energy, or at least an entitlement to it, will actually be money and energy firms may become the new banks in the way I outlined. This makes it particularly important that communities develop their own energy supplies, and that if banks issuing energy-backed money do develop, they are community owned.

As energy gets scarcer, its cost in terms of the length of time we have to work to buy a kilowatt-hour, or its equivalent, is going to increase. Looked at the other way round, energy is cheaper today than it is ever likely to be again in terms of what we have to give up to get it. We must therefore ensure that, in our communities and elsewhere, the energy-intensive projects required to provide the essentials of life in an energy-scarce world are carried out now. If they are not, their real cost will go up and they may never be done.

Working examples of both backed and unbacked forms of modern regional and community monies are needed urgently. Until there is at least one example of a non-debt currency other than gold working well somewhere in the world, governments will cling to the hope that increasingly unstable national and multinational debt-based currencies will retain their value and their efforts to ensure that they do will blight millions of lives.

Moreover, without equitable, locally and regionally controllable monetary alternatives to provide flexibility, the inevitable transition to a lower-energy economy will be extraordinarily painful for thousands of ordinary communities, and millions of ordinary people. Indeed, their transitions will almost certainly come about as a result of a chaotic collapse rather than a managed descent and the levels of energy use that they are able to sustain afterwards will be greatly reduced. Their output will therefore be low and may be insufficient to allow everyone to survive. A total reconstruction of our money-issuing and financing systems is therefore a sine qua non if we are to escape Vesuvius’ flames.


  1. Petrodollar Warfare: Oil, Iraq and the Future of the Dollar, William R. Clark, New Society Publishers, British Columbia, 2005. p31. See
  2. Qiao Liang and Wang Xiangsui, both colonels in the Chinese army, wrote a book, Unrestricted Warfare, which appeared on the Internet in English 1999 about strategies China could use to defeat a technologically superior opponent such as the United States through a variety of means including currency manipulation. Extracts from the book can be found at
  3. Debt Crisis in the Third World, by Yanhui Zhang, 2003.

Featured image: Stone money of Uap, Western Caroline Islands Source: Wikimedia Commons

Using equity partnerships to rescue building projects hit by the downturn

James Pike

Community land partnerships provide an alternative way of becoming a property owner and gaining a voice in the management of the development in which one lives. They should also be very stable and secure investments for pension funds.

As an architect working on both public regeneration projects and private residential and mixed-use developments which have run into serious problems over the past two years, I have an obvious interest in finding alternative ways to finance such developments. I have also been aware for some years of the problems of managing residential developments, where the current model is selling individual apartments or houses to investors who then rent them on short-term leases. The tenants have no say in the management of the development and the investors no interest. The result is that the owner-occupiers, often a very small proportion of the occupiers as a whole, are the only active participants in the management company. I know from managers of such developments and as an owner-occupier myself that this creates many problems.

One other major problem with public or private developments is rebuilding or redeveloping them when they become obsolete. Currently, each house or apartment is owned freehold and many local authority estates have been sold to the tenants. I have found over the years that bringing a large number of owners together is an almost impossible task.

When I came across the Community Land Partnership ideas put forward by Chris Cook of the Nordic Enterprise Trust, I recognised that this model could be an answer to both our financial and management and redevelopment problems. It offers an alternative path to property ownership and a stake in the management of developments for all tenants. It also presents a very stable and secure development model which should be attractive to pension and other investment funds. It shares some features with current tenant-purchase schemes and rent-to-buy schemes but provides a much more flexible framework.

I got together with an accountant, Kieran Ryan, who has considerable experience in property development, and a solicitor, Kevin Ryan, to investigate the feasibility of the model in the context of current finance, tax, management and property legislation in Ireland. We have consulted a number of interested parties, including banks, property developers, local government officers and property managers.

We consider that the proposed model can work satisfactorily in Ireland without any change in legislation though some adjustments might be made if it became common practice. There could also be considerably wider benefit in revising current 100-year-old legislation on Limited Liability Partnerships in line with recent legislation introduced in the UK and many other countries.

Applying equity partnership to urban regeneration projects

Set out below is a worked example of a major urban regeneration project in central Dublin within the canal ring. The calculations are based on a scheme selected following consultation with the existing tenants.

The land is owned by the local authority and its value is taken as nil when calculating “Capital Rent”. If land is valued at 1m or say 23,000 per dwelling, this would be added in calculating sum required to purchase Equity Shares. If own-door duplex/apartments are located at ground level in all apartment blocks, except those with commercial uses, more than one-third of all dwellings would have own-door access. This represents the general proportion of households with children across the city.

Therefore, the ‘capital rental’ is very affordable and there should be no problem letting the whole development. Tenants of the existing development or other prospective occupiers on the local authorities list would receive the appropriate level of subsidy.

Once the development is fully let, therefore it presents a very secure form of investment, so that if tenants or occupiers leave they can be easily replaced. They are not under pressure to pay more than the ‘capital rent’ but even at low current market rents, they can build up a substantial equity share within a reasonable period. If they have financial difficulties such as losing their job, they can just pay the current capital rent or even reduce their equity share until they are in a position to pay the required level of rent. If, on the other hand, their financial position improves, they can purchase additional equity shares.

The potential role of a pension fund

Such a secure form of investment must be attractive to pension funds. The basic capital rent at, say, 2,5% currently represents a good return for a pension fund but the figures also show that a 3% return does not make the scheme unaffordable. This return is independent of service charges. In addition to his basic capital rent, which is index linked, the occupiers are buying equity shares with their surplus rent which goes to pay off the original capital invested which the pension fund can now invest in further projects, but they are likely to hold a substantial share in perpetuity because, when occupiers leave, they are paid the full value of their share but the dwelling reverts to the partnership. It is proposed that a pension fund could purchase a portion of the equity partnership to either buy out the original investors or a substantial portion of their investment. The payment would include the sum invested plus a reasonable return in the current market for that sum. A reasonable figure in the current situation would be say 10%. This would increase the capital rental required by 10%.

The occupier

As shown in the above figures, equity partnerships offer many attractions to a potential occupier. It gives him/her much more certainty than current rent-to-buy schemes. It requires no borrowing and offers great flexibility depending on his/her financial circumstances at different times. It also involves occupiers in ownership and an input into the management of the scheme which tenants to not normally have. If occupiers want to leave the scheme, they are paid the full value of their equity share. If they have bought out their full share, they will receive the full market value of their dwelling.

The level of total rent required by the tenant to acquire the full equity share over a thirty-year period is calculated as the capital rent which will reduce by the proportion he pays above the capital rent each year plus an annual repayment at 1/30 of the capital cost, plus the operating / maintenance cost:-

Payments required to purchase full equity share over 30 years.

Capital Rent at 3.0% requires a total rent of – 11,641 p.a. = 10,574

Capital Rent at 4.0% requires a total rent of – 12,533 p.a. =11,861

Average projected net market rental payment is – 11,784 p.a.

Therefore the owner can purchase a full equity share in thirty years at a net rental payment less than market rents if Capital Rent is at 3.0% or just above if Capital rent is at 4.0%.

I have not included the commercial elements of the project. If the density was increased to achieve say 900 units it would reduce the land cost per dwelling to 19,000. The density would still be a relatively low 51/acre for an inner city site and could be achieved in a low height format. This demonstrates the attraction for occupiers who may well be able to purchase their equity shares in a much shorter period if their financial circumstances improve. If their circumstances deteriorate then they can revert to paying the capital rent only or even sell some of their equity shares if necessary. Note: the figures shown are for 2010 Future rents will vary with the cost of living index.

The investor

For a local authority or a government agency, particularly one wishing to undertake a regeneration scheme, the equity partnership model offers an attractive alternative to conventional fiance particularly if a pension fund can be persuaded to take on the bulk of the funding once the development is fully occupied. It also offers an excellent management structure in which the tenants can be engaged and is much better alternative than selling dwellings to tenants in the current way because the local authority or agency does not lose the opportunity to redevelop schemes when they eventually deteriorate after a long period.

The operator

Housing associations might be strong candidates for the Operator role, as some of them have a good reputation for managing not only their own social element in current housing projects but also the public realm in the private element of such schemes. They could perhaps also act as the Developer / Operator on behalf of local authorities or government agencies and take on the Custodian role as their boards and senior staff include a wide range of appropriate professionals.

Advantages and disadvantages


  • The model is not a straitjacket; it is inherently flexible and would be tailored to each regeneration opportunity.
  • The model offers the potential to attract outside investment when fully let and demonstrably in successful operation. It should be particularly attractive to pension funds.
  • For occupiers, they can own their dwelling, in time, without having to borrow. They also have an input in the management of the development as a member of the equity partnership: something they would not have as a renter of an investment property. They also become members of a community of stakeholders with a shared future. This core feature should make for more stable tenancies and a better experience for the occupier than possible in the private rental sector. An equity partnership also offers greater security of tenure compared to the private rental sector.
  • For the local authority / investor – the model has many advantages, particularly its flexibility; it can give the local authority continuing control over key issues of social policy, while being able to dispose of a substantial element of its investment at early stage, to a pension fund or other investor.
  • The development company has a project which it can easily let and which, when let, has a ready market for investors to buy out its share.
  • It presents a much better framework for reconstruction or redevelopment, when the development becomes obsolete.


  • The model is new and unproven in Ireland. While we do not see it as unduly complex or “over-engineered”, it may be viewed in that light.
  • For those on low incomes and / or paying social rents, the possibility of building an equity stake may remain quite abstract.
  • Residents may be reluctant to commit resources towards an equity share until the regeneration scheme is a proven success.

Examples of additional projects:


I consider that the equity partnership model presents a much better alternative to the current public-private partnership one as it does not require a private development company but only a contractor. It can recover the capital invested by the public body at an early date at a much lower cost to the taxpayer. It could form a major element in current proposals by the Construction Industry Council for funding major infrastructure projects using pension funds.

In the private sector, particularly in relation to projects whose funding loans will bring them into the NAMA portfolio, the equity partnership model must be a strong candidate as an appropriate development structure.

Current Irish legislation for Limited Liability Partnerships probably needs bringing up to date in line with recent legislation in the UK and elsewhere. The Limited Company is not a suitable vehicle for such developments. Equity partnership presents a model for future housing and mixed-use development which is very flexible and which promises home ownership to the occupier without the burden of a mortgage while at the same time offering a stake in the management of the development. For the developer and a bank, it substantially reduces the risk which has been so catastrophically exposed in the current market collapse. For the public authority, it presents a much more economically- and socially-sustainable model for development. If we wish to reduce the risk of future property bubbles, we should seriously consider using equity partnerships.

July 2011 update

While there is considerable interest from Funds for financing affordable housing, interest rates here have increased. It’s therefore thought necessary to consider an interest rate of 5% for calculating Capital Rent. However further decreases in land value and building costs help to balance the equation.

A further study of the Dolphin House Regeneration Project, using a lower rise solution without underground parking and using current service charges on a comparable scheme, shows that Capital Rent, plus service charges are very affordable, and the purchase cost of a full equity share is close to the current market rent.

Dolphin House Regeneration Project: July 2011

A second study of a further publicly owned site in the outer suburbs shows comparable results. Both studies are based on designs costed by a leading construction company.

Dublin Fringe Rail Based New Build: July 2011

Below are links to further recent outline studies based on a 4% interest rate, which would be still be very viable at 5%. We are hoping to undertake a detailed study on a “Ghost Estate” shortly.

New Build Development in Limerick Regeneration Area: July 2011
Ghost Estate: July 2011
Dun Laoghaire Apartments: July 2011
Sandyford Site for HCSA: July 2011

Re-thinking business structures – how to encourage sustainability through conscious design choices

Patrick Andrews

Business could be the most powerful force in the world in achieving higher levels of sustainability and resilience. Unfortunately, its potential is blocked by laws and by hierarchical structures that mean that shareholders’ interests are put before those of society and the planet. Some firms, however, are adopting new structures that free them to place proper emphasis on social and environmental concerns.

“That government is best which teaches us to govern ourselves”
Johann Wolfgang von Goethe

Our generation faces a massive challenge. We have to steer human society away from its present destructive path and towards a new era of peace, responsibility, social justice and low carbon emissions. If we are to succeed, we need everyone working together: individuals, communities, governments and, perhaps most of all, businesses. Business has become the greatest power on the planet but can we rely on businesses, and the talented people who work for them, to help?

Frankly, the signs are not good. Big businesses seem to have their own drivers, detached from ordinary life. They are focused above all on wealth maximisation. Saving the planet may be important but it cannot get in the way of short-term profit and long-term growth. As the CEO of oil giant Shell, Peter Voser, explained recently when asked why Shell was cutting back on its investments in renewable energy: “I have a business to run, and the purpose of a business is to achieve returns, to achieve long-term sustainable growth.”[1]

We cannot expect governments to step and in and correct this. Even if we could dream up legislation that would oblige businesses to make environmental considerations their highest priority, it is too much to expect our political system to adopt such a radical measure until there is far greater consensus about the need for urgent action. So, what can be done?

The premise of this chapter is that if we organise business differently we will see different behaviour. My contention is that the structure of most businesses, and particularly of large public corporations, holds back the people in them from acting to address climate change and other social and environmental issues. These structures are a hangover from a bygone age of feudalism and slavery; they are ripe for change. They foster unhealthy relationships amongst participants and uphold a belief system that places financial interests above human and ecological needs.

