- The Natural Rights of Ownership
- Our Bodies as private property
- Trade as private property
- Space as public property for rent
- Cotton and Wood as private property
- Oil, Water and Iron as public property for sale
- Gold and Silver as public property for rent
- Money as public property for rent
- Loans as private property for a limited time
- Inventions, Books, Songs as private property for a
The seventeenth century British philosopher John Locke was the first to present an argument for the existence of private property rights as derivable not from the whims of kings or the tyranny of the majority, but from natural law.
In the late nineteenth century in America, the economic activist Henry George extended Locke’s doctrine to include the idea of public property as also a right derived from natural principles.
This essay is built upon Locke’s and Henry George’s ideas and goes beyond them in exploring categories of things to reason what kinds of things are naturally private or public property.
Both Locke and George would agree that natural law precedes man made law and provides its moral foundation. They would each agree in fact that property rights are a subset of human rights, which also comes from natural law.
Most of us already believe that to kill another person would be a violation of natural law. Most would agree that even if a majority voted to pass a law that it was not a crime to kill a member of a minority group then that discriminatory law would violate a natural law. There is some moral principle here that preceded even a democratic majority vote. Whether it is the commandment of God saying “thou shalt not kill”, or something about the way the world is organized, or a feeling in our hearts, most of us believe that to kill is wrong. Then our man made laws are only reflections of this deeper principle that preceded it.
Says Alan Dershowitz in his book “Rights From Wrongs” Basic Books –2004, p-5, p16: “What are the source of our rights? The question is crucial because in the absence of an authoritative source of rights, such as God or nature, it is easy to argue that manmade rights must take a backseat to the preferences or perceived needs of the majority in a democracy. Unless there is a compelling source of rights that trumps majoritarian preferences, the default position in a democracy should be a vote of the majority. Imagine a new democracy being formed on a distant island (or planet). Everyone agrees to begin with the principle of one adult person, one vote. Someone asks, ‘what about the rights of minorities?’. It would then be fair to ask, ‘Where will these rights come from? What exactly are they? And why should they trump the votes of the majority?’ The first classic answer is that rights come from a source external to law itself, such as nature, God, human instinct, or some other objective reality. This theory (or, more precisely, set of theories) is generally called natural law. Our declaration of Independence explicitly cited natural law – ‘The laws of Nature and of Nature’s God’ – as the primary source of the colonists’ right to separate from Great Britain. …Rights, thus understood, are quintessentially undemocratic, since they constrain the state from enforcing certainmajoritiarian preferences. If the claim of the aggrieved individual is recognized as a right, it will generally trump the will of the majority – at least the current majority. Rights are a powerful trump over mere ‘interests’ or ‘preferences’.”
Although Dershowitz promotes the idea of human rights in the end he rejects the Jeffersonian idea of natural rights. Although he shows it to be a powerfully useful concept he simply cannot see any evidence for the independent existence of natural law. However, Dershowitz never mentions Locke, and does not seem to see the simplest and most obvious explanation of the source of natural rights – which is that natural rights come from each person’s natural or God-given ownership of his own body.
Our Bodies as private property
The philosophy of Natural Human and Property Rights as originally formulated by John Locke and utilized by the founding fathers of the United States always begins in the same place: each person has the inborn right to the ownership of his own body. It is a “Natural” right because it is the way things are as found in nature. There is a one to one relationship in the world between what we call our “selves” and our bodies. Each person is the owner of one and only one body. The self and the body are “naturally” connected in such a way that we say “my arm” (Siamese twins notwithstanding) and nobody ever can dispute what we mean. This is the basis of all property rights and all human rights. It is the reason why slavery, that is one person owning another person’s body as property, is a violation of human rights as well as property rights. Furthermore the ownership of your own body is “inalienable” – that is it cannot be sold, traded or given away, because it is the basis of all other property rights.
The fact that my body is my private property, is an independent principle that cannot be changed by cultural or historical contingencies. For that reason the Bill of Rights is part of the Constitution of the United States. These are not just laws that can be easily changed by the whims of popular consensus. The inborn rights of the individual must be protected from the tyranny of the majority. The acceptance of the principle of Human Rights may even be more fundamental to the American way of life then Democracy – the rule of the majority.
To own one’s own body is to be able to move around acting and speaking freely without hindrance or interference from another person’s body. It is the basis of the criminal law. We can do whatever we want so long as we don’t hurt each other. The principle of maximum freedom says that each person has the freedom to do what he or she so chooses so long as they do not block another person’s freedom. We cannot murder or assault each other. Other than that we have the freedom to say and do whatever we want and go wherever we want and live our lives however we choose to. Trade as private property
The Libertarian Principle states that the individual should have complete control over decisions regarding his own body so long as he does not interfere with the same rights of others.
This means that Libertarians are against laws that attempt to define the moral rights of a person where there is no victim other then himself. For instance, drugs should be legalized. The legitimate purpose of the State is to protect people from hurting each other. Other then this, the maximum freedom of each individual, who is the sole owner of his own body, must be respected.
To a libertarian, freedom of trade is viewed as much as a basic right as Freedom of Speech. According to Adam Smith, human beings have a natural propensity to “truck, barter and exchange” with each other. Once humans began talking to each other they immediately started agreeing on making swaps. I’ll provide you with medical service if you help me build my house. The fact that money is usually exchanged for a product or service is beside the point. Any transaction financial or otherwise is a private and voluntary act and should be protected as a basic right. But this would make such taxes as income and sales taxes an illegitimate act of state violence, because an agreed upon trade is a private act between two persons. The public in the name of the tax collector is interfering and making claim to something in which it has no stake. It is as if the public was to tax an individual for singing in the shower. This would constrain the law of the private ownership of ones own body. All private trades such as an exchange of medical service for home remodeling are free expressions of such services that are privately owned and directly extend from the private ownership of our own bodies.
If we viewed “free trade” as a basic human right of the same nature as “free speech” any laws which calls for income and sales tax are in fact a violation of the natural law of human freedom. If we were to tax the printed word and charge a fee for each word printed wouldn’t that in effect put a burden on “free speech” so that in fact it was no longer “free”. Why is an economic exchange any different? Free trade if it is taxed with sales or income taxes is no longer free and a basic property right has been compromised.
An argument to legitimize these kinds of taxes may say that in a contract between two parties the government is always there through its civil jurisdiction to enforce the contract should a dispute arise. I ordered a cheeseburger with fries and got a hamburger with no fries so I am not paying the bill – the restaurant calls the police. Given that there is always a possibility of dispute, which will be taken into the public sphere, all people who engage in trade are merely paying a usage fee to the government for government protection of all contracts. But then by the same argument why not tax each printed word to cover the possibility of libel suits whose enforcement would also have to be paid by the taxpayer.
Something must pay for all government protection of our civil liberties but it does not make sense to infringe upon liberties in order to pay the cost for protecting them.
Space as public property for rent
Henry George called it Land. But we are living in Modern Times and so I will give it three dimensions and call it Space for in today’s world the air space a building occupies has a value much like the land space and the earth deep below the surface also now can be accessed and has a potential value that was never known before.
