The Rankin File: #19

(also, see: Reply, from: Lowell Manning of Paraparaumu.)

Class is a useful concept for making divisions between sources of income, between major social groupings, and between differing political worldviews.

The quintessence of class is economic, and arises from the three "factors of production" of classical economics: land, labour and capital; and from the three "agents of production": landlord, labourer, and capitalist.

Classical economics inherited its class structure from the French "physiocrats", active in France in the third quarter of the 18th century and arguably the world's first economic "sect". Their worldview was called "The Agricultural System" by Adam Smith, and they were the single major influence on his thought. For them the three classes were the proprietors, the cultivators and the sterile classes. These loosely translate into landlords, labourers (albeit agricultural labourers), and merchants/manufacturers. The sovereign was the supreme proprietor.

In many ways the physiocratic formulation is more helpful to use today. It helps us to break the impasse of neoclassical economics which really divides us into just two classes - labour and capital - and, in doing do, downplays the economic function of the sovereign.

There are three sources of earned income: owning, working and dealing. Those terms relate closely to the physiocrats' proprietor, cultivator and sterile classes. The "dealers" today can be thought of as opportunists who are able to insert themselves into the circular flow of economic activity, drawing on existing streams of income while, at best, putting no more value into the circular flow than what they draw from it. This is the way the physiocrats saw the "sterile" merchants and manufacturers. It was the physiocrats who gave us the term "laissez-faire" - a term for an ideal system in which opportunists are unable to block the natural flow of commodities.

Interestingly, the metaphor of 'circular flow' in economics came to us from the physiocrats. The founder of the sect was a doctor, François Quesnay, who likened the economic system to the circulatory system of the human body.

While we can easily see how some people - including many of today's advocates of laissez-faire - would fit into Quesnay's parasite metaphor, the concept of a sterile class is probably not that helpful as a basis for a constructive analysis of class in the late 20th century. It is the analysis of the proprietorial class that may be of more interest.

I would like to separate the two distinct components of proprietorship: the public proprietor, the sovereign, and the private proprietor, the capitalist. The capitalist, as a capitalist, is therefore an owner of real assets or claims on real assets. (Claims on real assets are called financial assets.) A capitalist, as a proprietor, is a rentier (another French word, reflecting the French understanding of the upper class) and not a dealer. A landlord, for example, is a capitalist.

An entrepreneur (another French word) is a form of labourer. The entrepreneur's wage is a profit, which can only be determined once the contracts an entrepreneur embarks upon are settled. Entrepreneurs, as entrepreneurs, hire rather than own resources.

Entrepreneurs, as entrepreneurs and nothing else, hire factors of production and pay taxes, rents and wages. Their profit is their wage. Entrepreneurs, like labourers, become capitalists to the extent that they invest rather than consume their wages/profits. Entrepreneurs, as capitalists, effectively hire capital from themselves, and thus pay rent to themselves as well as earning wages.

Economic class is an abstract concept representing funds rather than persons. Economic classes are the funds from which revenue or income are sourced. We can call them the capital fund, the wage fund, and the public fund (which represents the tax revenue of the sovereign). Thus, tax is the revenue of the sovereign as the sovereign, rent and interest is the revenue of capitalists acting as capitalists, and wages are the revenue of labourers as labourers. Entrepreneurial profit is a mixture of rent (a return on the property of the entrepreneur) and wage (a return on the activity of the entrepreneur).

Every person can gain income from any of the three sources (or "funds"; where each fund defines an economic class). The sovereign (whoever the sovereign actually is) may own private assets as well as public ones, so may receive rents as well as taxes. Capitalists may be employed, and therefore earn wages as well as rents. Labourers also receive interest and dividends.

Social classes are groups of persons. Social class is determined by the predominant source of income. When ever there are changes in "factor prices" - ie interest rates, wage rates, tax rates - then there is a new distribution of income between the three funds, between the three economic classes. If, for example, interest rates rise then the capital fund gets bigger and either or both of the other two funds gets smaller.