In this chapter I will examine the way in which business structures influence the development of these unhealthy relationships, and look at the root causes. I will also share some examples of businesses that have already adopted alternative structures, pointing the way to a healthy and more sustainable future. In doing so I hope to encourage us all to re-think the purpose of business in society and to support the development of alternative businesses consciously designed to bring out the best in their people and to serve the entire community of life.

About business

“It is in exchanging the gifts of the earth that you shall find abundance and be satisfied. Yet unless the exchange be in love and kindly justice it will but lead some to greed and others to hunger.” Kahlil Gibran.

Business at its best can be something creative and beautiful — one person or a group of people meeting the needs of other people, for mutual benefit. The hairdresser, the corner shop, the local plumber, all have a significant and meaningful place in the community, as their predecessors have done for hundreds or thousands of years.

What stood out in the 20th century was the emergence and rapid growth of large businesses in the form of corporations, wielding huge power and influence. Such businesses now dominate our airwaves, our high streets and our supermarket shelves. Through their lobbyists they exert a powerful influence over our public policy.

Their list of achievements is impressive. They have helped shape our modern world, achieving miracles in engineering (cars, aeroplanes, high-rise buildings), medicine (vaccines, low-cost drugs such as aspirin), retailing (low-cost food distribution), communications, computing and world trade.

At the same time there is much that these corporations do that is frivolous and, in the worst cases, positively harmful. They profit from the sale of weapons, drugs, tobacco, alcohol and polluting chemicals. They dig up wildernesses in pursuit of minerals and lobby governments to water down environmentally friendly regulations. They pay their staff as little as they can get away with while systematically increasing executive remuneration well above the rate of inflation.[2].

They hop from country to country in search of higher subsidies, lower taxes, lower wages and more relaxed labour and environmental standards.[3] And every now and then they crash spectacularly, leaving society and the planet to pick up the pieces. Think of Enron and WorldCom, Railtrack, the banks recently in Ireland, the US, UK, Switzerland and elsewhere, to name but a few.

To many outsiders, corporations have a disturbing amorality, caring little for what they do so long as it makes money. You might say the corporation is the ultimate cynic — knowing the price of everything and the value of nothing. I have seen all this as an insider. Employed by powerful corporations, I plied my trade as a lawyer for 14 years. I had my generous salary and bonuses, my company car, my business class flights around the world and sojourns in fancy hotels. I enjoyed the lavish Christmas parties, and conferences in sunny places. And, in return, I knuckled down to help these corporations grow and profit.

For a long time I saw nothing wrong with what I was doing. I earned a good living, I liked and admired my colleagues and the work was stimulating and challenging. It didn’t occur to me to question the aims or morals of the businesses where I worked. But at a certain point a personal crisis caused me to wake up and start asking questions. What was the purpose of business, I wondered? The answers I received seemed banal. Business is about “making a profit” or “creating wealth”, or “delivering long-term sustainable growth.” Yet I knew that money can never be an end in itself but merely a means to an end. There had to be something more meaningful.

The only answer that really made sense came from the poet Kahlil Gibran. In The Prophet he wrote: “You work that you may keep pace with the earth and the soul of the earth…. When you work you are a flute through whose heart the whispering of the hours turns to music…. Work is love made visible.”[4]

Work is love made visible. This spoke to my soul in a way that talk of profit and long-term sustainable growth never could. So what was I to make of my role at the time, which was to lead merger and acquisition projects for a multinational retailer? Did helping this behemoth grow have any meaning for me? I realised with increasing dismay that it didn’t. My work had become fundamentally disconnected from my deepest values. I had to leave.

That was the start of a journey of exploration, as I sought to make sense of my experience. I read widely, spoke to lots of people and took on various roles in charities and social enterprises. Slowly a pattern began to emerge from the fog in my head.

We are not free

“Aboriginal man always been free… just Aboriginal. But white man… he was slave one time… maybe he slave himself.” Bill Neidjie

“Non voglio piu servir” (“I no longer want to serve”) Da Ponte[5]

It all starts with individual human beings. Every single action or omission by an organisation ultimately translates into a decision by an individual or group of individuals at some level in that organisation. In order to understand an organisation we need to understand humans.

Our starting point is to understand that we are not free. We feel that we are our own person, free to make our own decisions. Yet we are unconsciously influenced in all sorts of ways from many directions. Our upbringing, our life experiences, what our peers, our family, our parents think or expect, societal norms of behaviour, the physical environment [6], the weather, our physical and mental health, all affect our decisions in subtle ways and to varying degrees.

In organisations we are influenced by the rules, the practices and the culture of the group we belong to, particularly in large organisations or those with a long history. The influence of this institutional framework can be so powerful that the people can change with no effect on the institutional behaviour. This can be seen in the grand old institution of Britain’s parliamentary democracy, where it gets harder and harder to distinguish between one party in power and the next.

Over time, in response to these influences, we adopt habitual patterns of thinking and behaviour, which become part of us, in the way a tall man who continually stoops ends up with a permanent hunch, unless he exercises to correct it. This is what Buddhists refer to as a samskara: a habit of thinking that locks us into patterns of behaviour over which we have less and less control with every succeeding repetition. We don’t react appropriately to a new situation, we react out of habit.

Sometimes these patterns of behaviour are passed down from generation to generation. As Karl Marx put it: “Men make their own history but they do not make it just as they please; they do not make it under circumstances chosen by themselves, but under circumstances directly encountered, given and transmitted from the past.”[7]

One of the common patterns we have inherited is the habit of obedience to authority. Historian Theodor Zeldin observed that we are all descended from slaves [8] and the history of work is rooted in feudalism and slavery. You can see this in language; for example the Russian word for “work” is derived from the word “slave” [9].

The institutional structure of the corporation exploits this tendency. This is not surprising since the structure has been passed down for centuries, as Canadian law professor Joel Bakan points out in his book The Corporation. This structure has been designed to allow capital (the shareholders) to control labour (the managers and staff). And it works. Each day across the planet millions of people come together to offer obeisance at the altar of “shareholder value.”

In a corporation, so-called “shareholder value” is the highest value — higher than basic human values such as honesty, respect, compassion or responsibility. It is the bottom line, the alpha and omega. As Bakan puts it: “in all corporate decision-making, life’s intangible richness and fragility are made invisible by the abstract calculations of cost-benefit analyses.”[10] Did BP really give proper weight to environmental considerations when designing their deep-drilling rig in the Gulf of Mexico, the one that failed so dramatically? It seems likely that cost savings had too high a priority.

Prioritising the interests of capital is so embedded in the corporate culture that it is rarely, if ever, questioned by those involved. I never heard a fellow employee challenge those two great pillars of shareholder value, the pursuit of growth and the primacy of profit. But don’t take my word for it. Listen to the words of Roger Carr, Chair of the Board of iconic British chocolate maker Cadbury, which was taken over in early 2010 by the American corporation Kraft after a long, proud history of independence. You might think the board decision to agree to the takeover would be a complex matter, involving consideration of issues such as the effect on staff and the local community. Yet Roger Carr didn’t worry himself with such matters. “I am paid to do a job and that job is to deliver the best value for shareholders,” he told the London Evening Standard [11].

The power that shareholders wield is somewhat mysterious. Why do people serve shareholders at all? After all, it seems quite unnatural for human beings to willingly serve a group of people they have never met, have no connection with and no ability to influence.

Of course shareholders do provide the money, and money has long been associated with power in our society. Those who pay our wages expect to be able to control us. There is also the law. For example, in Britain, section 172 of The Companies Act 2006 requires directors to consider first the interests of shareholders and then of other participants such as staff when making decisions. This was intended to oblige directors to take their responsibilities to stakeholders more seriously. However, the way the law is drafted, shareholders’ interests still prevail, as law professor Andrew Keay has pointed out [12].

There is another factor, operating on a more subtle level, which is the power of capital at the top of the hierarchical order. Shareholders are too remote to interfere with the day-to-day business but they hold a very powerful weapon, the ability to sack the executive, and they don’t have to use this weapon very often to ensure they get what they want. All they need is for executives and employees to be aware that the weapon is there and may be used at some point.

Professor Stephen Lukes of New York University [13] points out that there are different ways in which power is manifested. At the most obvious level there is coercion — using force or threat of force to get what you want. At the opposite end of the spectrum is latent power, power so subtle that people don’t know it is being exercised. As he puts it: “…is it not the supreme exercise of power to get another or others to have the desires you want them to have?” This is the nature of shareholder ownership. Like Big Brother in George Orwell’s book 1984, shareholders do not show themselves in public yet their influence is felt everywhere.

Critics see corporations madly pursuing growth and blame the executives. Yet it is the subtle influence of capital, in the shape of the shareholders, which encourages such a strategy. In this sense, shareholders as a group are just as much responsible for the near-collapse of the Royal Bank of Scotland as the CEO, Sir Fred Goodwin.

In effect we have a “tragedy of the commons” situation [14]. Everyone in the system is behaving rationally in their own self-interest, but the system as a whole is not serving anyone. In this situation it is largely unproductive (although satisfying!) to blame individuals. It is far more useful first to look at how the system affects each individual and then look to change the system.

How the corporate structure affects individuals

The shareholders

“Men should not be ruled by an authority they cannot control.” R.H. Tawney

Shareholders are the owners of the corporation but it is a strange sort of ownership; they have no involvement in or legal responsibility for the actions of the business. Like absentee landlords, they only need to turn up and collect their rent. They are not expected to care about anything other than returns.

You might think that the shareholders, as human beings, would care about the behaviour of the corporation they own, and its social and environmental impact, but they are too distant from the business to know or care.

As humans we care for things we feel a connection to. Something close to us matters more than something far away. We are interested in a flooding 15 miles from our home, not so much in a flood that happens 2,000 miles away.

Small shareholders feel distant from the business and very insignificant in the scheme of a large corporation. Their holding is a tiny fraction of the whole, they are one among tens of thousands, and lack the detailed information to question effectively the full-time executives who run the business. How could they hold these people to account? The only formal chance to express their views is the annual general meeting, which is controlled very tightly by the board.

As for the large institutional investors, they are run by professional fund managers who are very focused on the financial bottom line (they have to be, since their remuneration depends on it). They have no incentive to take a long-term perspective — many of them “churn” their shares regularly, buying and selling in rapid succession to take advantage of temporary rises or falls in prices. Why should they care about the long-term social or environmental record of individual corporations?

Thus investors are discouraged by the system from taking an interest in anything other than returns. A German investor in a British utility provider has no incentive to care how much the company charges or overcharges its customers, so long as he gets dividends and capital growth. It is a question of distance. By contrast, distance does not stop investors caring about money. £1 is the same whichever bank account it is in.

In summary, the role of the shareholder is a remote one, marked by lack of emotional involvement and undue attention on financial returns.

The executives

“I was having a drink with the CEO of one of the largest oil companies in the world and he admitted, “Yes I’m concerned. You are absolutely right. This world is going to pieces.” And then he said, “But, hey, what can I do?” ‘ Ichak Adizes [15]

The senior executives sit at the heart of the corporation. Wielding huge power and carrying huge responsibility, these are our modern-day generals, leading armies of foot soldiers in the brave fight for greater efficiency, lower prices and wealth creation.

Heroes or villains, it is hard to say. In many people’s eyes the executives are the real cause of corporate wrong-doing. Yet before we blame them we need to understand the pressures they are under. For they, too, are not free.

When a CEO sits down to write his list of things to do for the day, it is a long one. Every day he (or she) has to consider the needs and expectations of many people including staff, customers, suppliers and shareholders. At the same time he has to keep an eye out for what the competition are doing whilst ensuring the business complies with the law. He also has his own personal needs and dreams to consider.

At the bottom of his list are some nice-to-haves. These are things that he hopes to get around to but will never be fired for failing to achieve. These include social and environmental matters.

Not surprisingly, few CEOs reach the end of their daily list. They simply don’t have the time or the energy or the thinking space to deal with all these often-conflicting matters. Fortunately for them, they usually don’t have to. Provided they keep shareholders happy, and don’t break the law, they will keep their jobs. No one can hold them to account for failing to serve social or environmental needs, provided they hit their financial targets.

In fact, CEOs have considerable autonomy. Uniquely in the corporate structure, they have no direct supervisor. What’s more, they amass great power through the hierarchy, which concentrates power just as a magnifying glass concentrates light. This is what concerns many people, because the combination of autonomy with power can lead to moral corruption and excess.

Power is intoxicating — it goes to people’s heads. Not to everybody’s, perhaps, but to most ordinary mortals’ heads. They begin to believe that they are wiser, more charismatic and more beautiful than ordinary men or women. They start to listen less and become detached from reality. They surround themselves with people who tell them what they want to hear.

They also, given half a chance, pay themselves and their close colleagues extremely generously. Executives as a group have proved adept over the years at systematically increasing their salaries, bonuses and share options, irrespective of the company’s performance [16].

Looked at from a human perspective, these patterns of behaviour are understandable. As we have seen, the executives are obliged by law and by the corporate structure to put money for shareholders first. Yet the pursuit of money on its own is meaningless; it can never satisfy our highest yearnings as human beings. The need for meaning in our lives is hardwired into our system, as the social observer Dana Zohar has commented [17]. Without meaning or purpose, we lose our bearings and sink to a frivolous pursuit of wealth, power or other distractions.