Freedom to move one’s body as one would choose cannot exist without space. Bodies always move in space. To be free one must not only be able to have private ownership of your own body and be free to move it as you please, but you must have some space in which to move it.
People naturally privately own their bodies but then what about the space between people?
In the public space – streets, sidewalks, parks, beaches – we are all equally free to move around. We can set up appointments, meet each other and make our deals. But we are not free to make permanent unauthorized changes to the public environment. We can’t just start digging up the land in a park to build a house. That is because the public, which must agree on how it should be parceled out and zoned, owns space and will not allow arbitrary private control over its use.
In order to be free not just to move around but to alter the environment we need to have exclusive rights to an area of space. Within that exclusive territory we can play God. We can rip out old trees and plant new gardens. But our total freedom in a private space comes at the expense of everybody else giving up his or her freedom to move around. Nobody is allowed to come inside my private space without breaking the trespassing laws. In fact if all space were privately owned everybody would be confined to their own little territories and nobody would have any freedom to go anywhere. We’d be like little crystal particles vibrating in place. In such a world of private territories, people who had no territory could not exist.
Because the space between our bodies is not privately owned it is by default publicly owned.
What Henry George said was that if man made laws were in harmony with natural rights people would only be giving up their equal access to move within the public space in exchange for rent. The private landowner pays an ongoing fee to the public for the privilege to exclude. The larger and more desirable the space that the public is giving up the more rent that the private individual should pay.
Henry George called this rent the Land Value tax because unlike Real Estate taxes in most localities today, this tax does not increase with improvements on the vacant land. A vacant lot is assessed the same value even after a fabulous house is built on it. Because the house is created out of labor which is a natural right.
Private property also includes a certain amount of air space above your house (or land below it). Depending on town zoning you may not be able to build above a certain height. People who own condos essentially own a slice of the sky – which is why it may be more accurate to talk about a 3 dimensional space tax rather then George’s 2 dimensional single tax on land. Buildings that occupy space above a certain height may be charged an additional rent for the air space, which could for instance be denying an ocean view to others.
A landlord that rents offices sets the rent based on the market value of the space that is being rented. He does not charge based on a percentage of how much income you make from your business. Nor does a landlord charge rent based on the value of the furniture and equipment you put in the space. In the same way it makes no sense for the public as landlord of all space to charge rent based on how much income is generated from the space or how much value is assessed on the contents of the space. We pay rent based on the size and value of the raw space. What goes on inside that space is private business and should not be taxable.
The Georgist system of site value taxation is the same as this. George’s single tax is a tax on the unimproved value of raw space. Unlike a private landlord when we say that the public owns the space we do not mean that it can arbitrarily repossess it at the end of a limited time lease. The public owns the space and acts as landlord only in principle. In practice, unlike furniture in a rented apartment, buildings cannot be easily separated from the space they occupy and to repossess the land after a certain fixed time period would mean the owner being de-possessed of his buildings. This would be a public theft of private property created through free labor.
See the Henry George’s essay: The Single Tax, What It Is and Why We Urge It Cotton and Wood as private property
So far we have said nothing of a man’s legitimate possessions. For if space is rented from the public and not permanently owned – then all that we would privately possess for free and forever are our own bodies and its services.
The rest of our private possessions are derived from the space we rent. The land within that space may have a natural productive power, which we can channel through our own skill and labor. The person who rents the private use of the land has the option of growing things on that land, such as cotton or vegetables for food or trees for shelter. Renting the space through the single tax assumes that you are also renting the land's productive power which you can only realize through your own private labor. Once the tax on unimproved land is paid the taxpayer may privately own forever and outright that stuff when mixed with his own labor that he grew upon it.
One man uses the land to grow cotton and another leaves it alone and does nothing with it. If we are already taxing people for the exclusive use of the land itself, there is no need to further tax the one that through his own free bodily activities chose to grow plants on it. Any such tax is a violation of that person’s freedom.
If the farmer trades the cotton to a clothing manufacturer and the clothing manufacturer who is also renting space from society for his factory then turns the cotton into shirts then that should not be taxed either. For any free labor is a basic freedom of action and any tax on trade is also a restriction on natural freedom.
If a lumber producer grows trees for wood and the wood is sold to someone to build their house there is no need to then tax the sale of the lumber or the building of the house. There is only a legitimate tax on the land for growing the trees and the land for building the house. All else is a restriction on bodily activity and freedom.
After all rent on space is paid then my house and my clothes become like extensions of my body – things that I own forever and without any further tax penalty. They are things that were produced by free labor on land that was legitimately held in private possession (by tax payers) and came to me through free and unrestricted trade.
Oil, Water and Iron as public property for sale
If wood came from trees, which the lumber company grew on the land it rented from society – then there, is no need for any additional tax on the lumber products themselves. But in cases where the trees were not planted and grown but found on the land – old growth forests that had been there for centuries before mans’ arrival, then society certainly has a right to charge for the private removal of those trees. The public has the right to sell what’s found on the land. The old growth forest belongs to everyone equally and its logging should only happen when society sells that one-time removal right to private individuals. What is found on the land and removed from it devalues it and there should be a sale corresponding to the removed asset value.
Like the old growth forests, fossil fuels such as oil (which come from the decayed remnants of ancient forests) are not grown but simply found in the public space between human bodies. Oil is a non-renewable and consumable natural resource. It is non-renewable because unlike food and wood we cannot grow it and harvest it in our lifetimes. It is consumable because its value consists in being used up in an instant transformation from potential energy into real work. Once the transformation is complete there is no reversing it. It can only happen once.
No individual person has the right to deny other people from using this one-time non-renewable energy resource unless those other people voluntarily give up their equal claim to the resource and are compensated by charging a fee to the private user. Energy companies should bid to the public for the right to purchase this resource.
As oil is burned it is turned into energy plus a waste product – gases in the atmosphere that we all must now breathe. The consumer who burns gas and dumps the waste into the air for others to breathe is denying to everybody else the ability to have clean air. The community has a right to tax the use of a polluting energy (at the pump) as well as the mining of fuels because we are giving up our right to the pristine air in exchange for a compensatory fee. Anytime somebody permanently devalues the public space such as clearing an old growth forest, strip mining, or dumping some air pollutants into it, this should be done only when the public is willing to allow it to happen for a price.
Fresh water, like oil, is found in the public space. It is in fact a kind of potential energy just like oil. As the energy stored in oil came from the sun and was captured by organisms millions of years ago - fresh water came from the oceans and needed energy from the sun to cause evaporation. The rain formed rivers that will eventually flow back into the ocean. But on its way we can divert it into our showers, toilets, washing machines, and lawn sprinklers. Whoever diverts the water for his own private usage is excluding others from using it, either now or at some future time, and is subject to the same kind of one-time usage fee that the oil extractor or air polluter would be subject to.