Capitalists, as a social class, like the capital fund to grow relative to the wage fund and the public fund. They may draw income from the wage fund and the public fund, but they draw more income from the capital fund. Thus, to push for a policy package that gives high interest rates, low wages and low taxes represents the political strategy of the capitalist social class.

The fixed-wage employed class (the "working class", which includes, for example, the Prime Minister and the chief executive of Telecom) seeks high wages, low taxes and low interest. The sovereign seeks high taxes, low interest and low wages. Entrepreneurs (the variable-wage employed class) seek low interest, low taxes, and low fixed-wages. But good entrepreneurs recognise that their revenue comes from spending from the funds, so they do not seek to drive down taxes and wages, in the way that capitalists do.

In a democracy, the sovereign is the people. But even in an ancien régime monarchy of the kind the physiocrats lived under, the king, as sovereign, had an obligation to provide a number of public goods. Such public goods represented part of the income of the people.

Is there a modern sovereign class, as a social class? Yes. It is everyone who gets the majority of their income from the public fund: that means most beneficiaries, students, retired persons, plus many homemakers and caregivers. It comprises most of those whom the statisticians call "not in the labour force". It is in their interest to have high taxes, low interest and lower after-tax wages.

With the importance of fixed-price labour diminishing, and the importance of real assets such as knowledge, technology and infrastructure rising, then it is the sovereign class that is growing fastest. Thus, over time, taxes should rise, as the value of the sovereign's property rises. To prevent increasing inequality, the public fund must rise over time. If taxes do not rise with productivity growth, then the capitalist class gains revenue that rightfully belongs to the sovereign.

Political class is linked to the same core economic "factors" as social class: public property, private property, and labour. It represents our visions of a good future, and not just our present economic interests. Thus it is possible to present a vision of sovereignty to someone who is clearly identifiable as a member of the capitalist or the working class. And it is possible to present a vision of an oversupplied labour market, which represents the interest of the capitalist class, and sell that vision to workers under the misleading name of "full employment".

In his first 1997 Robb lecture (see World Revolutions: 1848, 1968 and sometime next century? ), Immanuel Wallerstein presented images of social change driven by the vigour of an emerging liberal political class in the late 18th century. The founders of the American and French Revolutions were the radical political ancestors of today's neo-liberal reactionaries. They represent the political class that corresponds to the capitalist social class. Many neo-liberals are not capitalists, in that they draw most of their income from labour rather than from property. But they embrace the ideals of liberal capitalism.

Likewise, the political working class represents those who promote an egalitarian future based on wage income and the work ethic. The political working class constituted the radicals of the late 19th century and the first two-thirds of the twentieth century. Like the neo-liberals, the political working class is no longer radical. It's main raison d'être as a political class is to conserve gains won during the radical era. And, as those gains are lost (as represented by, for example, the 1991 Employment Contracts Act), we see the emergence of a conservative working class, happy to shore up its falling wages with falling taxes, and feeling threatened by both organised business and non-workforce groups such as beneficiaries, students and even the retired.

I see the new working class - as a political class - as neo-conservatives. In Australia, they are attracted to Pauline Hanson. They emerged in New Zealand in the late 1970s as "Rob's mob". The 1981 riots were as much an expression of the different worldviews of the neo-liberals and the neo-conservatives as they were about a rugby tour.

It seems to me that the radical vigour next century must come from the other political class. The sovereign class, as a political class, favours an increased public input into economic life, and an acknowledgment of existing public resource base that is undervalued. The green movement, with its emphasis on the public value of the natural environment, falls very much within this political class. So, on the whole, do the other constituent parties within the Alliance. Indeed the Maori sovereignty movement, which spurred the formation of Mana Motuhake, represents a movement seeking to promote a more public view - a more Maori view - of property. Maori, as tangata whenua, are at the leading edge of the formation of a new proprietorial social class.