The staff

“Organisations of all kinds are cluttered with control mechanisms that paralyze employees and leaders alike… We never effectively control people with these systems, but we certainly stop a lot of good work from getting done.”[18]
Margaret Wheatley

Below the senior executives are layers and layers of managers, supervisors and low-level staff, arranged in a rigid hierarchy. A hierarchy is a power structure that lowers some and elevates others in an often arbitrary manner, with the aim of achieving control from above. It is inefficient at distributing information and, as we have seen, leads to excessive power at the top, but the main trouble with hierarchy is its effect on the human spirit.

A hierarchy does not teach employees to accept responsibility for their actions — it encourages them to hand over responsibility to their “superiors.” There is little need to think for themselves; they can simply follow orders and blame the manager when things go wrong. Equally, it can be demoralising for managers since they have the unrewarding task of motivating staff whilst trying to keep their own bosses happy.

Hierarchy could theoretically work well in an ideal world where all the managers were talented leaders with no ego, who lead by example and inspire their staff to give their best, while the staff were self-motivating, enthusiastic and humble. In the real world, however, this is rarely the case. Managers and staff are humans, with human failings, and a hierarchy doesn’t bring the best out of them.

We all like to feel in control of our work; in fact psychologists point out that this is a vital ingredient in mental and emotional health. [19] Being given orders can undermine our self-respect. The result is that in these institutions, staff seek survival routes. Some rebel and eventually leave. Some choose blind conformance, relinquishing responsibility in return for a steady income and a quiet life. Others become cynical, pretending to work while quietly doing as little as possible and passing the hours until it is time to go home. [20]

The net result

If we understand each individual’s position, we can start to explain why corporations systematically subordinate social and environmental interests. It is a natural tendency in humans to care for others and for the environment but these instincts are suppressed by the corporate structure.

Many, including Joel Bakan, think that if we want to improve standards of corporate behaviour, we should increase regulation [21], but regulation is rarely the best long-term solution. Regulators are always playing catch-up since they lack the detailed knowledge of what is really going on.

Far better, to my mind, would be to change the institutional framework to encourage the sort of behaviour we want to see. If organisation is the “mobilisation of bias”, as one social observer suggested [22], let’s change the bias of the corporation. RH Tawney put it best 90 years ago:

It is obvious indeed that no change of system or machinery can avert those causes of social malaise which consist in the egotism, greed or quarrelsomeness of human nature. What it can do is create an environment in which those are not the qualities which are encouraged. It cannot secure that men live up to their principles. What it can do is establish their social order upon principles to which, if they please, they can live up and not down. It cannot control their actions. It can offer them an end on which to fix their minds. And as their minds are so, in the long run and with exceptions, their practical activity will be. [23]

There are two things we need to change. We must make the ownership of corporations more democratic and their governance systems more open and less hierarchical. The good news is there are existing models we can learn from, as I discovered once I left the corporate world.

Alternative approaches

“If you want to build a ship, don’t herd people together to collect wood and don’t assign them tasks and work, but rather teach them to long for the endless immensity of the sea.” Antoine de St Exupery

In the last 15 years or so we have seen the emergence of a new term, the social enterprise, which I think of as “business with a purpose.” Social entrepreneurs tend to have a sense of mission; they are not simply trying to make money, but using business as a way to achieve something meaningful.

A leading example of a social entrepreneur is the Nobel Prize winner from Bangladesh, Professor Muhammed Yunus. He founded the Grameen Bank, a microcredit provider owned by its customers, and subsequently set up 31 other social enterprises, including a phone company that is now the largest company in Bangladesh.

There is no single legal structure associated with a social enterprise, but very few are owned by external shareholders. Mainly they are owned by “stakeholders”, those directly involved in the business. Many are customer-owned businesses, such as building societies, consumer cooperatives and mutual insurance businesses and some are employee-owned, such as workers’ cooperatives.

One notable group of social enterprises are fair-trade businesses. The whole fair-trade movement can be seen as a reaction to the inherent unfairness of the shareholder-ownership model. Not all fair-trade businesses have adopted a stakeholder-ownership structure [24] but they all share a commitment to serving the interests of their supplier producers and placing them above or at least equal to the interests of investors.

The beauty of stakeholder ownership is that it aligns the interests of the participants, thus encouraging the formation of a genuine community of interest, with a high level of trust and cooperation, an invaluable asset to any business. It also reduces, but does not solve, the governance issues of excessive executive power and staff alienation. We have to look elsewhere for solutions to these issues.

The most compelling solution to excessive executive power is what Australian academic Shann Turnbull describes as a “compound board.” [25] This is where the traditional responsibilities of the board are divided up between several bodies, rather than being concentrated in one. Well-known examples of compound boards can be found in Mondragon, the highly successful Spanish federation of workers’ cooperatives, and in the John Lewis Partnership (see below).

And what can you do about motivating staff and bringing the best out of them? Perhaps the answer can be found in the quote above from St Exupery. You have to inspire people and unite them around a common goal. The most passionate and articulate advocate of this way of organising is Dee Hock, the first CEO of VISA International and the driving force behind its creation. He emphasises clarity of shared purpose as a key organising principle, uniting people in pursuit of something meaningful [26].

Another source of inspiration for me has been the work of Elinor Ostrom. The first woman to win the Nobel Prize for Economics, this US professor studied communities that have successfully managed and maintained common resources, many of them for hundreds of years. These communities serve as a reminder that people are more than capable of sharing fairly the planet’s natural wealth, if we can just organise ourselves properly. [27]

We can then remove the control systems and scrap the hierarchy. This is not unheard of in creative, people-based businesses but it can also work in more traditional manufacturing industries. W. L. Gore, manufacturers of Goretex and other hi-tech products, has been in business since 1958 and has 9,000 staff. It has what it describes as a “team-based, flat lattice organisation that fosters personal initiative. There are no traditional organisational charts, no chains of command, nor predetermined channels of communication.” [28]

Michel Aumont playing Harpagon, the rich money-lender, in Moliere’s play The Miser in a scene from a 1969 production.

Finally I need to mention one of the most radical and exciting organisational developments of the last 20 years, which is the emergence of on-line communities collaborating to produce free software (Linux and Mozilla), free encyclopaedias (Wikipedia) and even a map of the human genome. These adaptable, anti-hierarchical structures hint at the radical possibilities opened up by new communication technology and particularly the internet. [29]

There is a question in my mind. Given that there are options available, and they appear to be successful, why have they not been more widely adopted? Why do people cling to the established corporate model? The answer I believe is in the mindset.

The mindset

The mindset is the fundamental beliefs that lay behind a system. If you want to cause a significant change in a system, according to systems theorist Donella Meadows, the mindset is the highest place you can intervene [30]. We seem to be stuck with an out-of-date mindset. I have identified four key beliefs that lie behind the corporate structure:

An acceptance of domination and subservience.

Our society views it as normal that the powerful dominate the weak. This manifests itself in many ways, in particular through male dominating female, humans exploiting the non-human world, and shareholders ruling over staff and the board.

Some would say the root of this is in the book of Genesis: “And God said, Let us make man in our image, after our likeness: and let them have dominion over the fish of the sea, and over the fowl of the air, and over the cattle, and over all the earth, and over every creeping thing that creepeth upon the Earth.” [31]

Property rights as a superior form of right.

Property rights are treated as superior even to human rights. If you are starving and take an apple from a tree on someone else’s land, you can go to jail (in Saudi Arabia, you might even lose your hand!).

Shares are a form of property, and the ownership rights that come with shares are not counterbalanced by matching responsibilities. Power without responsibility breeds immorality.

Growth is the best measure of success.

In businesses, as in most of our society, there is the unchallenged assumption that growth is the best, indeed the only valid, measure of success. We are obsessed by it and recognise no limits to it. By contrast, once a natural organism attains maturity it stops growing and develops in other ways.

If we are willing to go deeper and look at root causes, we might consider this fixation on growth is rooted in fear of death. By making believe that we can grow forever, we temporarily forget our mortality.

Profit is pursued above all other values.

We have become a society of Shylocks, Scrooges and Harpagons. As EF Schumacher put it “Economically, our wrong living consists primarily in systematically cultivating greed and envy and thus building up a vast array of totally unwarrantable wants.” [32]

Choosing an alternative mindset

An alternative mindset, one that serves us better, might look something like this:

Old mindset

New mindset

An acceptance of domination and subservience.

Equality (but not sameness), balance, dialogue, no-one in control. Giving back to Mother Earth more than we take.

Property rights as a higher form of right.

Human and ecological rights as more important than property rights. Ownership rights balanced with responsibilities.

Growth as the best measure of success.

Growth as one of many measures, and not the most important one.

Profit is pursued above all other values

Profit and wealth as a means to an end, not as ends in themselves.

It may seem too much to hope that a new mindset will emerge in the near future. Yet I see signs that change is coming. For example, there are signs of recognition of ecological rights at the international level. [33] The power structures we have lived with for so long are being shaken. The rich Western countries are saddled with debt, while new powers such as Brazil, China and India are growing in strength and confidence. Many corporate giants of the past are collapsing (investment banks, the American auto majors) and more will follow.

We are near the end of the industrial age and moving into the information age. Information in the form of words or data is being shared at the speed of light and this is having a profoundly disruptive impact on business and society.

The country of Bhutan has shaken off the constraints of GNP and officially adopted the measure of Gross National Happiness (GNH). Even President Sarkozy of France recently suggested that happiness and well-being should be part of a country’s gross national product. [34] Most significantly I feel, change is coming because we are approaching a major global crisis, a combination of the ecological, economic, social and energy crises, and this will precipitate the adoption of new thinking and new approaches. From this new mindset, new structures will emerge.

The way forward

“You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.” Buckminster Fuller

What might these new structures look like? I cannot give you one set recipe; each organisation will need to work out how to make these approaches work in their own particular circumstances. But I can give you four essential ingredients:

  1. The business is owned by those who are involved with or affected by its activities, and the executives are obliged to balance the interests of all involved.
  2. The business has a meaningful purpose, one that inspires and unites all participants.
  3. The business adopts governance systems that strive for balance between two apparent opposites, freedom and accountability.
  4. The participants are prepared to accept the responsibility that freedom brings!

Some inspiring examples

John Lewis Partnership — large-scale employee ownership

The John Lewis Partnership, including the John Lewis department stores and the Waitrose supermarket chain, is very familiar in the UK. In 2009 it was voted by readers of the Consumer Association Which magazine as the best UK retailer.

The purpose of the partnership is the happiness of the staff. The business is structured accordingly; it is owned by a trust on behalf of the staff. The original owner, John Spedan Lewis, started sharing profits with staff in the 1920s and transferred ownership of the business in 1950. Since that time it has thrived and now boasts nearly 70,000 employees in 29 department stores and over 200 food supermarkets.

John Lewis is owned on behalf of, but not controlled by, the employees. In fact, no-one is really in control; control is shared amongst employees and management. Half the board are appointed by the Partners’ Council, a representative body elected by staff. The other half are appointed by the Chair, who presides over the meeting. The Chair is powerful, but ultimately he can be dismissed by the Partners’ Council.

Two more key elements to the governance structure are the registrars, a type of ombudsman responsible for ensuring that the partnership remains true to its principles, and the in-house newsletter, produced by staff for staff to allow free flow of information within the organisation. Thus, as Australian academic Shann Turnbull has pointed out [35], the John Lewis structure has the four elements of a democracy: executive, legislature, judiciary and free press.

John Lewis is intriguing because it is a rare example of a large-scale employee-owned business. Employee ownership is not uncommon at a small scale (up to around 50 staff), but when such businesses try to grow beyond that size, the complexity increases significantly. With so many owners, the management can get tied down in too much explaining or politicking. Just imagine a democracy where every decision is made by referendum! It appears that John Lewis, by adopting a relatively sophisticated structure that balances control amongst the board and the staff, has found a way to avoid the problems of simple democracy where one person equals one vote. As a consequence the business has grown and prospered.

OBI and Media Markt — local autonomy

OBI and Media Markt are two German retailers, leaders in their fields (respectively home improvement and electrical goods). Both have thrived in what is reckoned by many to be the toughest, most competitive retail market in Europe. They are each very different but they share a belief in the power of local autonomy. Most large retailers retain tight, centralised control of how their stores are run. They have a powerful head office that decides strategy, locates new stores, determines store layout and negotiates with suppliers.

OBI and Media Markt, by contrast, entrust the stores and their local managers with considerable responsibility. At OBI, for example, it is the store manager who decides the range of goods the stores will sell. Rather than a “head office,” OBI has a central service centre that supports the stores by delivering a range of services on request.

The principle of local autonomy extends to store ownership. OBI has a mixed franchise model — some stores are owned 100% by OBI, some by local franchisees and others are joint ventures, part owned by OBI and partly by locals. Media Markt gives each store manager a 10% ownership stake in his or her store.

These two retailers represent another example of a healthy balance of power, in this case between the centre and the stores. The centre has the high-level strategic view, gathering information from across the network of stores, sharing best practice and helping to co-ordinate activity. The stores have sufficient freedom to ensure that they respond to the particular needs of their customers, and they hold the centre to account whenever it fails to deliver a good-quality service.

The Forest Stewardship Council — stakeholder ownership in a not-for-profit

The FSC is the world’s leading timber certification body. It is a not-for-profit business, reinvesting its profits rather than distributing them. The FSC ownership concept is based on the triple bottom line of economic, social and environmental. Its members are divided into three “chambers”: in the economic chamber there are retailers, wholesalers and plantation owners; in the social chamber there are trade unions and indigenous peoples groups; and in the environmental chamber there are NGOs like WWF and Friends of the Earth.