The stuff that we are trying to get people to recycle: metal, plastic and glass all came originally from natural resources such as iron and aluminum. Although in theory a piece of iron can be re-used over and over again for different purposes, the reality is it is so abundant in the earth’s crust that it is actually cheaper for people to re-extract it anew for each manufactured use.
The incentive for society is to recycle and the best way to promote it is to make the mining fee for these common materials higher. By making it more expensive for the extraction of these minerals, it makes it more economical for manufacturers to buy from recycled products rather then mined products - therein freeing up land that would have been used on mines and garbage dumps.
Once the mining fee is paid there is no more justification for any additional taxes on the manufacturer or trade in finished products as that would amount to a tax on the free labor of the manufacturer.
The material of automobiles should start from legitimately paid for natural resources – iron paid from the mining tax. Then there is no justification to tax the creation of the car from those materials as the manufacture is born out of free labor. Our cars, like our homes and clothes, from the time we buy them are then like extensions of our bodies - private untaxable possessions until they and are discarded and recycled for some other purpose.
Gold and Silver as public property for rent
In the public space between privately owned bodies we find several kinds of valuables. Some things found have a temporary value such as fossil fuels and therefore can only be sold by the public for private use. But the land itself has a permanent everlasting value and therefore can be rented out to reflect this never-ending source of value. Future generations are cheated by the current generation when an ongoing public source of value, such as the electromagnetic spectrum, is simply sold away forever rather than rented.
While iron and aluminum are more like oil in that they tend to be used up and thrown away, gold and silver are more like land in that they retain value over time. These metals never tarnish or rust. Precious metals can be re-used over and over again for different ends – as jewelry, for practical applications, as a store of value, as medium of exchange. People throw old iron pots in the garbage but nobody throws away solid gold because it can economically be sold and melted down and reused.
Seen in this light - gold is just like a piece of land that has detached and gone mobile.
So as the people in a society give up the freedom to move onto a piece of land that is somebody else’s for a price – the same principle can apply to gold. The freedom to privately posess part of the limited supply of the world’s gold reserve would under “natural law” be given up by all the people to certain private individuals in exchange for rent.
Money as public property for rent
This section is about money. There are two kinds of money: cash – which is “fiat money “ made of paper and now pure information which in itself has no intrinsic value and commodity money such as Gold.
Gold, as discussed earlier can be thought of as a form of movable land. Like land it retains its value over time. It does not rust or tarnish. It can be re-used over and over again for different purposes. You do not see people throwing out a pound of gold, as they would steel.
Gold is not made by anybody. It is in no way related to the actions of a person’s body and the creation of free labor. The fact that some person has a right to own Gold excludes me from the use of that precious resource. Therefore Gold is like floating land and it is perfectly legitimate for society to rent out its private use.
In historical times Gold was the main form of money but today cash or electronic checkbook money, which is fiat money, is the most widely used form. Fiat money is made of paper or electronic information with no intrinsic value. The value of paper money or electronic money comes from the legislature. It has value because the government says it has value and the government gives cash or checkbook money its real value by accepting it as “legal tender”. It is acceptable as tax payment for use of the public space and purchase of natural energy such as fresh water and oil. Fiat money as cash or electronic information is accepted by the state to pay for the use of land and natural resources. In that sense fiat money while not having an intrinsic value, is given a value by the state because it is reedemable for the use of land or some other natural resource. It is backed by "natural resources".
Money (cash and electronic checking money) is given value by society because it is accepted as tax payment by society for the private use of public resources. As money is a creation of society as a whole and not the free action of private individuals, this resource then belongs to all of society. Cash then should be rented out for use just like any other public resource. Private individuals are given the right to hold onto money thereby denying access to the money to all other individuals.
As we have seen, the real estate tax is legitimate when it is a rent on the use of land only. It violates natural law when it becomes a penalty on the natural freedom to build by also taxing the houses on the land. So also the income and sales tax in its current form is a penalty on free labor and free trade which are extensions of our bodies. A replacement of the income tax with charging interest on the holding of cash is however legitimate because cash is a public resource which can be rented out by the government rather than given away.
Government spends money on projects such as police and public roads with the expectation that this cash will circulate and eventually find its way back into the public treasury through legitimate taxes and fees. The purpose of the money, like blood, is to circulate. But today we penalize and thereby impede the very circulation of the money. Instead of taxing money at the point where it circulates, we should be taxing money that does not circulate. It make more sense to tax the holding of the money rather than its spending because we don’t want money to form clots - we want it to keep moving. The social value of money is in its movement.
When money forms clots and stops freely circulating we have recessions. Says Robert Heilbroner: “If we tucked these savings into mattresses or hoarded them in cash, we should obviously break the circular flow of income. For then we would be returning to society less than it gave us. If such a freezing process were widespread and continued, there would soon be a cumulative fall in everybody’s money income, as less and less was handed around at each turn. We should be suffering from a depression. But this dangerous break in the income flow does not normally take place. For we do not freeze our saving…Whether we bank our savings or use them to buy insurance or securities, the channels exist for those savings to get back into circulation via activities of business. For when our savings are spent by business, they again turn up as someone’s wages, someone’s salary, or someone’s profit. But – and notice this vital fact – there is nothing automatic about this savings-investment channel…And here is where trouble enters. A thrifty community will always attempt to save some part of its income. But business is not always in a position to expand its operation …..Why should business expand their facilities when they look to the future with trepidation? And therein lies the possibility of depression. If our savings do not become invested by expanding business firms, our incomes must decline. We should be in the same spiral of contraction as if we had frozen our savings by hoarding them.” - Robert Heibroner – The Worldly Philosophers – (Keynes) – p 266 – Touchstone – 1999.
Egalitarians value equality over liberty and want to spread the wealth by charging a tax at the point when the rich man is paid. Libertarians promoting liberty over equality say that nobody is forcing people to buy the rich man's service and therefore people want what he has to sell. The cash tax would let the rich man make as much money as he can but he will be penalized if he does not choose to quickly spread that wealth around by buying the services of others. In the same way the cash tax obviates the need for an inheritance tax because unused cash looses value naturally over time.
The cash tax is an extension of the philosophy of Henry George. But where George divided the world into “Personal Human Labor” and “Natural Resources” that leaves social privileges like taxi medallions hanging in an unclaimed gap. It is clearer if we instead divide the world into “Personal Human Labor” and “Everything Else”. “Everything Else” then includes not only natural resources but also any socially created resources. For instance, in New York City, taxi medallions are certificates that give a limited number of private individuals the right to operate a taxi service. The medallions can then be traded and may increase in value. Most Georgists would agree that the a social privilege such as the taxi medallion should be rented out as a tax on private individuals who cannot then profit from the unearned increment over time. Fiat money is a piece of paper like a taxi medallion; a certificate created by the government. Wouldn’t it also be logical that this social resource be rented out to private individuals – the public charging interest for the private use of cash?