There is a similar structure at board level. The board has nine members, three appointed from each chamber, and no decision can be passed at the board unless a majority of each chamber approves it (this ensures consensus but prevents any one person blocking a decision).

The FSC has been very successful — it now certifies more than 13% of the world’s managed timber, and has seen off a number of commercial competitors. The former CEO of the FSC, Heiko Liedeker, accredits this success in large part to the ownership structure. As he points out, the FSC is the only timber certification body endorsed by Greenpeace and other NGOs; it thus has legitimacy, a priceless marketing asset that commercial certification bodies can’t compete with. As Liedeker commented to me once: “If a commercial organisation were structured this way, it would be unbeatable”.

There are certainly challenges with this structure. In particular the board, who lead the business, is composed mainly of amateurs rather than professional business people. According to Liedeker, this means they don’t always appreciate the commercial necessities of running a business and need to learn a lot before they can usefully contribute. Board meetings last three days and need a lot of facilitation.

Its main strength is that by embedding the triple bottom line into the structure, it forces those who usually oppose each other, such as retailers and NGOs, to sit around a table and thrash things out. As with the other companies described here, there is a healthy balance of power, from which well-thought-out decisions emerge.

Riversimple — a shared-ownership model

The last business I want to describe is still at an early stage in its development, and its structure is relatively untested. However, there are reasons to believe it represents a new paradigm, where stakeholder ownership is truly embedded in the business. Riversimple is a revolutionary transport business, which is developing a highly efficient hydrogen-fuel-cell-powered electric vehicle. Its purpose is to build and operate cars for independent use whilst systematically pursuing elimination of the environmental damage caused by personal transport.

Riversimple’s technology demonstrator June 2009

Riversimple began life in 1999 as a gleam in the eye of Hugo Spowers, an Oxford-trained engineer and former racing driver. A committed environmentalist, he quit the motorsport world in 1997 when he became convinced that the internal combustion engine would have to be replaced with something more benign. He decided he would have nothing more to do with cars! However, he was introduced to the work of US physicist Amory Lovins, who had conceived of a lightweight electric vehicle powered by a hydrogen fuel cell. Spowers decided to take on the challenge of developing this concept, pursuing his vision of truly sustainable transport.

The first milestone came when he successfully led a research project, in collaboration with Morgan Cars, Oxford University, Cranfield University, BOC and others, and part funded by the UK Department of Trade and Industry, to create an energy-efficient sports car. Known as the LIFECar, the vehicle drew much attention when shown at the Geneva Motor show in 2008.

In 2007, Hugo and a team of collaborators formed Riversimple LLP, with funding from the family of Ernst Piech, part of the Porsche dynasty, who have committed nearly £2m to the project to date. The funding was used to develop the strategy and build a demonstrator vehicle which was unveiled to the public at London’s Somerset House in 2009. The vehicle is a two-seat local car powered by hydrogen, with the following characteristics:

range on 1 kg tank of hydrogen

240 miles

top speed

50 mph

fuel consumption

300 mpg (energy equivalent)

carbon emissions

31 g CO2/km

As this book goes to press, Riversimple is in the middle of a round of capital raising, aiming to raise £25m to go to the next stage, which is further development of the vehicle, and pilot projects in the UK cities in 2012, leading to vehicle production in 2013.

When looking at the corporate structure, Spowers took the same approach as he did to the car design, starting with a blank piece of paper. The aim was to harness the goodwill and support of the various stakeholders in the business. The challenge was how to do this while attracting and retain capital. The structure that Riversimple devised looks like this:

There are three particular features I want to point out. Firstly, the business is owned by six “custodians” who serve and protect the various benefit streams that the business is aiming to deliver to the environment, investors, staff, users/customers, commercial partners (e.g. suppliers) and neighbours (e.g. local government). The board is instructed to strive to deliver multiple benefits, serving the community as a whole, not any one group.

Secondly, the intention is that profits will be distributed amongst all stakeholders. Of course investors will receive the lion’s share, since this is their primary interest in the business. But since the business is a creation of all stakeholders, it is right that all should share in the financial rewards.

The other notable feature is the stewards’ council, which has a function rather like the Registrar in John Lewis partnership. This function is really important for holding the board to account and encouraging high standards of decision-making. The theoretical justification for the stewards’ role can be found in the famous experiments by Stanley Milgram at Yale University in the 1960s [36]. Milgram conducted tests on students and members of the public, asking them to give electric shocks to a volunteer (in fact it was an actor, and no shocks were actually given). The results showed that the average person, when ordered to by an authority figure, would inflict a surprising amount of pain on another. Milgram found that people were far less likely to obey orders automatically if there was someone else present in the room putting the case against —a rival authority figure. In Riversimple’s structure, this is the role played by the stewards.

This structure is very new so there is not much else to say, except that those involved in devising it are convinced that it matches the purpose of the business and provides a solid basis for future success.

But are they more sustainable?

Are these businesses more ethical, more caring, more kind to the planet than their shareholder-owned competitors? I can’t pretend to have done any rigorous analysis. To my eyes, compared to their peers, the John Lewis partnership food stores put more focus on quality and customer service and less focus on pushing cheap food to cash-strapped consumers at any price. They play less with prices and use fewer gimmicks. Rightly or wrongly, I trust them more.

I am not a regular customer of OBI or Media Markt. What can be said is that these businesses have proved successful over the long term and long-term success is a fairly reliable indicator of a business that finds a balance between its various stakeholders. As for the Forest Stewardship Council, it is the only timber certification body supported by WWF and Greenpeace, which speaks for itself.

These businesses succeed because, fundamentally, they acknowledge that to thrive they need to get the best from the people involved. They empower their staff, and they stretch their organisational boundaries to encompass those who are normally considered to be outside, such as customers and suppliers. They make them all feel like owners, whatever level they work at. The result is that the people show a greater sense of commitment, stewardship, compassion and joy in their work, and the business thrives as a consequence, as does the community as a whole.

Treat your customers like friends and they will return and recommend you. Treat your suppliers like partners and they will work harder to deliver a better service. Treat your staff like collaborators, rather than “human resources”, and you’ll see the difference. Brad Bird, director of the blockbuster cartoon films “The Incredibles” and “Ratatouille” for Pixar, explained it this way: “In my experience, the thing that has the most significant impact on a movie’s budget…is morale. If you have low morale, for every $1 you spend you get about 25 cents of value. If you have high morale, for every $1 you spend you get about $3 of value.” [37]


“We are the ones we have been waiting for.” Thomas Banyacya Sr, Elder of the Hopi Nation

Ultimately it is up to each of us. We can choose to see ourselves in our daily lives as powerless, subject to the whims of politicians and corporate leaders and awaiting our fate with trepidation. Alternatively, we can choose to see ourselves as free, powerful, self-regulating, autonomous and creative individuals with a role to play in the birth of a new age of responsible business. Individuals who “resist more, and obey less.” [38] as Walt Whitman urged. If we do this, we free ourselves to make better, more conscious choices about the type of organisations we buy from, work with, participate in, create and own. The result will be businesses that demonstrate the best that humans are capable of. I can’t wait.


  1. See
  2. Thomas Clarke, in his recent paper “A Critique of the Anglo American model of Corporate Governance” (2009), pointed out that in the 1980s the average CEO in a publicly traded company in the US earned 42 times what the average worker earned. In 2002 this had risen to 400 times. As William McDonough, President of the New York Federal Reserve Board, said in 2002: “I can assure you that we CEOs of today are not 10 times better than those of 20 years ago.”
  3. For examples of this behaviour pattern, see No Logo by Naomi Klein (2000). Published by Flamingo.
  4. Kahlil Gibran (1926) The Prophet.
  5. Words sung by Leporello, the servant to Don Giovanni, at the beginning of Mozart’s Don Giovanni opera. First perfomed 1787.
  6. Architect Christopher Alexander wrote a trilogy of illuminating books discussing the influence of physical space on human activity. These are The Timeless Way of Building (1980), A Pattern Language (1978) and The Oregon Experiment (1978). Published by Oxford University Press.
  7. Karl Marx and Freidrich Engels “The Eighteenth Brumaire of Louis Bonaparte,” in Marx and Engels Selected Works 1962, vol 1:247.
  8. Theodor Zeldin (1994) An Intimate History of Humanity. Sinclair-Stevenson.
  9. The Russian word for work is “rabota” and the word for slave “rab”.
  10. Joel Bakan (2004) The Corporation, Constable and Robinson. p65.
  11. Quote from London Evening Standard, 25th November 2009.
  12. “Moving towards stakeholderism? Constituency statutes, enlightened shareholder value, and all that: much ado about little?” Andrew Keay, available for download at
  13. In Power (second edition 2005), Professor Stephen Lukes suggests that power manifests itself in three ways: (i) decision-making and behaviour; (ii) non-decision making, a refusal to countenance discussion of certain matters; and (iii) our very wants are influenced and shaped by the influencing force. It is this third type of power, which is tremendously subtle and all the more powerful as a result, that is exerted by shareholders.
  14. In a now famous article in 1968 published in the journal Science, Garrett Hardin described a situation in which multiple individuals, acting independently and rationally consulting their own self-interest, ultimately deplete a shared resource even though it serves no-one’s interest for this to happen. He called this dilemma “the tragedy of the commons”.
  15. Ichak Adizes, founder of the Adizes Institute, quoted in the magazine What is Enlightenment? March 2005.
  16. According to The Guardian newspaper survey of executive pay, salaries amongst corporate executives rose by 10% in 2009 in a time of world recession and fall in share prices. See
  17. Danah Zohar and Ian Marshall (1994) The Quantum Society. William Morrow and Co. Chapter 11.
  18. From Goodbye, Command and Control (1997) by Margaret Wheatley. Available for download at
  19. For example see R. Karasek (1979) “Job demands, job decision latitude, and mental strain: implications for job redesign.” Published in Administrative Science Quarterly, 24, 285-308.
  20. This is the approach recommended by Corinne Maier, an economist at state-owned Electricité de France, in her bestselling book Bonjour paresse (Hello Laziness) (2004) sub-titled, “The Art and the Importance of Doing the Least Possible in the Workplace”.
  21. See The Corporation (cited above), chapter 6.
  22. Elmer E. Schattschneider (1960) The Semi-Sovereign People: A Realist’s View of Democracy in America. Holt, Rinehart and Winston. P71
  23. R.H. Tawney (1921) The Acquisitive Society. G. Bell And Sons.
  24. Those that have adopted such a structure include Cafedirect, Liberation and Divine Chocolate.
  25. Shann Turnbull (2002) “A New Way to Govern: Organisations and Society After Enron”. Available at
  26. Dee Hock (1999) The Birth of the Chaordic Age. Berret-Koehler Publishers Inc.
  27. Elinor Ostrom (1990) Governing the Commons. Cambridge Univ Press. For her work in this field, she received the 2009 Nobel Prize for Economics.
  29. For a thorough analysis of the potential for new technologies to transform our society, see The Wealth of Networks (2006) by Yochai Benckler, available for download at
  30. Donella Meadows (1999) Places to intervene in a system. The Sustainability Institute. Available from:
  31. The Bible, King James edition. Genesis 1:26.
  32. E.F. Schumacher (1974) Small is Beautiful. Abacus edition published by Sphere Books. p30.
  33. See for more information.
  34. See
  35. See “A New Way to Govern” cited at 25 above.
  36. Described at
  37. Quoted in an interview in the McKinsey quarterly, April 2008, see
  38. Walt Whitman (2001) Leaves of Grass. Random House. First published in 1855.

Calculating the Energy Internal Rate of Return

Tom Konrad

With a constant technology mix, EROI (Energy Return on Investment) is the most important number because you will always be making new energy investments as old investments outlive their useful lives and are decommissioned.  However, in a period of transition such as the one we are entering, we need a quick return on our energy investments in order to maintain our society.  We have to have energy to invest; we can’t simply charge it to our energy credit card and repay it later.  That means that if we’re going to keep the non-energy economy going while we make the transition, we can’t put too much energy today into the long-lived energy investments we’ll use tomorrow.

To give a clearer picture of how timing of energy flows interacts with EROI, I will borrow the Internal Rate of Return (IRR) concept from finance.  IRRs compare different investments with radically different cash-flow timings by assigning each a rate of return that could produce those cash flows if the money invested were compounded continuously. Except in special circumstances involving complex or radically different sized cash flows, an investor will prefer an investment with a higher IRR.

To convert an EROI into an Energy Internal Rate of Return, EIRR, we need to know the lifetime of the installation and what percentage of the energy cost is fuel, compared to the percentage of the energy embodied in the plant. The chart above shows my preliminary calculations for EIRR, along with the plant lifetimes I used, and the EROI shows as the size of each bubble. 

The most valuable energy resources are those with large bubbles (High EROI) at the top of the chart (High EIRR).  Because of the low EIRR of photovoltaic, nuclear and hydropower, emphasizing these technologies in the early stage of the transition away from fossil fuels is likely to lead to a scenario in which we don’t have enough surplus energy, to both make the transition without massive disruption to the rest of the economy. Jeff Vail, the author of The Theory of Power (See refers to this front-loading of energy investment for renewable energy and nuclear as the Renewables Hump. Note that the three fossil fuels (oil, gas, and coal) all have high EIRRs.  As we transition to lower-carbon fuels, we will want to keep as many high EIRR fuels in our portfolio as possible. 