Cash is an abstraction - a legal entity. Worn out paper money can be returned to the government and exchanged for new paper. Unlike other commodities such as oil, the paper money is only a representation of the eternal legal dollar underlying it. In the same way the taxi medallion is only a certificate representing a legal privilege and the legal certificate entitling ownership that is worn out or lost can be replaced if you can prove that you are the registered legitimate owner.
So like land and gold, cash is eternal and also is totally independent of any person’s physical labor. In Georgist economics the public is the ultimate landlord and rents the land for private use. With this extension of Georgist economics into the fiscal realm, the public is also the ultimate banker and loans out cash at interest for private use. In Georgist economics there is a disincentive to hold onto undeveloped land. Similarly, as nobody takes out a loan knowing they will have to pay interest just to hoard the cash, nobody would want cash, which is always being loaned from the public unless they can put it to use. But this is exactly what we want. It is the hoarding of cash that can cause deflation and depressions. Like blood only when cash is circulating does it serve its social purpose.
Somebody may argue that if they received cash payment for labor then you are penalizing the labor by taxing the cash. But that is exactly what the income and sales tax does and the money tax does not do. The money tax only penalizes the holding onto money. It is a kind of tax on "wealth" rather than a tax on "transaction".
The idea of the state charging interest for the use of paper money is not a new one. The colonial state of Pennsylvania used it to great success. “Various methods were adopted by the different colonies, but the one practiced in Pennsylvania was considered the best. A certain amount of paper was emitted for a given time, say ten years, at the expiration of which it was all to be redeemed. The paper was put into circulation in the form of loans to individuals, secured by mortgages on land. One tenth of each loan was to be paid back annually by the borrower, with the interest at five per cent. Thus, at the end of the ten years, the whole had been returned to the loan, offices and redeemed; the government having gained the interest during that time, and the community having received the benefit of the circulation. The paper was made a legal tender for, the payment of debts, and it generally maintained its original value, with slight fluctuations caused by the rise of gold and silver, when a larger quantity of these metals than usual was wanted for exportation.” See:www.ushistory.org/franklin/biography/chap04.htm
Apparently this method of taxation impressed Benjamin Franklin who at one time proposed it as a counter alternative to the stamp tax. “Franklin proposed that Parliament authorize the issue of paper currency at interest. In effect this would be a stamp tax on paper money, but Franklin thought it would go down far better than a stamp tax on the sort of items Greenville envisioned: licenses, deeds, indentures, leases, newspapers, almanacs, playing cards, dice. Greenville’s list hit people unused to paying for these items, people often without much money. The appeal of Franklin’s plan was that the people likely to avail themselves of the paper money – merchants, most obviously – were used to paying for money (in the form of interest) and had the wherewithal to do so. As Franklin explained his scheme, ‘It will operate as a general tax on the colonies, and yet not an unpleasing one, as he who actually pays the interest has an equivalent or more use of the principal’. He added, ‘The rich, who handle most money, would in reality pay most of the tax’”. See: The First American – H.W. Brands – Anchor Books - page 361.
The idea of the state charging interest on money was championed in the early twentieth century by the economic reformer Silvio Gesell. He said: “Only money that goes out of date like a newspaper, rots like potatoes, rusts like iron, evaporates like ether, is capable of standing the test as an instrument for the exchange of potatoes, newspapers, iron and ether. For such money is not preferred to goods either by the purchaser or the seller. We then part with our goods for money only because we need the money as a means of exchange, not because we expect an advantage from possession of the money.” Today money has two purposes - it is a medium of exchange and a store of value. For Gesell that is the problem. The primary social purpose of money should be as a medium of exchange rather than as a store of value.
His proposal for “free money” sounds much like Franklin’s. “Free-Money loses one-thousandth of its face value weekly, or about 5% annually, at the expense of the holder. The holder must keep the notes at their face value by attaching to them the currency stamps mentioned above. A ten-cent stamp, for example, must be attached every Wednesday to the $100 note which is shown as it will appear during the week August 4th - 11th, 31 ten-cent stamps ($3.10) having been attached to it, on the dated spaces provided for the purpose, by its various holders, one stamp for each week since the beginning of the year. In the course of the year 52 ten-cent stamps must be attached to the $100 note, or, in other words, it depreciates 5.2% annually at the expense of its holders.”
The American economist Irving Fisher also had an idea based on Gesell’s of taxing money. His idea for a “Stamp Scrip” was: “First: It is like money, because it can be banked OR invested OR spent. Second: It is unlike money, because IT CAN NOT BE HOARDED. For the stamps, as we shall see, compel Stamp Scrip to ‘step lively.’ “
In more recent times the above proposals have been reborn as what is called the “carry tax”. “Now, a senior Federal Reserve official is proposing a plan to impose a ‘carry tax’ on cash using the magnetic strip as a tracking device under certain conditions. At a conference last October, Marvin Goodfriend, a Richmond Fed senior vice president, suggested taxing Federal Reserve notes held by the public by imbedding a magnetic strip in each bill. The magnetic strip could visibly record when a bill was last withdrawn from the banking system. A carry tax could be deducted from each bill upon deposit according to how long the bill was in circulation since last withdrawn and how much carry tax was ‘past due’ [in order to stimulate stagnant economic growth in an environment of stable or falling prices and nominal short-term interest rates at or near zero]." The carry tax was proposed by economists John Keynes and Silvio Gesell but abandoned decades ago due to inadequate technology. The Fed official believes the technology now exists and is studying the proposal as a remedy to ‘hoarding’ cash under hypothetical conditions that might soon develop”. See: cash and the carry tax
The suggestions of Franklin, Gesell, Fisher, Keynes and Goodfriend to tax the holding of money (rather than the transfer of money) can today be implemented much easier using these two different techniques: demurrage and seigneurage. According to monetary reform: "The two most discussed reforms are the introduction of demurrage (i.e. the accumulation of money should cost something so it cannot be speculatively hoarded), and the reform of seigneurage, the contemporary monopoly of private banks to issue money, so that it can be freed up for use by local communities". Demurrage is a straight forward tax on the holding of money as Gesell proposed but with todays electronic money as basically a form of information this becomes simpler then ever. We are moving towards a cashless society where all money will be simply data accessible to debit cards and electronic wallets. With the technology we have in place today Gesells annual carry tax can be achieved if the government were to simply debit from every demand account overnight a certain amount. For example if the government debited .02 percent each evening from every demand deposit representing electronic information units of dollars that would come out to 7.3% tax per year on the holding of money. As long as electronic money is convertible from registered checking accounts to anonymous bearer bonds such as physical cash and coins this is impossible as people would rush out of checking money to physical notes and coin to avoid the money tax. But at some point in the near future we can say legal tender may no longer be conmvertible to cash and all money will be electronic and require the use of registered checking accounts. When that happens a tax on money becomes as simple as charging a negative interest rate which is technically as trivial as administering a positive interest rate. Then a demurrage tax along these lines would be far superior to implement then the convoluted system of income tax forms we have in place today.
see: It May Be Time for the Fed to Go Negative by Greg Makiw
and: Negative interest rates: when are they coming to a central bank near you?
and also Why Not Negative Interest Rates?
and: how eliminating paper money could end recessions
Another way to implement a tax on money is for the state to create inflation by printing more of it (seigneurage). Creating a stable rate of inflation by printing more money may then be a simpler alternative with the same effect as a “carry tax” or may be used in conjunction with a direct tax on the holding of money (demurrage).