The area of each bubble represents the energy return on energy invested — EROI. The most valuable energy resources are those with large bubbles – a high EROI – at the top of the chart because this shows that they also have a high Energy Internal Rate of Return – EIRR. In other words, they pay back the energy invested in developing them rather quickly. Photovoltaic, nuclear and hydropower have low rates of energy return. Graph compiled and redrawn specially for Feasta by Jamie Bull,

Energy efficiency and “smart” strategies

I have been unable to find studies of the EROI of various efficiency technologies.  For instance, how much energy is embodied in insulation, and how does that compare to the energy saved?  We can save transportation fuel with “smart” strategies such as living in more densely populated areas that are closer to where we work, and investing in mass transit infrastructure. The embodied energy of mass transit can be quite high in the case of light rail, or it can be very low in the case of better scheduling and incentives for ride sharing.

Many efficiency and smart technologies and methods are likely to have much higher EIRRs than fossil fuels.  We can see this because, while their embodied energy has not been well studied, their financial returns have.  Typical investments in energy efficiency in utility run demand-side management programmes cost between $0.01 and $0.03 cents per kWh saved, much less than the cost of new fossil-fired generation.  This implies a higher EIRR for energy efficiency, because part of the cost of any energy-efficiency measure will be the cost of the embodied energy, while all of the savings are in the form or energy.   This relationship implies that higher IRR technologies will generally have higher EIRRs as well.  Smart strategies also often show extremely high financial returns because they reduce the need for expensive cars, roads, parking, and even accidents. See

Brain rather than brawn

The Renewables Hump does not have to be the massive problem it seems when we only look at supply-side energy technologies.  Demand-side solutions, such as energy efficiency, conservation and better public transport, enable us to avoid running into a situation where the energy we have to invest in transitioning from finite and dirty fossil fuels to clean renewable energy overwhelms our current supplies.  

Efficiency and smart strategies are “Brain” technologies, as opposed to the “Brawn” of traditional and new energy sources. As such, their application requires long-term planning and thought. Cheap energy has created a culture where we prefer to solve problems by simply applying more brawn.  As our fossil-fuel brawn fades away, we will have to rely on our brains once again if we hope to maintain anything like our current level of economic activity.

Featured image: Light bulb. Author: Ale Paiva. Source:

Why Pittsburgh real estate never crashes: the tax reform that stabilised a city’s economy

Dan Sullivan

Pittsburgh and Cleveland have adopted diametrically opposed strategies, with dramatically different results. In Pittsburgh, foreclosure rates are low despite the downturn, home prices are climbing slightly and construction rates are increasing. Cleveland, meanwhile, is struggling to stem a complete collapse of its housing market. The difference lies in the fact that Pittsburgh has had a site-value tax, which steadies the market, and Cleveland has not.

130 miles apart, Pittsburgh and Cleveland are similar cities in many ways. Pittsburgh lies at the junction of three major rivers and Cleveland on a natural harbour on Lake Erie. These navigable waters connected them to coal and iron ore mines and made them industrial hubs but the decline of steelmaking and related industries has left them as the two largest “rust belt” cities. At the beginning of the last century, Cleveland was the nation’s fifth largest city and Pittsburgh was eighth, and Cleveland was the third largest corporate headquarters (behind New York and Chicago) until it fell in rank to Pittsburgh. Both have seen their populations decline with migrations to the suburbs and to the south and west of the United States. Both now have fewer than half the residents they had during their peak years.

Cleveland has never fully recovered from the collapse of “big steel,” while Pittsburgh rebounded easily. This was because Ohio never gave Cleveland the option of having a land tax similar to that in Pittsburgh, and as a result, it relied less on real estate taxes for raising revenue. Its lack of a land tax means that its property prices tend to be higher than in Pittsburgh and purchasers consequently have to borrow more. In 2005, Cleveland had an affordability index [median house price divided by median household income] of 3.61 compared to 2.44 in Pittsburgh. Although 3.61 was not high by national standards, it was the highest of any northeastern industrial city.

In 2008, just after the housing bubble broke, Cleveland led the nation in mortgage foreclosures per capita while Pittsburgh’s foreclosure rate remained exceptionally low. Since then, the foreclosure rates in Las Vegas and many Californian cities, none of which collect significant real estate taxes, have passed Cleveland’s foreclosure rate. However, on September 15, 2010, The Pittsburgh Post-Gazette reported that while at the end of the second quarter of 2010, 21.5% of America’s single-family homes had underwater mortgages (the American term for negative equity), only 5.6% did in Pittsburgh. As a result Pittsburgh was top of a list of the ten markets with the lowest underwater mortgage figures. [37]

How land value tax prevents speculation

Land value taxes discourage the bidding up of land prices and it is cheap land coupled with lower taxes on productivity that attracts productive investors to Pittsburgh. During the boom decades, land-taxing cities like Pittsburgh could not offer the speculative gains that California did but now they not only offer lower land prices and lower productivity taxes, but, importantly in these volatile times, they also offer land prices that are unlikely to fall in the future simply because they never became inflated in the first place.

This came about because investors are not just interested in the return to their investment but in the after-tax return. If land is increasing in value by 9%, and there is a 1% tax on land values, the net return is 8%. However, a 5% tax on land values cuts the net return to only 4%. Similarly, if the return to a productive investment such as a building is 9% and the taxes on productivity are only 1%, the net return is 8%. If the productivity taxes take 5%, they reduce the return to only 4%. If an investor has the choice of putting all his money into building a small number of houses or into buying up a much larger number of vacant lots, he will choose whichever course of action yields the highest after-tax return. That is, he will choose to build in a land-tax economy and choose to buy up land in a productivity-tax economy.

Pittsburgh has not always done so well during recessions as it is doing today. It suffered badly in the real-estate crashes up to and including the 1906 depression but its property market has been remarkably stable ever since and is continuing to attract investors despite the present recession. This transformation is linked to a series of economic reforms adopted between 1906 and 1913. Before 1906, Pittsburgh gave special tax breaks to large landholders under “agricultural” and “rural” classifications. During Pittsburgh’s reform era, the city not only eliminated those breaks but also changed its property tax to fall more heavily on land and more lightly on improvements. Productive land use became less costly while idle speculation became unprofitable. As a result, city real-estate prices did not crash during hard times because they hadn’t inflated during boom times.

America’s early depressions were sometimes as severe as the Great Depression, which was “great” partly in the sense that it was global, just as World War I was originally called The Great War because it was global. (In fact, far more Americans lost their lives in the Civil War than in both “great wars” combined.) America’s most severe panic was probably in 1837, which closed more than 40% of the banks [1] and wreaked havoc on the economy.

According to historian Stefan Lorant, “The panics of 1819, 1837 and 1857 hit the city [Pittsburgh] with particular severity. Business slackened and factories closed; and workingmen and merchants alike felt the impact of the hardships.”[2] Lorant notes that the depressions of 1873, 1884 and 1893 were also severe in Pittsburgh. He quotes The Growth of the American Republic, by professors Morrison and Commager:

Prices and wages hit rock-bottom and there seemed to be no market for anything. Half a million laborers struck against conditions which they thought intolerable, and most of the strikes were dismal failures. Ragged and hungry bands of unemployed swarmed the countryside, the fires from their hobo camps flickering a message of warning and despair to the affrighted townsfolk.[3]

In 1894, “Coxey’s Army” of unemployed began its march on Washington, D.C., from western Ohio, with members having arrived by train from as far as Texas. Their ranks nearly doubled when they passed through Pittsburgh and Homestead.

The Russell Sage Foundation’s famous Pittsburgh Survey of 1910 showed how severe the poverty was here. “One third of all who die in Pittsburgh… die under five years of age. One fourth… die under one year of age.”[4]

Fighting land monopoly and speculation

Until recently, Americans had always opposed the kind of land monopoly that had oppressed Europe. The Articles of Confederation called for even the federal government to be funded from a tax on the value of privately held land. [5]

The minor parties that formed the Republican Party also formed the roots of the progressive movement. They regarded land monopoly as a second form of slavery, and opposed both forms vigorously. The Free Soil Party advocated “the free grant to actual settlers,” as opposed to selling large tracts of land to privileged elites. [6]

Abraham Lincoln had gained his reputation defending homesteaders against “land sharks” who would file counter-claims and demand payment to drop the challenges. In 1843, Lincoln wrote:

“An individual, or company, or enterprise requiring land should hold no more than is required for their home and sustenance, and never more than they have in actual use in the prudent management of their legitimate business, and this much should not be permitted when it creates an exclusive monopoly. All that is not so used should be held for the free use of every family to make homesteads, and to hold them as long as they are so occupied….

The idle talk of foolish men, that is so common now, will find its way against it, with whatever force it may possess, and as strongly promoted and carried on as it can be by land monopolists, grasping landlords, and the titled and untitled senseless enemies of mankind everywhere.” [7]

After the Civil War, progressives witnessed the closing of the frontier and saw land speculators out-bidding those who wanted to put the land to use during the boom years, fueled by the expansion of bank credit that contracted during recessions. Besides monetary and banking reform, progressives advocated real-estate taxes, particularly on land, to make such speculation unprofitable. [8]

The Pittsburgh battle for reform

Although land speculation was a problem everywhere, it was particularly bad in Pittsburgh, which had been carved up for the benefit of officers in the Revolutionary War. Speculators and large estates in the city got special “farmland” and “rural” tax rates at the expense of urban properties. The price of land, and the taxes on urban real estate, became so high that workers lived in tiny houses on tiny lots. [9]

Henry W. Oliver, president of the Pittsburgh Common Council, complained in an 1872 speech of “the great landholders and speculators, and the great estates which have been like a nightmare on the progress of the city for the last thirty years.”[10]

The same Pittsburgh Survey that exposed Pittsburgh’s poverty showed that this classification system had “enabled big real estate holdings to get out from under the full share of their local responsibilities.”[11] Corrupt assessment practices also shifted taxes off of speculators. However, that government was swept away after perhaps the largest municipal scandal in American history resulted in 41 indictments against city councilmen, bankers and industrialists.

In 1911, the reform government abolished special tax breaks for large estates [12] and abolished the taxation of machinery. [13]

In January 1912, the Pittsburgh Civic Commission, headed by H. D. W. English and H. J. Heinz, reported that land prices were extraordinarily high in Pittsburgh at that time, second only to those in New York City. “Industries will be slow to locate in Pittsburgh if rents or prices of land are higher than in other cities,” the report stated.

It also noted that a few individuals and families had owned large tracts and that some owners, by making ground leases or by improving to a very small extent, had received sufficient income to enable them to hold their land for increases in value due to the city’s rapid growth.

A few individuals have been enabled by circumstances to place and hold land prices at a figure which prevents the profitable use of the land by others. Can this paralyzing grip on Pittsburgh’s growth be broken? We recommend twice as heavy a tax on land values as on building values as the remedy. This means to place a penalty on holding vacant or inadequately improved land and to offer special inducements and premiums for improving land. [14]

Mayor Magee endorsed the measure on learning that Vancouver, British Columbia, had enjoyed considerable success after replacing their building tax with a land value tax (LVT). [15] Supporters got a state law introduced for second-class cities (Pittsburgh and Scranton) requiring those cities to adopt the Civic Commission’s proposal, with a phase-in spread over ten years.

Even the Pittsburgh Real Estate Board (now known as the Association of Realtors) had joined with the Single Tax Club of Pittsburgh, the Civic Commission, the Pittsburgh Board of Trade, the Civic Club of Allegheny County and other organizations in support of the bill. The Pittsburgh Dispatch wrote: “The realty board endorsed the act and recommended its passage and is anxious to have the Governor approve it.” They sent a delegation to Harrisburg to urge passage of the bill. [16]

It passed in the House by a vote of 113 to 5 and in the Senate by a vote of 40 to 0. [17] A repeal campaign was launched by the largest landowners, including agents of the Schenley estate, the biggest of all. Some opponents of the graded tax said that “unimproved landowners are the poorest of property owners” and that the graded tax was disturbing to the economic and financial situation in Pittsburgh and that it would bring depression and hard times.[18] Former Mayor Magee traveled to Harrisburg to defend the bill. He said the opposing delegation from Pittsburgh didn’t represent the small property owner but the large interests of the city. “They come here weeping and wailing,” said Magee, “and you would think the small property owner would be wiped out of existence. They tell you it is a terrible experiment.”[19]

The Pittsburgh Press also defended the law, stating:

The law is working to the complete satisfaction of everybody except a few real estate speculators who hope to hold idle land until its value is greatly increased by improvements erected on surrounding territory. Everybody endeavoring to gain a big profit in this parasitical manner is naturally opposed to the law and to the principle which it represents; it is nevertheless endorsed by and is clearly in the interest of the vast majority of the public.[20]

The repeal bill passed both houses, but was vetoed by Governor Brumbaugh, who said:

This repealer is opposed by the largest group of protestants that have been heard on any bill…. It is advocated by those in charge of the fiscal policy of one of the two cities concerned. Inasmuch as there is such a conflict of opinion, and inasmuch as the law has scarcely yet been tried, it is well to allow it to operate until a commanding judgment decrees its fate. To disturb it now, when a preponderance of opinion favors it, is unwise.”[21]

Pittsburgh’s experience with land value tax

Land prices only rose 14% in Pittsburgh during the 12 years after the graded tax was adopted in 1913, while they boomed in the rest of the nation. [22] Real-estate interests complained that LVT was robbing Pittsburgh landowners of gains enjoyed elsewhere. However, Mayor Magee saw these gains as speculative, and stood by his actions. He noted in 1924:

I am principally interested in two things regarding taxation: the progress of the graded tax law and the problem of assessments for public works. Both concern the unearned increment, the profit of land owner who becomes rich through growth of the community without effort on his own part. I am frankly opposed to him…. [H]e is a parasite on the body politic.”[23]

Magee was proved correct. National land prices peaked in 1925 and plummeted with the Great Depression, except in Pittsburgh. Despite the great flood of 1936, Pittsburgh’s land prices fell only 11% between 1930 and 1940, compared to 58% in Detroit, 50% in Los Angeles, 46% in Cleveland, 28% in Boston, 27% in New Orleans, 26% in Cincinnati, 25% in Milwaukee and 21% in New York. Land prices in Pittsburgh even fell less than in Washington, D.C., where the New Deal was booming. [24]

Of course, times were still tough in Pittsburgh, especially for those who depended on steel or other industries tied to the global economy. Still, Pittsburgh was spared the added problem of a real-estate crash because its graded tax had discouraged speculators from bidding up land prices during the previous boom.