The economist Paul Krugman proposed that Japan use the printing press to create inflation when the interest rates approach zero and the national bank cannot lower rates any more to combat deflation. As a Keynesian, Krugman is looking at ways to get people to spend when in recessionary times it is more profitable to simply hold onto cash and the central bank can no longer lower interest rates which are already at almost zero. Krugman recommends a “managed inflation” so as to “convince people that the yen they are tempted to hoard will buy less a month or year from now than they do today … what Japan really needs is a commitment to inflation.” “… Indeed, there has long been a strand of thought that says that moderate inflation may be necessary if monetary policy is to be able to fight recessions.” And “… advocates of inflation have had to contend with a deep-seated sense that stable prices are always desirable, that to promote inflation is to create perverse and dangerous incentives. The belief in the importance of price stability is not based on standard economic models – on the contrary, the usual textbook theory, when applied to Japan’s unusual circumstances, point directly to inflation as the natural solution.” “ … But there is a minority view calling for quantitative easing – printing enough money to generate expectations of mild inflation.” From: The Return of Depression Economics by Paul Krugman (WW Norton 2000 – page 78-79).
I am not proposing an arbitrary executive use of the printing press but a strictly controlled and limited creation of a well-defined expansion of the money supply through an act of legislation. Law would fix the rate of money creation and would be well known far in advance of any change in the rate much as the income tax rates are not arbitrary administrative edicts but set today by law and known for years in advance.
From James M Buchanan (and see also THE CONSTITUTIONALIZATION OF MONEY):
"A constitutionally selected and enforced rate of inflation that would provide government with funds sufficient to finance an estimated desired quantity of public goods would not run into the confidence dilemma previously discussed. But this difference emerges precisely because the rate of inflation is chosen constitutionally, as a rule to be enforced on government, rather than an announcement of intent by government. In this context of a constitutionally selected institution for financing governmental outlays, inflation does become a simple tax on money balances, and, as such, it might be considered along with other taxes on capital stocks, which would also have to be designed to embody constitutionally designated rates to prove at all acceptable."
Printing money would not be a carte-blanch for the expansion of government spending, because the income tax would transition to become the inflation tax. The transition could be phased in so that each increase in printing money would be tied by legislation to a decrease in the income tax rates. This is compatible with Georgist views because in the end private transactions (which extend from our own free labor) would become free, but the holding of money (which is a product of society) would be charged interest by society.
Keynes thought such solutions as Gesell’s stamp tax was a good idea but would be unworkable because people would leave paper money and use commodity money. But in our view receipts for Gold and Silver cannot be used as an escape from cash because these are nothing but detached pieces of land that are also legitimately subject to taxation. Secondly, money as cash will always have value in itself because society accepts it as the only legal tender for the tax on land.
Now in the United States today we already have a steady low rate of inflation so what’s the problem? The inflation tax is legitimate assuming that it is the public sector that has the right of seigneurage, which is the ability to create and be the first to spend new money. However, today this is not the case. The private banking sector creates new money and so the inflation tax acts as a private tax collected by a single powerful industry.
Public creation of new money is legitimate because it is the public that owns the commons and the community that accepts each new dollar of legal tender in exchange for the private use of commonly owned natural resources. Each dollar represents some ability to claim the commons. However, in our society the public has given seigneurage, the right to create new money, away to the private banking system, which means the public has given away for free “claims to the commons”. The inflation tax, which could be a legitimate means of public financing, has been usurped as a private tax benefiting the banking industry and subsidizing the product that they sell: debt financing. In fact it is a bizarre system where the only way to create fiat money is to create debt.
There are actually two kinds of fiat money – cash (including coin) and checking account money. Banks only need to keep in reserve a small percentage of cash to back the checking account money that they create which is in fact pure electronic information given the status of legal tender. Checking account money although it is pure bits of information is accepted by the government for tax payment and can be exchanged for natural resources and is thus as real as any physical money. Each electronic blip although not backed by a corresponding unit of cash represents a claim to the commons - as the "people", for example implementing a land value tax, will accept these electronic money blips in exchange for the private use of a parcel of space for a period of time. Therefore the authority of the state backs each electronic dollar with a small chunk of space-time. The central bank not only gets “first use” for free of newly printed money but also because of the multiplier effect created by fractional reserve banking – the banking system as a whole gets free checking account blips by being able to expand tenfold each new physical dollar into information blips that are also legal tender. Because the banking system gets free first use of new money they are the beneficiaries of the inflation tax that is paid by everyone holding money.
How do they do it..how does the banking system create money? Well there are many resources that describe how "fractional reserve banking" works and actually increases the money supply (see money creation). When a bank loans out money it doesnt have to deduct money from anybody's checking account just to deposit it into another persons checking account. Money is created out of thin air simply by making a loan. If I loan you money it cannot happen without a subtraction from my checking..not so with banks. Most of the money in existence is just electronic pieces of information originally created when a bank makes a loan. But each of these new dollars created privately when a bank makes a loan, because they are legal tender usable to pay taxes is also a claim for the private use of the public commons.
Says: vladimir z. nuri: “the modern international fractional reserve banking system is actually equivalent to legalized economic parasitism by private bankers. This is the case because, contrary to conventional wisdom, the proceeds of inflation are not actually spendable by the state. The economist Keynes helped analyze the process of publicly-owned money expansion and considered the ensuing inflation as a pernicious hidden tax on the masses. However, many monetary reformists have proposed publicly-owned money expansion as a very useful means of taxation superior to alternatives, presuming it is limited and erected at full knowledge and political consent of citizens. Via such a system the state can obtain spendable revenue that requires no vast, complex, and cumbersome accounting system in e.g. the way the income tax does. It also is an extremely uniform taxation system; representing a percent of every dollar in circulation, in contrast to every reported dollar, or every dollar in only particular types of transactions. Conventional taxes on the other hand have uneven effects, which are notoriously difficult to anticipate by a legislature. Tax evasion is essentially impossible under publicly-owned money expansion!”
Says James Robertson:
“As national monetary authorities, central banks should create non-cash money (i.e. bank-account money) as well as cash (i.e. banknotes and coins). They should create out of thin air at regular intervals the amounts they decide are needed to increase the money supply. They should give these amounts to their governments as debt-free public revenue. Governments should then put the money into circulation by spending it. This will parallel what happened with banknotes in 19th-century England. Electronic bank-deposit money has now become real money and it is time to stop pretending it is just credit. As the issue of banknotes became subject to seigniorage then, so the creation of bank-account money should become subject to it now. In other words, the profit from creating it should no longer accrue to commercial banks but be collected as public revenue.”