After World War II, other industrial cities got hammered once again, but even though Pittsburgh had been the world’s number-one supplier of armor plate during the war, it enjoyed a renaissance that was the subject of at least 26 national and international news articles. [25]

The most amazing aspect of Pittsburgh’s renaissance is that it had a construction boom without a real-estate price boom. In 1960, when real estate went into another recession, Pittsburgh continued building.

During that recession, House & Home, the construction industry’s leading trade journal, recommended that other cities prevent land bubbles by doing what Pittsburgh was doing — taxing land values more heavily than building values. It quoted Pennsylvania governor and former Pittsburgh mayor David L. Lawrence as saying: “There is no doubt in my mind that the graded tax law has been a good thing for the city of Pittsburgh. It has discouraged the holding of vacant land for speculation and provides an incentive for building improvements.”[26]

Over the years, Pittsburgh adopted other taxes that eroded the effect of LVT on speculation. In December 1978, however, Pittsburgh council president William J. Coyne rejected the mayor’s call for increased wage taxes and convinced council to nearly double the LVT. The next year Pittsburgh raised the LVT to five times the building tax rate, and two years after that raised it again. These were also Pittsburgh’s last overall tax increases for twelve years.

Another spectacular surge in construction followed as owners of underused land became more willing to sell. The only eminent domain controversy involved land acquisition for the PPG complex the year before LVT increases went into effect.[27]

1978 was also the year that California passed Proposition 13, which sharply curtailed real-estate taxes in that state. From that point on, cities in California got smaller shares of their revenue from property taxes than cities in any other state. While Pittsburgh enjoyed steady land prices in the midst of a building boom, California was consumed by a land-speculation frenzy. Foreign interests acquired more California land within the first 18 months after Proposition 13’s passage than they had accumulated in the entire history of that state.[28]

Most foreign land acquisition was by Japanese concerns. How did they get enough US dollars to buy up California land? Early in 1980, US Steel chairman David Roderick accused Japan of “dumping” cars on the US market, noting that Toyotas sold for 17% less in the US than in Japan.[29] Japan had already been increasing exports to the US for some time, but lightly taxed California land made American dollars even more attractive to Japanese land speculators.

In 1979, Pittsburgh’s largest employer, the Jones & Laughlin steel mill, shut down. Even this didn’t prevent Pittsburgh from enjoying the biggest construction surge in its history. The real-estate editor of Fortune credited the LVT with playing a major role in Pittsburgh’s “second renaissance.”[30]

Councilman Coyne was elected to Congress in 1982. In 1983, council president Ben Woods convinced council to reduce taxes on buildings and make up the shortfall from higher taxes on land values, even though there was no need for more revenue.

However, Pittsburgh and its school district also levied an aggregate 4% wage tax, and research requested by mayor Masloff indicated that this tax was driving renters and potential home buyers out of the city at an alarming rate. In 1988, Masloff determined that the city had a surplus, and reduced the wage tax by five-eighths of one percent.

In 1989 she proposed to lower the wage tax by another 0.5 % and make up the revenue with a conventional property tax increase of 10 mils (1 percent) on both land and buildings. Council president Jack Wagner proposed to put the entire increase on land values instead. A storm of protest raged at the public tax hearing against increasing overall property taxes, but most testimony with regard to Wagner’s LVT alternative was in favor of it. In a compromise with the mayor, Wagner’s council increased the tax on land value by 33 mils and on buildings by 5 mils. Pittsburgh’s real-estate values and construction levels remained steady during the recession of 1990.

As Pittsburgh’s economy continued to grow and land values remained stable, California’s land prices rapidly rose and its economy became strained. California’s housing affordability index (median house price divided by median income) had been only 10% higher than the national average when Proposition 13 passed. By 2005, it was three times the national average. 23 of the nation’s least affordable cities were in California. The median house price in San Francisco rose to 12.8 times the median income. Even dusty, miserable Bakersfield, the most affordable city in California, had an affordability index of 5.6. Pittsburgh’s index was 2.44, among the lowest of any northeastern industrial city.[31]

Once again, the real-estate collapse missed Pittsburgh because LVT prevented the bidding up of Pittsburgh’s land prices during the national boom decades of the ’80s and ’90s. In 2008, with the nation’s construction industry coming to a near standstill, the business agent of Pittsburgh’s Carpenter’s Union announced that they were looking for 250 additional carpenters and apprentices to fill the increased demand Pittsburgh was enjoying. Meanwhile, California, which had curtailed real-estate taxes at the behest of those who said that those taxes were “forcing people out of their homes,” led the nation in housing foreclosures.

Undoing the graded tax

Support for taxing land values more than buildings remained so strong in the City of Pittsburgh that efforts to repeal the policy consistently failed.[32] many years, the chief city assessor was also the head of the Henry George Foundation of America, which championed LVT throughout North America [33]

In 1942, however, responsibility to assess land values was shifted to the county, where opposition to LVT was stronger and support weaker.[34] A provision of Pennsylvania law was added to the second-class county code requiring Allegheny County to assess the value of land and improvements separately. Although the law reflects preferred assessment practices anyhow, it was put in place to protect the city’s LVT.

County assessors gradually came to ignore land values, keeping those the city assessor had put in place and putting subsequent changes onto building values whenever possible. 1980 assessments were a fairly accurate reflection of 1950 land values.

This meant that land values became relatively over-assessed in declining neighborhoods and under-assessed in advancing neighborhoods. However, the city’s shifts to LVT in the 1980s were followed by substantial land-assessment reductions in Shadyside, the trendiest neighborhood in the city, and smaller reductions in Oakland and Squirrel Hill, the city’s two most prosperous and politically prominent neighborhoods after Shadyside. This marks the point when county assessors crossed the line from neglect to overt malfeasance. Even so, home owners in the poorest neighborhoods still saved under LVT, and many in the richest neighborhoods paid more. Middle-income neighbourhoods saved the most.

However, opponents of LVT dominated the county board of assessors. They hired a private assessment firm, Sabre Systems, which assessed land values with such a terrible lack of uniformity that the city was forced to abandon the tax in 2001. Sabre Systems assessed lots with buildings on them six to ten times as high as identical, adjacent vacant lots. They did this only in Pittsburgh, even though there were three smaller cities in the county, Clairton, Duquesne and McKeesport, that also relied on LVT.

Wildly erratic land-value assessments forced Pittsburgh City Council to abandon LVT in 2001. The increased cost to home owners was partly offset by special exemptions, but this was done at the expense of renters and business properties, who have had to pay higher taxes into a shrinking budget. Many council members blamed the assessments and said the tax change was temporary. Only one council member blamed the LVT itself.

After losing a long series of court cases and appeals, the county is today finally addressing assessment irregularities under court order. The city controller and several city council members have expressed interest in returning to LVT if realistic land assessments are made because, if Pittsburgh is to be protected from the next recession, it must end these abuses and reinstate LVT before the next boom era.

Pittsburgh is not alone

Every one of the 19 land-taxing cities in Pennsylvania enjoyed a construction surge after shifting to LVT, even though their nearest neighbors continued to decline. Clairton, Altoona and Aliquippa have shifted farther than any other cities toward a pure LVT, and are enjoying unrivaled economic vitality. LVT has also been far more extensively employed in Canada, Australia, New Zealand, Denmark and other countries, with similar success. Those who dispute the effects of LVT and suggest that Pittsburgh is prospering for other reasons have not put forward an answer as to why virtually all land-taxing cities in the world out-perform their neighbors.

Even states that rely heavily on conventional property taxes (with equal rates on land and buildings) have done far better than states that have curtailed property taxes.

Claims that Pittsburgh is prospering because of its efforts to become a “green” city do not explain how Pittsburgh held its land values during the Great Depression, when it was the dirtiest, smokiest, most polluted city in the nation, nor why Pittsburgh land values failed to inflate as it cleaned itself up during what were boom years for other cities, nor why the much greener cities of Portland and Seattle have suffered serious economic setbacks.

Claims that Pittsburgh was saved by its economic development projects try to gloss over the many disastrous projects, where one subsidy after another went to businesses that opened, sucked out the subsidies and then failed, or to over-subsidized corporate businesses that drove out competing, fully-taxed smaller businesses in a process known as “economic cannibalism.” Those who suggest that the new casino helped the economy have to admit that the city with the highest foreclosure rate in the U.S. is Las Vegas, the casino capital of the nation.

If anything good can be attributed to our changing policies, it is that the changes were either thwarted or came too late to do the damage done in other cities. Pittsburgh fought unsuccessfully to get a “commuter” wage tax like the 2% tax in Cleveland or the roughly 4% tax in Philadelphia. However, those cities’ commuter taxes drove out businesses even faster than residency taxes drive out residents. Some suburbs of Cleveland even made a science of stealing businesses by charging the tax on workers and then rebating half of it back to the employers. Meanwhile, Philadelphia’s flight of businesses has been so bad that even the Philadelphia Association of Realtors has advocated shifting from wage tax to LVT.

What will become of Pittsburgh?

If Pittsburgh can either force the county to assess land properly or retake control of its own assessments, it will once again be able to boast the most recession-proof real estate in the nation. However, if it does not do so before the next real-estate price boom, it will not be able to prevent the next crash either. This is because LVT prevents booms and preventing the booms is the only way to prevent busts.

Lessons for environmentalists

Extending LVT to air, water and non-renewable resources

Some pollutants are so noxious that they must be banned outright, but most must merely be reduced. The principle that the earth is a commons applies to air, water and non-renewable resources. A pollution tax on emissions begins with the premise that everyone has an equal right to enjoy the air and water, and that those who use the air and water to hold their pollutants owe rent to the rest of use, whose enjoyment of that air and water is diminished. Thus, while a local LVT might not prevent factory pig farms, local taxes on water pollution certainly would.

The difference between land and non-renewable resources is that the latter are consumed, while land is merely held. Therefore, non renewables cannot be rented. Still, the principle that resources are part of the commons means that it is proper for the community to decide how quickly or slowly it wants those resources to be consumed, and to set royalty charges accordingly.

Cap and trade and the Enclosure Acts

Cap and Trade, on the other hand, is based on the idea that those who have been polluting all along have somehow earned a “property right” to continue polluting, and that those who want to pollute, even if they produce more and pollute less, must purchase “pollution rights” from the entrenched polluters.

It is put forward as a liberal environmentalist idea, but it has its origins in the “pollution tax credit” schemes of Ronald Reagan and Margaret Thatcher. It is a very dangerous approach, as it not only rewards past polluters, but enables them to punish cleaner, greener competitors.

For example, a company that can produce electricity with half the emissions must first purchase pollution credits from the established polluters. If the established polluters don’t want to sell, or want to charge enough to make the greener alternative unprofitable, their Cap and Trade privileges actually hinder the transition to greener technology.

The burden of Cap and Trade falls on ordinary people for the benefit of the privileged. It is analogous to the Enclosure Acts of England and other countries, where, “for the sake of game,” ordinary people were prohibited from hunting or disturbing wilderness land, while nobles were allowed even more latitude to run roughshod over the environment.

There are various sound alternatives to Cap and Trade, from pollution taxes to Cap and Share, in which every citizen gets pollution tax credits to sell to the polluters. The differences between these proposals are minor, and the best alternative is probably the one that is simplest to administer. The essential feature is that polluters must pay the community to pollute, rather than greener industries paying dirtier industries to pollute less.

LVT vs. rural building restrictions

Many environmentalists think of sprawl as building in rural areas, and try to fight sprawl with restrictions that hamper the economy. Supporters of LVT see the demand for rural land as caused by the failure to build compact development in urban and inner suburban areas. Rural land is prized by developers for one reason only: it is less expensive to buy than urban and suburban land. A tax on the value of land draws that development inward and reduces the demand for rural and agricultural land. Removing land speculation as an obstacle to urban development has a positive effect on the economy, compared to imposing restrictions on rural land. The notion that “good environmentalism is good economics” is true with regard to LVT. It is hard to make a case that it is good with regard to building restrictions and the bureaucracy that inevitably accompanies them.

Problems with exemptions

Some environmentalists argue for exemptions for land owners who hold their land as farmland or in a “clean and green” state. Those who hold “clean and green” land are invariably wealthy, for who else can afford to hold large tracts of land out of use? Often, land is held back where demand is high, forcing development to “leap frog” over that land into more rural areas. As the editors of House & Home noted half a century ago,

Suburban sprawl is what makes homebuyers drive past miles of unused or underused countryside to get home to their tiny 60’ x 120’ lots. (Open fields, cow pastures, private golf links, and millionaire estates are fine, but it is much better to drive out five miles beyond your home to enjoy seeing them when you want to than to have to drive five miles past their “No Trespassing” signs when all you want is to get home.)