From: www.jamesrobertson.com/book/monetaryreform.pdf and Creating New Money by Huber and Robertson
The ability of the private banking system to create money using fractional reserve banking is actually a manifestation of a larger problem which infects the entire financial industry. Read on...
Loans as private property for a limited time
Each person may decide to trade something for a time dependent period. For instance I can rent out my house or my car. Such are loans. A loan is a private and voluntary contract granting use of an item such as a car, a house or cash for a period of time.
The person who is loaning is giving up use to another for a specified period of time in a contractual exchange. If I lease my apartment for two years to another person I can no longer use it myself for those two years. Even after three months if a better deal comes along I cannot just kick the renter out.
It is the same with cash loans. If I loan you money the rent you pay for the use of that money is called interest. I cannot legitimately force you to repay the principal earlier then the agreed upon point in time.
There is corollary to the above laws of loans which is that even if the renter is given permission to sub-rent, it is implied that the sublet cannot possibly extend beyond the end-date of the original lease. For then the renter would be sub-renting a slice of future time to which he has no legal authority. The same principle should also apply to cash loans. If I loan you money you cannot possibly have the right to sub-loan it out to a maturity date that goes beyond the date of the original loan. For then you would be lending something beyond the point at which you have been given rights to it.
But amazingly, banks under our legal system are treated under a different set of laws than the natural ones just described. Under our system, when I deposit cash in a bank either in checking or savings I have not given up access to that money and yet banks can lend it out. Furthermore, even when I do give up access to the money, say in a three-month Certificate of Deposit (CD), banks are able to loan that money out for a period of time much longer than the three months I have entitled them to. They are able to do this because they expect that even if I withdraw my cash at maturity in three months, other depositors will come along to take my place. And even if other depositors do not take my place the bank can go out and borrow money from other banks
The important thing here is that banks can do what other private corporations and individuals cannot do and that gives them a special privilege. If I personally lend you cash for a year, I cannot expect to access that money for a year. But when I deposit money in a bank I certainly consider it to be available to me at any time and can legally demand it, yet the bank may have loaned it out for thirty years. The bank can get away with it because there are always new pools of money coming in. But should it get away with it and why should I care.
Anytime there is a special privilege it will in some way infringe on my natural rights and distort the effective principles of supply and demand. It would be ridiculous for me to be in the business of loaning money because private individuals and corporations are at a disadvantage competing with banks. If the special rules that enable banks to borrow short-term and loan long-term did not exist it would be an even playing field. I could loan my money out for thirty years and get an outstanding interest rate but why should anybody borrow from me when a bank will give them a thirty year loan for a much lower interest rate? Banks have access to a pool of cheap money but any other private individual would have to give up long-term use of money (which is expensive) in order to lend it out.
In a sense private individuals are being robbed by banks because they are denied a source of high yield interest for making long term loans. In a legal system entirely derived from natural ownership rights, long-term loans for things such as mortgages would come from long-term savings from such things as retirement savings bonds and pay a very higher interest rate.
Alternatively long-term loans can come from corporations (like Fannie MAE or mutual funds) that invest pooled resources of public stock into long-term loans and return a stable high dividend yield to the investors. However, in such a public stock corporation investors are always at risk of losing some equity when selling stock.
However, banks through special legal privilege are able to provide a short circuit of the natural capitalist process whereby one must give up something in order to get something in return. The system is then skewed in such a way that it will be cheaper to borrow long term and less profitable to save long term. Private individuals are robbed of the opportunity to invest because they can never compete on an even playing field with banks.
But isn’t it cheaper then to buy a house knowing that low interest rates will make the mortgage affordable and isn’t that a worthy social goal? Isn’t being able to borrow long term and cheap a good thing? Not necessarily. The housing bubble in the years post 2000 have shown that low interest rates do nothing to make housing more affordable because they only drive up the price of homes to the point where the mortgage will again end up as the maximum that people can afford. In other words the relationship between average income and average mortgage spending is a constant. The first time home buyer is certainly not better off with artificially low interest rates if that causes artificially high home prices.
The natural solution based on the loan contract is an even playing field where banking reform requires 100% reserves of money in demand deposits such as checking. This checking money, banks cannot loan out at all. Banks would only be able to lend out money in CDs and for no greater a period of time then the maturity date of the CD. People could get higher rates of returns by investing in longer term CDs or Bonds. Banks can continue to be a source of mortgage investment if for instance a pool of money from 3 year CDs was used to finance variable rate mortgages whose rate is only locked in for three years. Then there is no longer a mismatch between the bankers unnatural privilege of borrowing short term and lending long term.
Robert De Fremery’s “Rights Versus Privileges” (Provocative Press) explains: “Once we admit the unsoundness of borrowing short to lend long, we will see the wisdom of converting our banks into lending institutions that borrow long to lend short. Government alone would then exercise its constitutional prerogative ‘to coin money and regulate the value thereof.’ And once government performs its legitimate function of providing our country with an adequate supply of money, banks could perform their proper function of safeguarding that money, facilitating the exchange of titles to money by means of checking accounts, and lending the savings of the community by borrowing long to lend short.” - P79 …“there could be a back-to-back relationship between term loans and CDs – i.e., a five-year loan with a 5 ½ per cent yield would be based on a five-year CD paying 4 ½ per cent interest rate. That way the banks could budget their income and obligations more precisely….All funds loaned by banks should come from the issue of negotiable CDs with maturities and yields tailored to meet the needs of borrowers and savers. And banks should be required to maintain a ‘back-to-back’ relation between loans and CDs. Banks would then have 100 percent cash reserves behind their checking accounts. There would be no savings accounts. Those savings would buy negotiable CDs. Liquidity squeezes such as we had in the past would then be impossibility. There would be no more borrowing short and lending long – none of the multitude of problems and changing expectations caused by that unsound practice – and no excuse for any controls of borrowing and lending except to maintain the ‘back-to-back relation between loans and CDs.” P 113-114
DeFremery understood that fractional reserve banking was merely a special case of the more general principle of maturity transformation specifically whereby a demand deposit with Zero term can be used to finance loans of long duration. But even outlawing fractional reserve banking without the more general restriction over Maturity Transformation would only result in the creation of near money alternatives; for example 1 day rollable savings accounts that could be used to finance long term loans. A more general law banning all forms of maturity transformation would have as its happy side effect the elimination of fractional reserve banking and private debt created money.
As mentioned above, people could also invest in corporations and mutual funds whose charter it is to re-invest in pools of long-term loans. This would give people some liquidity and be similar to bank savings accounts. Except while bank savings were traditionally susceptible to runs, corporate stock has a natural self-balancing mechanism. If people start wildly selling the stock, for example based on bad loan portfolio rumors, the stock will eventually fall enough in price so that people are no longer selling it. Rather than some people getting all their money out and others losing all their money, what caused the fear that created a bank run, stockholders who didn’t sell quick enough would only lose some equity value as a price for the risk that they undertook. Limited Purpose Banking advocates such as Kotlikoff and Cochrane recommend this approach for all financial intermediation. Says Cochrane: "Among other features, run-prone contracts promise fixed values and first-come first-served payment. There was no run in the tech stock bust because tech companies were funded by stock, and stock does not have these run-prone features."
Bank runs were basically put to rest by the Federal Deposit Insurance created during the Great Depression. But Federal Deposit Insurance is a bandaid fix that only substitutes one problem for another. Now instead of savers and bankers being cautious and prudent investors they can relax knowing that the government insures savings. When bankers take on high risks and win they make great private profits and can pay high yields to attract depositors who do not care about risk. But when risky portfolios fail it is now the public that must pay as happened during the Savings and Loan bailout of the nineteen eighties where the government stepped in and paid hundreds of billions of dollars. “Moral hazard” results where investors take overly aggressive risks knowing they will be insured by government programs. Even Franklin D Roosevelt who promoted the FDIC saw its potential drawbacks. He said: “we do not wish to make the United States government liable for the mistakes and errors of individual banks”. (From “An Empire of Wealth” by John Steele Gordon – Harper Collins 2004 – p.398). Nonetheless that’s exactly what government deposit insurance did. Banks and depositors assuming the hazard of a potential panic have now been replaced by the potential for massive and expensive government bailouts.
Here are some descriptions of the Savings and Loan bailout which occurred in the late nineteen eighties and clearly shows the problem with banks borrowing short term to lend long term even after government insurance removed the threat of bank runs.
“When S&Ls tried to compete for funds by offering relatively high rates or - after deposit interest rate ceilings were eliminated between 1980 and 1982 - by offering interest rates in line with or above market rates, an unsustainable gap opened up between the cost of their funding liabilities (short-term interest rates) and the income generated by their assets (long-term, fixed-rate mortgage repayments).” Worse, as interest rates moved higher, the economic value of existing S&L portfolios of long-term, low interest rate residential mortgages moved sharply lower, threatening institutions with insolvency. The trigger for the closing shut of this asset/liability trap was the shock rise in oil prices in 1979, pushing up inflation and headline interest rates around the world. By 1980, with interest rates on US government debt hitting 16%, many S&Ls had already been fatally wounded.” From: see And
“For S&Ls, the loss was near $200 billion, some $150 billion of which was beyond the resources of the FSLIC and was therefore charged to U.S. taxpayers. The losses accrued primarily to the federal insurance agencies and taxpayers rather than to depositors and other creditors because the insurance effectively guaranteed the par value of deposits up to $100,000 per account. Before the introduction of deposit insurance in 1934, S&Ls made primarily intermediate three-to-five-year renewable mortgage loans. These loans were effectively variable rate mortgages with sizeable down payments. They were financed by time deposits (legally labeled share capital), which were not necessarily redeemable on demand. As a result, neither the S&Ls' interest rate nor liquidity exposures were very great. But things changed dramatically after 1934. Public policy encouraged S&Ls to make progressively longer-term (first 20, then 25, and finally 30-year) fixed-rate mortgages with progressively smaller down payments. At the same time, the new deposit insurance program effectively increased the liquidity and shortened the maturity of their deposits. These changes increased the institutions' exposure to interest rate and liquidity risk. Indeed, the large degree of maturity (duration) mismatch by the mid1970s made the industry a disaster waiting to happen. When interest rates increased sharply in the late 1970s as a result of inflation, the disaster occurred. Between 1976 and 1980, interest rates on three-month Treasury bills jumped from 4 percent to 16 percent and those on long-term Treasury securities from 6 percent to 13 percent. By 1982, an estimated 85 percent of all S&Ls were losing money and two-thirds were economically or market value insolvent so that, ceteris paribus, they would be unable to pay their depositors in full and on time. The negative economic net worth of the industry and the corresponding loss to the FSLIC was generally estimated to be about $100 billion, although some estimates placed it as high as $150 billion. This figure represents the difference between the par value of deposit accounts (the large majority of which were less than the maximum insured $100,000 per account) at insolvent institutions and the market value of the S&Ls' assets.” “If the high-risk bets paid off, the institution won and possibly regained solvency. If the institution lost, the FSLIC bore the loss. That is, heads the institution won, tails the FSLIC lost! “ from: from george kauffman
What the savings and loan crisis showed was that maturity mismatching contains a built in riskiness. When an investment goes sour because a business failed to make a profit and could not pay back its debt that is a legitimate risk that can always happen in any capitalist system. But in the case of the S&L crisis it was an externality outside the real estate investments, a rise in oil prices causing inflation and higher interest rates that set the stage for the crisis. Some people will say that in a free market system this risk is entirely up to investors to accept. They say we cannot compare renting a home for one year and the renter then sub renting it out for thirty years to renting money for one year and the renter then sub renting it out for thirty years. Because unlike a specific individual thing like a home, money is a fungible quantity - as long as I pay you back the one hundred dollars it is not expected to be your original hundred dollars. But maturity transformation has built within it a riskiness as part of its very design. The lender of your money has given it away for thirty years but expects that they will be able to find new lenders to take your place when you are owed your money in one year. This expectation is a new risk that is completely separate from the legitimate risk that the borrower of the thirty year loan defaults on payments. This built in fragility based on the expectations of always being able to find new investors and rollover debt has much in common with an old fashioned Ponzi scheme. So why should we care so long as we insist that lenders will bear all the risk? My answer is “we” should care because this system has always been unstable and led to runs which then require government prop-up insurance and guarantees that then lead to moral hazard and ultimately taxpayer bailouts. Furthermore, there are perfectly legitimate natural alternatives to fractional reserve banking and all forms of maturity mismatching: long term CDs, bonds, and stocks. People normally need some form of long term savings and without the shortcut of enabling maturity mismatch, the market would reward them with higher savings yields. These instruments do not create “panics” due to their very nature. Nor do they require government sponsored explicit or implicit guarantees with the inherent risk of catastrophic taxpayer bailouts.