House & Home thinks “development easements” are the worst idea yet. They just aggravate and perpetuate the sprawl by using tax money to keep golf links, orchards, and cow pastures where houses should be built, and push homebuilding out beyond to where the golf links, etc., should be. Green belts should be planned for maximum, not minimum, public use and enjoyment of the land. The 1,200 acre Field estate will make a fine state park, but as a fenced-in private property it was little or no good to anybody except the owners.[35]

Many who first hear about LVT fear that it will lead to “overdevelopment” of land, with no green space or human scale. However, Pittsburgh is reputed to have more trees than any other city in the U.S. While this is partly due to the city’s hilly terrain, it is also due to very large city parks, many of which were sold or donated to Pittsburgh by its largest land owners.

Municipal parks are an appropriate way to maintain green space; that is, space that is maintained for the benefit of all should be under the control of democratic institutions. In contrast, open land has often been held by private interests that enjoyed tax breaks while waiting for land values to “ripen,” and was then sold at a profit. Meanwhile, development leap-frogged over that land.

“Special farmland assessments” whereby land is assessed at its farm value instead of its market value, are similarly flawed. In genuine farming areas, the farm value is the market value. Farmland assessments mostly protect farms within or adjacent to the suburbs, and force the suburbs to leap-frog into farming areas.

“Smart growth” development zones and density zoning

Development zones, often based on the Portland model, are artificial attempts to offset the effects of automobile-based sprawl. They impose incentives for developing within the zone and penalties for developing outside the zone. However, where land is inadequately taxed, the price of land inside the zone will simply rise until it swallows the value of the incentives, and the price of land outside the zone will fall until it offsets the cost of the penalties.

The problem is further aggravated by density limits within the smart-growth area. Laws that prohibit high-rise buildings in low-rise zones, low-rise apartments in townhouse zones, and townhouses in zones for free-standing houses with minimum lot sizes, prevent development from occurring within the zone, both by preventing the developer from doing more with less land, and by keeping land prices high within the smart-growth zones. Abolishing density limits within urban areas is a lot smarter than imposing arbitrary smart-growth zones.

These smart-growth zones assume that development should occur within a large circle, but a look at development patterns prior to the automobile reveal that this was rarely the case. Rather, development was dominated by small, self-contained towns, connected to urban hubs by rivers, rail lines, or even roads. However, the roads were lightly traveled, as people tended to work and shop in the same small towns where they lived, and buy a substantial share of their foodstuffs from local farmers.

The bottom line is that it doesn’t matter how far a new development is from the center city. What matters is how far the people in the development will travel from their homes to the places where they routinely work and shop. This is impossible to manage via zoning laws, but substantial taxes on pollution and resource consumption will give people an incentive to arrange their lives accordingly, while substantial LVTs would make it easier for them to do so. Meanwhile, taxes on their own productivity could be reduced.

Alternative energy subsidies

Alternative energy subsidies take money from ordinary taxpayers, including those who have arranged their lives to consume very little energy and give it to people who consume energy, merely because they consume “less.” Thus the person who bundles up and lives in a cold house subsidizes high-efficiency furnaces, and the person who mostly gets around by walking and bicycling subsidizes electric and hybrid vehicles for those who cling to the automotive lifestyle. Replacing productivity taxes with LVTs and resource consumption taxes still gives the owner of the high-efficiency furnace and the electric car an advantage over the person with a dirty furnace and a gas-hog car, but it also gives the sweater-wearing walkers and cyclists an advantage over all energy wasters.

The same is true of public transit, which is extended via subsidies into sprawling suburbs where it just doesn’t work. Taxing land values and eliminating zoning creates the kind of environment where transit can compete with very little subsidy. What subsidies transit needs can come from the land-value increases that transit creates.

Ecological economics

The bottom line is that ecology and economics come from the same root and mean almost the same thing, the former from “study of the house” and the latter from “management of the house.” However, it is not enough for environmentalists to insist that good ecology is good economics, for the corollary is that bad economics makes for bad ecology.

Environmentalists naturally rankle at economics, which has been a tool for maximizing wealth from the time when kings sought to out-produce rival nations to modern times when corporate monopolies seek to out-produce rival corporations. That obsession has caused economics to become increasing divorced not only from environmentalism, but also from principles of justice and even from rationality.

Still, disdain for economics on the part of environmentalists perpetuates that logical disconnect. Fortunately, environmentalists do not have to wade through neoclassical econobabble. Rather, if they start with the same key premises that classical liberal economists and philosophers started with, the solutions become clear. Those premises are:

  1. that the Earth is a commons and that the rent of land belongs to the whole people,
  2. that the right to the Earth is a usufruct right, not a right to leave it in worse condition than one found it in, and
  3. that what a human being produces is entirely his own, so long as he has compensated the community for what he has taken from them or foisted on them.

Following these principals, one no longer has to argue whether global warming is apocalyptic or merely detrimental. The one form of energy that is wasted when it is not consumed is human energy. So long as human energy is taxed, following these principes make it obvious, even to global warming deniers, that taxes on non-renewable energy should replace taxes on human energy. So long as human beings sit in forced idleness, it becomes obvious that keeping non-renewables out of use is preferable to keeping human beings out of use.

The limits of resource consumption were not an issue in Thomas Jefferson’s day. Yet Jefferson recognized that forced idleness was caused by monopolization of the earth. Observing wretched poverty in France, he wrote:

Whenever there are in any country uncultivated lands and unemployed poor, it is clear that the laws of property have been so far extended as to violate natural right. The earth is given as a common stock for man to labor and live on. [36]

The global warming issue has been polarized into a battle between what may be called the alarmist camp and the denier camp, to the detriment of all. Stepping back from this battle, environmentalists can “cut the Gordian Knot” by realizing that it is not necessary for others to agree with their analysis of the problem, but only for others to agree with their solutions.

Shifting taxes off labour and legitimate (labour-produced) capital by placing as much of the tax burden as practible on land, natural resource extraction and pollution is a proposal that many in the “denier” camp can support.


  2. Lorant, Stefan, Pittsburgh, The Story of an American City, 1999 edition, p. 101
  3. ibid, p. 196
  4. Ibid. p. 287, citing Homestead chapter of The Pittsburgh Survey.
  5. Articles of Confederation, Article VIII, “All charges of war, and all other expenses that shall be incurred for the common defense or general welfare, and allowed by the United States in Congress assembled, shall be defrayed out of a common treasury, which shall be supplied by the several States in proportion to the value of all land within each State, granted or surveyed for any person…
  6. Article 14, Free Soil Party Platform of 1848.
  7. Letter from Lincoln to Martin S. Morris, Springfield, March 26, 1843, included in Basler, Collected Works of Abraham Lincoln
  8. Terence Powderly, head of the Knights of Labor, wrote that, if not for banking privilege, there would be no need for labor unions. The KoL listed one of its purposes as “To prevail upon governments to establish a purely national circulating medium, based upon the faith and resources of the nation, and issued directly to the people, without the intervention of any system of banking corporations, which money shall be a legal tender in payment of all debts, public or private..”
    -Thirty Years of Labor, chapter 9, “The Circulating Medium.”
    Powderly also wrote, “The demand of the order of Knights of Labor is, ‘that all lands now held for speculative purposes be taxed to their full value.’ The great difficulty is to ascertain to what extent lands are now held for the purpose of speculation…. If the Knights demanded that ‘all lands held by parties, other than the government, shall bear an equal proportion of the taxation required for the maintenance of the government, and unimproved lands shall be assessed at the same rate as the nearest improved land,’ they would come nearer to the establishment of a just rate of taxation, and whether lands were held for speculation or not, they would not escape their just proportion of taxation. -ibid, chapter 8, “Land, Telegraphy and Railroads.”
    See also, George, Henry,
    Progress and Poverty, Book V, Chapter 1, “The primary cause of recurring paroxysms of industrial depressions.”
  9. Some of these tiny-house neighborhoods survive today, most notably in the bottoms of Lawrenceville.
  10. Henry Oliver Evans, Iron Pioneer, Henry W. Oliver, New York, Dutton, 1942, pp. 65-6.
  11. Civic Frontage: The Pittsburgh Survey, “The Disproportion of Taxation in Pittsburgh,” pp. 156-213; 455-68.
  12. Pennsylvania Laws, 1911, p. 273, approved by Governor John K. Tener, May 11, 1911.
  13. ibid, pp. 287-88, approved, May 12, 1911.
  14. Pittsburgh Civic Commission, Civic Bulletin, January, 1912; also An Act to Promote Pittsburgh’s Progress, published by Pittsburgh Civic Commission in 1913.
  15. “But before finally committing himself to the plan, he [Mayor Magee] sent a special investigator, Thomas C. McMahon, a member of the board of assessors, to visit municipalities in western Canada where similar tax systems had been in operation and were attracting favorable attention. The City of Vancouver had entirely exempted buildings from taxation by gradual steps over a period of fifteen years. That community was enjoying a remarkable building boom, conditions were very prosperous, and the city was receiving ample revenue under its new tax plan.
    “Mayor L. D. Taylor of Vancouver came to Pittsburgh about this time to address the Oakland Board of Trade and gave a first-hand report which was decidedly in favor of shifting the tax burden from improvements to land values. Mayor Magee then gave his endorsement to the proposed law and ever thereafter was a consistent supporter of the graded tax plan, bringing to its support many of those who were closely associated with him in political life.”
    -Williams, Percy, The Pittsburgh Graded Tax Plan, Its History and Experience, citing Robert M. Haig, The Exemption of Improvements from Taxation in Canada and the United States, 1915, pp. 170-1 (a report prepared for the Committee on Taxation of the City of New York).
  16. Pittsburgh Dispatch, May 6, 1913, headed “Real Estate Board Committee Goes to Confer with Governor”
  17. Pennsylvania Legislative Journal, 1913, Vol. 2, pp. 1635-36, 2453
  18. Pittsburgh Post, April 28, 1915
  19. op.cit., Williams, Percy
  20. “Graded Tax Repealer Jolted,” Pittsburgh Press, May 18, 1915
  21. Pittsburgh Press, June 10, 1915, p. 1.
  22. op. cit., Williams, Percy, appendix, table 2, “Assessed Valuation – Land and Buildings – City of Pittsburgh”
  23. ibid,
  24. ibid,
  25. Saturday Evening Post, August 3, 1946; June 9, 1956; Commonwealth, September, 1947; Pittsburgh Bulletin Index, January, 1948; Business Week, March 12, 1949; June 21, 1952; April 2, 1955; Greater Pittsburgh, April, 1949; National Geographic, July, 1949; Time, October 3, 1949; Architectural Forum, November, 1949; The American City, July, 1950; Town and Country, August, 1950; Harper’s, January, 1951; August, 1956; The Atlantic Monthly, May, 1951; Fortune, June, 1952; The Spectator (London), December 19, 1952; Real Estate, March, 1953 ; January, 1960; Collier’s, May 30, 1953; USA, Tomorrow, October, 1954; National Municipal Review, March, 1955; Reader’s Digest, May, 1955; Liberty Magazine, February, 1956; Life, May 14, 1956; Look, January 8, 1957; The Nation, February 8, 1958; Holiday, March, 1959; Engineering News-Record, November 19, 1959; Esquire, September, 1960; Newsweek, October 24, 1960
  26. House & Home, August, 1960, Time-Life Inc., p. 139
  27. “Plan in Pittsburgh on Building Fought; Merchants Oppose Taking of Their Property for Downtown PPG Industries “Headquarters Protest from Diocese,” New York Times, June 3, 1979, page 51
  28. California Department of Agriculture. (Further citation needed.)
  29. “Steel exec thinks Japan ‘dumping’ cars in America,” The Bulletin, Bend, (Deschuttes County), Oregon, Feb. 5, 1980, p. 24.
  30. “Pittsburgh raised its tax rate on land from 4.95% to 9.85% of assessed valuation in 1979, while leaving the rate on buildings at 2.475%. New construction, measured by the dollar value of building permits issued, rose 14% as compared with the 1977-78 average. In 1980 the city widened the differential still more, to a tax rate of 12.55% on land vs. the .475% building rate, a ratio of 5.07 to 1. … Construction in 1980 leaped 212% above the 1977-78 average, reflecting ground-breaking for a new crop of office skyscrapers that is giving the city its so-called second renaissance (the first came in the 1950s with the redevelopment of the Golden Triangle). The adoption in 1980 of three-year tax exemptions on all new buildings – but not the land – also boosted construction. In 1981 construction peaked at nearly six times the 1977-78 rate. “Some of the dozen new office towers that have gone up in Pittsburgh would have been built with or without tax concessions; downtown office space had been growing scarce. But the widening differential between the taxes on buildings and land undoubtedly helped. It cut the annual bill for owners of some skyscrapers by more than $500,000 a year when compared with conventional 1-to-1-ratio taxation.” – Breckenfeld, Gurney, “Higher Taxes that Promote Development,” Fortune, August 8, 1983, pp 68-71
  31. Buffalo is the only large northeastern industrial city with a lower affordability rank, but Buffalo is notoriously slum-ridden. “Housing Affordability Rank of 243 US cities with populations of over 100,000.”
  32. A study by the Pennsylvania Economy League (Weir and Peters, 1986) alleged that a consensus of experts claimed land value tax did not aid development and hurt home owners in poor neighborhoods. However, this study was so tortuously contrived and so easily refuted that city council ignored it and continued shifting the tax burden to land values. Statements from development experts who had contradicted the PEL’s desired conclusions were either twisted or ignored by the researchers. For example, former director of economic development Ed DeLuca had said land value tax did encourage development, but thought that further shifts would be necessary to have a sufficient effect. They claimed there was a consensus that the tax had no effect and that further shifts would also have no effect. Donald Stone, professor of economic development at Carnegie-Mellon University’s School of Urban and Public Affairs said that interviewers responded to his positive comments about land value tax by changing the subject. Also, a check of the poor neighborhoods cited in the PEL study showed that most properties paying more were absentee-owned, and that owner occupants actually saved in those neighborhoods. A subsequent study by city finance director Ben Hayllar suffered from exactly the same failure to distinguish owner-occupied from absentee-owned properties. Owner-occupied properties in Hayllar’s own sample also saved in poor districts where he alleged land value tax was punitive.
  33. Percy Williams was executive secretary of the Pittsburgh Real Estate Board from 1918 to 1921. A Democrat, Williams was appointed to the board of assessors by Mayor Magee, a Republican, in 1922. The first Democrat mayor Appointed him Chief City Assessor in 1934, where he remained until the county took over assessing in 1942. He had been Secretary and a trustee of the Henry George Foundation since it was chartered in 1926 until his passing in 1978.
  34. Almost all of the testimony against land value tax in the city’s public hearings came from non-city residents within the county, particularly from the affluent Mount Lebanon Township. These suburban residents either owned city real estate or represented organizations of real estate interests. In contrast, most civic leaders and ordinary voters in the suburbs do not live in the four cities that have taxed land values (Pittsburgh, McKeesport, Duquesne and Clairton) and are oblivious to the issue.
  35. House & Home, Time-Life, Inc., August, 1960, page 115
  36. “Property and Natural Right,” Letter to James Madison, Sr. from Fontainebleau, France, Oct. 28, 1785