Since I orginally wrote this section the financial meltdown of 2008 occurred and made the S&L crisis puny by comparison. But the crisis of 2008 went way beyond the banking system and in fact was largely caused by the same kind of maturity mismatches within the financial system as a whole. The crash of 2008 was fundamentally caused by the “shadow banking system” being able to use money borrowed short term from all over the world to invest long term and drive up real estate prices to unnatural and unsustainable levels. This bubble broke and ultimately led to a run (much like an old-fashioned bank run) and the shadow bankers were not able to roll over their short term funding. Then they required government bailouts to avoid bankruptcy. Turning short-term low interest borrowing into high interest long-term lending is like a magical money making machine while the game lasts. But the game is inherently unstable and society then pays the price both for the bailouts and the instability in prices and employment. The maturity mismatches at the heart of the crisis is explained by Herman Schwartz in Housing, the welfare state, and the global financial crisis: what is the connection? "Both commercial and investment banks – a distinction that became increasingly meaningless in the 2000s) – traded CDOs on their own account. They did so by creating SIVs offshore. SIVs were the point at which all parts of the financial system met. SIVs inverted the usual matched maturities found in the pension-mortgage match-up. SIVs borrowed short term – for 90 to 180 days – in the commercial paper market (i.e. money market mutual funds), and then turned around and bought CDOs composed of long term, subprime mortgages. This allowed them to arbitrage between the 3 to 4 % interest rate on short term loans and the 7 % interest rate that subprime mortgages generated in their first two years. SIVs were gambling that those subprime mortgages would be refinanced before the money market funds called back their loans to the SIVs." And said Lord Turner, Executive chairman of the Financial Services Authority "But shadow banking wasn’t just non-bank credit intermediation. It was non-bank finance that created bank-type risks outside the constraints of bank regulation. Banks can make long-term loans funded by short-term deposits. So, too, can shadow banking, by combining multiple steps into a complex chain. If an individual holds an instantly available cash investment in a money market fund, which in turn buys 30-day commercial paper issued by an SIV, which buys a mortgaged back security created out of a structured package of 25-year residential mortgages, that multi-step chain is functionally equivalent to bank maturity transformation. And because it is functionally equivalent to banking, it can create the same risks – surges of confidence, credit supply and asset prices which become self-reinforcing and sudden losses of confidence which provoke the equivalent of deposit runs, fire sales of assets and a downward spiral in asset prices." As Martin Wolff of the Financial Times says: “The big point is that a financial structure characterised by short-term and relatively risk-free liabilities and longer-term and riskier assets is highly profitable, until it collapses, as it is rather likely to do.”See martin wolff. There are some posts by Moldbug that illustrate this:
http://unqualified-reservations.blogspot.com/2008/10/misesian-explanation-of-bank-crisis.html Inventions, Books, Songs as private property for a limited time
When a person invents a new process or technique they have created something from their own imagination combined with hard work. This new creation should belong to that individual privately for it was expressed from free behavior. He then has the right to sign non-disclosure contracts with manufacturers and investors that commercialize the invented process. Any disclosure of the secret process is a contract violation and is illegal. The eventual sale of products based on the invention may carry with them (in the fine print) the contractual obligation. The new design cannot by mutually contracted agreement be stolen. This is the beginning of patent law, starting as a natural extension of nondisclosure contractual agreements.
From the above example one can see that patents are an extension of a natural process and legitimately privately owned. It is simply a clause stating that you will not copy or reveal the secret process that I am telling you. However, there is a difficulty in practical enforcement of trade secrets without the extra special legal treatment of the intellectual property laws. For example, some inventors may claim that they independently arrived at that new creation without ever seeing the original one. Practically speaking it would be impossible for a government to enforce, not knowing who was actually influenced by the invention and who honestly came to it in total isolation. Therefore, the government makes a rule to objectify the process, stating that the first person to register a working model of the invention is automatically the patent holder.
It is often stated that patents are a practical invention in that they are a useful tool for rewarding the creation of social progress. However, as shown above patents are not merely arbitrary rules to promote social progress, but extend naturally from already existing contracts with “privacy” stipulations. The practicality comes in when society creates a special branch of intellectual property law to make these contracts more easily enforceable. This is done by removing any potential disagreement over whether somebody stole the idea and replacing it with a first come first serve registration process.
How long should a patent holder’s exclusive right be in effect? The incorrect way to answer that question would be to look at it from the standpoint of how long it will take the patent holder to pay back his investment. From the natural rights perspective, the correct way would be to ask how long should others be denied from their own liberty of pursuing a similar invention. The way to answer this is to guess how long it would have taken (on average) for somebody else to have invented the technique in the absence of any information about the invention. For example, how long would it be, on average, for any pharmaceutical company or chemist to have eventually discovered a company’s patented drug had that patent never existed? Of course, the answer is only a wild guess at an average, and the time-span will shorten over time as there are more people involved in research, but it at least provides some guideline for how many years a patent should be in existence for.
With books, the argument spelled out above works almost the same way. However, books fall under the copyright laws rather then patents. Patents represent useful inventions while copyrights are for artistic or intellectual expressions. The difference is that there is an objective criteria involved with a patent. A patentable item must be a non-obvious and useful technique. Patents are subject to a scientific standard and must be a proven working duplicatable process. Therefore a patent falls more into the category of a “discovery” while a copyright is more in the nature of a “creation”. Both patents and copyrights may start out as secrets specifically protected by non-disclosure contracts. But eventually they become commercial products and enter into the public marketplace. At this point each purchaser of the product implicitly agrees to not copy the novel idea.
The difference then between a patented invention, such as the electric light bulb, and a copyrighted book, such as “The Brothers Karamazov”, is that the former being a discovery would have eventually been found by someone other then Edison, while the latter may never have been created by anyone other then Dostoevski. Therefore the basic natural rights justification is the same, but the time period for which a patent is granted should be much smaller than for a copyright protection.
Books highlight the important distinction between an expression and an idea. For instance, the “single tax” proposals of Henry George are ineligible to be either copyrighted or patented. However, the specific wording used by George to express those underlying ideas are copyright-able. With books there is a clear distinction between the abstract themes expressed by the book and the actual rendering of those themes as concrete phrases. If people steal the ideas of a written article without giving credit to the author this may become a moral issue called plagiarism, but it is not necessarily a copyright violation which only comes into play when the actual wording is lifted verbatim without consent.
Music copyrights however, reverse the protected distinction between the idea and the expression. In songs it is not so much the performance that is protected but the melody. It is the melody that is original and highly unlikely to have been duplicated by others. Once the melody was publicly known, for instance, it was trivial to interpret the Beatles song “Hey Jude” as an instrumental by String quartet or as a bluesly female voice. What was unique and therefore protection worthy was not the particular rendetion but the melody itself, which may never have come into existence had the Beatles not created it.
The difference between songs and books shows what it is that the intellectual property argument is about. Starting as a kind of private contract, a “trade secret”, it must be something that would not have come about very easily on its own by another author. In the case of a book for example, Henry George’s themes are similar to ideas expressed by other thinkers, but they were presented and argued in a rather unique way by George. In the case of books the ideas cannot be copyrighted only the expression of those ideas – the actual formulations of the phrases on the page. “Hey Jude” on the other hand was a recognizably distinct tune, which would have been the same unique and recognizable tune whether played by the French horn or piano. In the case of music it is just the opposite – the expression cannot be copyrighted – it the melody which is protected and not he rendition. This is because with intellectual property seen as natural rights and extensions of trade secrets, we have to ask what is worth being kept a secret.
If we protected a philosophical idea such as the theory of relativity, we would be violating the rights of others to free thought because there are no ideas that are so unique that others have not also thought them, but a song can be highly unique. A trade secret is a kind of contract, which protects a private creation from being stolen, but in order for something to be worth keeping secret it must be non-obvious. Secrets must have a specificity and distinctness that makes it highly unlikely that within a period of time somebody else would have independently brought forth them. In testing the distinctness of the musical creation it cannot just be a small musical phrase of three or four consecutive notes, because a high enough specificity to make the creation unlikely to have eventually been written by another will only materialize with the occurrence of a certain greater number of consecutive notes.