Featured image: A map of Pittsburgh, Pennsylvania with its neighborhoods labeled.
Author: Tom Murphy VII

Should the United States try to avoid a financial meltdown?

Appendix to the US edition of Fleeing Vesuvius.

Many Americans believe that the US cannot avoid hyperinflation or a catastrophic financial crash. Tom Konrad‘s position is slightly different. He thinks that while a crash is possible, the system is more likely to end with a whimper rather than a bang and that any progress towards building a more sustainable society will be undermined unless the country undergoes significant cultural change. With the confidence that comes from living on the other side of the Atlantic, however, Richard Douthwaite thinks he’s wrong and that, in Fleeing Vesuvius terms, what he’s saying amounts to “let’s allow this flow of lava to pass over us. Some of our institutions will be burned up and lots of people will have a bad time but, after it’s over, we can rebuild in a more sustainable way”. Here’s how the debate between them went:

Richard Douthwaite

I think we agree, Tom, that the United States is trapped in a downward spiral, blocked on one side of its balance sheet by insupportable debts and on the other by unsustainable asset values. When the spiral was running upwards, almost everyone was delighted because the value of their houses and other assets was increasing and enabling them to live well by borrowing more. The increased borrowings injected additional purchasing power into the economy. This increased the price people were able to pay for assets – which, of course, they bought with borrowed money. It was a wonderful flight from reality while it lasted.

But in 2007 and 2008, when the high energy and commodity prices generated by a global boom pushed up the cost of necessities and left the weakest borrowers with too little money to service their debts, many of those flying on borrowed wings came crashed to. down. The sub-prime mortgage crisis set the spiral turning in the other direction, pulling everything down rather than pushing it up.

In this new environment, no-one wishes to borrow to buy assets since their prices are still falling. People are fearful about their financial future and have cut their spending, increased their saving and are trying hard to pay back their loans. This has given the downward spiral an extra twist as the lack of demand has cut national income and increased unemployment, sucking even more families into the debt trap.

The imbalance between asset values and incomes has widened the gap between rich and poor. The US is one of the most unequal countries in the world and the richest 1% of the population enjoy almost 24% of the nation’s income, up from only 9% in 1976. This was the reason for the death of the American Dream. More than 80% of the increase in national income generated by economic growth between 1980 and 2005 went to this group. The heads of companies did particularly well. They earned an average of 42 times as much as the average worker in 1980, but 531 times as much in 2001.

This imbalance is closely linked to the imbalance between asset values and GDP. Whenever the top 1% get a further increase in income, they spend very little of it on American-made goods and services – in other words, in ways which create many jobs for other people. Most is invested in assets and has the effect of driving their prices up or at least limiting further falls.

If conventional policies continue to be followed, the gap between rich and poor makes it very difficult to see how the US economy can avoid a continuing decline, still less how it can ever “recover”. Any pick-up in the economy can only come from a pick-up in demand for US goods and services but the rich aren’t going to consume any more, the poor can’t afford to and the various levels of government are overborrowed as it is. The federal government’s deficit in 2010 was expected to be over 10% and many local governments have had to make extremely painful cuts. The only possible conventional source of extra demand is an increase in exports but that’s going to be difficult to achieve as the manufacturing base has been badly eroded by free trade policies and there is huge competition from the rest of the world.

What all this says to me is that an unconventional policy is needed that gets money into ordinary people’s hands without asking anyone to take on any more debt. Would you agree?

Tom Konrad

While I agree with your assessment of the situation, I disagree about the proper goal for a long term shift to a sustainable economy. A sustainable economy operates at a much lower level of economic activity and its primary driver of economic activity is not consumer spending. America’s problem is cultural as well as economic. We have an unsustainable culture, where status is equated with material wealth. The race to acquire more material wealth is in its essence unsustainable. The death of the American Dream of universal home ownership is not just a product of inequality: Universal home ownership leads to sprawl, and is incompatible with a sustainable society.

Our most important task is to bring our culture back to one much more like that of our founding fathers, where industry and hard work are the source of status, instead of the possession of material wealth. Benjamin Franklin used to fetch the paper for his printing shop in a wheelbarrow with an intentionally squeeky wheel. His intent was to call attention to the fact that he did this manual labor for himself, raising his reputation as an hard worker. Today, such manual labor is more likely to be seen as a badge of shame, and fit only for immigrants. Our debt-fueled society has led Americans to believe that we are entitled to everything we want, including the luxury of not working for it.

Putting money into people’s hands without requiring anything in return will simply reinforce America’s unsustainable culture. Instead, current debts should only be absolved through the arduous process of bankruptcy. Social inequity should be addressed through high taxes on inheritance and programs such as the Earned Income Tax credit, while the income tax and Social Security payments (which reduce the rewards of work) should be replaced with a large and meaningful carbon tax on energy, including the embodied carbon of imported goods.

These tax changes should help reward sustainable industry, and reduce the incentives to live the lavish, unsustainable lifestyles to which Americans have come to believe we are entitled.

Richard Douthwaite

What you are saying, Tom, is that before the people of the United States can rediscover the virtues of thrift and hard work, they need to pass through the fires of Vesuvius in order to be cleansed of their false consumerist values. My view is that there is a better, surer way to achieve this result. The hundreds of thousands of corporate and personal bankruptcies you envisage would destroy incomes, savings, pensions and asset values. People would become fearful, bitter and possibly violent as a result. They would look around for scapegoats (the Jews, perhaps?) or turn to crime.

Consequently, I just can’t see a period of financial turmoil creating a good basis for building a better society. A worse one seems much more probable as extremist leaders are likely to emerge in response to mass unemployment and the rich could well use force to protect themselves and their lifestyle. The positive things you want like a carbon tax would be much harder to introduce (“What, you want to tax the energy that makes me so productive?”) and Dan Sullivan’s land-value tax ideas was would be rejected outright because people would realise that such a tax would prevent their property values from ever recovering to whatever they were at their peak.

The choice before the US is either to increase incomes by enough to support the current level of debts and asset values, or to write down debts and asset values until they correspond with current income levels. In essence, I’m proposing increasing incomes by enabling more people to work while you, although not exactly wanting a massive deflation, think that one is necessary and would ultimately prove beneficial.

The main reason you seem to reject my job creation route is that it would involve giving everyone some money “for nothing” for a few years while enough jobs were being created to raise the national income by enough to enable it to support the country’s massive public and private sector debts. Let’s go through my proposal carefully to see if your objections really hold.

In November 2010 the Federal Reserve said that the recovery was “disappointingly slow” and it would inject money it had created out of nothing into the economy by buying $600bn-worth of long-term Treasury bonds from their holders before July 2011. As it had already announced it would buy $250bn to $300bn worth of bonds over that period, the announcement meant that between December 2010 and June 2011, the Fed will be handing over about $3,000 for every person resident in the United State to investors in exchange for their bonds. It hopes that the investors will spend the money in ways which boost the economy but it seems unlikely that they will.

Instead of the $3,000 per head being passed to investors, I would like to see some of it being given as a gift to state and county governments so that they can restore local services and rehire the folk they have sacked. I would like the remainder to go on an equal per capita basis to every US resident in a form which prevented them from using it in any other way than to pay down their loans. This would strengthen the banking system, People with no debt would be required to invest it in, say, community facilities or the transition to renewable energy.

It would not be necessary to give this money away for nothing. It could be part of a package involving, say, the introduction of a carbon tax although Peter Barnes’ Cap and Dividend, the US equivalent of Feasta’s Cap and Share, would be much better. This puts up the price of fossil fuel according to its carbon content but returns every cent to the public. Everyone gets the same amount, so those people who use less than the average amount of fuel come out better off. What do you think? Would enabling people to clear their debts for three or four years while jobs were being re-created and the financial system was being restored to balance really be demoralizing?

Tom Konrad

Bankruptcy replaces unsupportable debt with debt which is (barely) supportable. The losses are borne by the lenders foolish enough to extend unsupportable credit. Inflation destroys incomes and asset values by cheapening them, and the losses are borne by savers who have tried to do all the right things to prepare for their futures.

I certainly see your “solution” would feel much better in the short term but I don’t see how it will do anything to help with the cultural problems I think are the root cause of our current and future crises. Americans are not going to scale back their lifestyles (a must in a sustainable world) without some pain. As long as we pursue strategies that avoid pain, no lessons will be learned and we will simply be setting the stage for the next crisis.

I agree my solutions are not politically feasible, while yours are fairly close to the current policies of deficit spending and quantitative easing (printing money.) Americans are not ready for the necessary painful adjustments, and they would no doubt look around for someone to blame besides themselves.

Just because we’re not ready for it does not mean it’s not the right thing to do.

Richard Douthwaite

I don’t think we can avoid pain whatever we do. As Chris Vernon’s article shows, fossil energy supplies are likely to contract very rapidly over the next 40 years. The economy will contract with them, turning everyone’s lives upside down. That will be very painful. My proposal is an attempt to minimise the pain by ensuring that we have a functioning monetary system to help us through a wrenching transition to a low-carbon economy. What’s your alternative strategy to get families and communities through the next forty years? Can you protect savers whose money has been invested in activities which are based on cheap energy from taking hefty losses? I can’t, but an inflation would mean their losses were gradual rather than near-total and overnight.

Tom Konrad

I believe that your course is a well-intentioned attempt to treat symptoms but may actually worsen the disease, and you believe that my course may kill the patient.

I agree the proper goal is to minimize the pain of the transition to a low carbon economy, but I believe much of that pain is necessary to avoid future bubbles caused by excess stimulus in the face of declining energy supplies. A root cause of the last (housing and debt) bubble was the Fed’s stimulus in response to the dot-com crash, with the money driving up asset values to unsustainable levels. Too much stimulus now, whether it takes the form of giving money directly to households or the Federal Reserve buying Treasury bonds will simply lead to new bubbles and new crises.

In order to reduce the pain today, we should focus on enabling debt renegotiation in the place of bankruptcies. Yet the remaining debt not only needs to be supportable on the reduced incomes that come with lower economic activity, it needs to be large enough that Americans do not just learn the lesson that we can borrow as much as we want and there will be no consequences.

Savers who invested in cheap-energy supporting businesses, like heavy debtors, should take losses. They also have a lesson to learn, and that lesson is that investments in sustainable businesses are sustainable assets, while investments in unsustainable businesses will decline. Investors who invested in sustainable businesses such as energy efficiency, resource conservation, alternative transportation, and sustainable agriculture, are already doing their part to shift our economy in a more sustainable direction, and the fruits of their wise investing should not be appropriated through inflation.

Investors have ways to protect themselves from inflation (by buying commodities or inflation-indexed bonds, for instance) or from declining energy supplies (by buying the securities that are aiding the transition.) If investors must protect themselves against inflation as well, they will have fewer resources (both financial and mental) to dedicate to the transition to a sustainable economy.

Just as the attitudes of ordinary households are important in helping them adjust to a sustainable economy which is not based on debt-fueled consumerism, the attitudes of investors are important in deploying the capital we need for the transition. Cultural attitudes are not changed by pretty speeches; cultural attitudes are formed by real world experiences.

The only way I see to change the American culture to one that is compatible with a sustainable economy is to make both households and investors who have lived and invested unsustainably bear much of the consequences of their actions.

Yes, we must let the lava of Vesuvius wash over us, because it will wash over the most unsustainable parts of our economy and culture. We should not build dams in a vain attempt to stop the lava, especially when those dams are piled on the foundations of a sustainable future economy.