The term 'economic sovereignty' means different things to us today. But it is noteworthy in that, whatever meaning is attributed to the term, it is becoming central to the new public policy debates. Sometimes economic sovereignty means something close to nationalism. Indeed that usage reflects the emergence of globalisation, and globalisation represents the ultimate dominance of the capitalist social class as an international class. Thus economic sovereignty becomes the banner from which to oppose the ultra-imperialism of international capital, whether it is internationalism that is being opposed, or unfettered capitalism that is being reigned in..

The sovereign class, as a political coalition, represented eighteenth century conservatism. But, as a political class, the sovereign class is becoming the radical class of the twenty-first century.

A stable class system exists when most people identify with all three economic classes, through having incomes from all three class funds, and through being tolerant of political worldviews associated with each income source. An evolving class system, on the other hand, involves some struggle; struggle which manifests itself at each of the economic, social and political levels.

Keith Rankin "Class: Economic, Social, Political", 23/10/97 has sought to use the traditional class structure as an indicator of income sources in the modern economy.

The three factors of production of classical economics (land, labour, and capital) were derived from the French concept of proprietors, cultivators and the sterile class that included merchants and manufacturers. The sovereign was the supreme proprietor.

I believe the progressive and systematic removal of the "sovereign" (read, the public good, common wealth) as the primary proprietor, by the market economy is the defining calamity of the world economic system.

The move has been achieved by the private banking system de-linking the money supply from the production and consumption of goods and services. This has been made possible in the first place by the powers granted to the private banking system itself; second from the weakening or removal of public (sovereign) controls over its operation, and finally by automation that has enabled the banking system to monopolise financial and exchange transactions, particularly since the advent of computers.

The dealer of the sterile class (merchant/manufacturer) is not necessarily a parasitic opportunist in the "circular" flow of the traditional macro-economic model, because the services the dealer provides can have real value (for example, distribution of production, without which the consumer would not have access to the producer). [Incidentally, I don't think the traditional macro economic model flow is circular at all, as it doesn't take account of the system dynamics. It's more like a multidimensional coiled spring, resplendent with feedback loops that constantly adjust the pitch and diameter of the spiral "economic" loops so it "pulsates" with time].
    Keith Rankin notes that we owe the macro-model to a doctor Quesnay.

The more one reads about economic history the more one finds input from engineers, Quakers, doctors and others, to the point where you begin to wonder really what theoretical "economists" have really contributed to the debate! Even James Meade now seems to have belatedly and indirectly hinted the high point of modern economic thought , the Welfare State, represents a kind of evolutionary economic dead end. We haven't learned to link the inherent consensus-seeking middle path of the modern democracy with the need to constrain the present monopoly of the means of exchange. We haven't done so because theoretical economists, by and large, have been very slow to step outside the square of unreal assumptions on which much "modern" economic thought has been based. More practical people dealing with everyday problems in real life situations, like Frederick Soddy, for example, have been willing to follow scientific method and look for practical solutions that work instead of finding ways to justify theoretical positions that don't.

Without checks and balances in the financial system ( that I've called "democratising money" in my booklet "The Money Tree" that is shortly to be published), the democratic process itself becomes futile. This is why the Social Credit movement and now the NZ Democratic Party have concentrated on monetary reform for more than 70 years.

In Keith Rankin's article, in the classical sense the proprietor is the landlord, not the capitalist. The capitalist merchant manufacturer is in the sterile class. It seems to me that by dividing proprietorship into public and private sectors Keith Rankin is confusing the underlying issue in much the same way "modern" economists have done.

The fundamental assumption the pre-industrial revolution French seem to have made (later supported by other writers like Soddy), is the distinction between real "permanent" wealth (land, property, resources) and temporary consumable wealth that includes depreciating investment "capital" consumed in the economic process. This distinction is also linked to the Georgian movements for land/resource taxation. Insofar as permanent wealth is inalienable, a modern participatory democracy can assume public ownership of permanent wealth and charge an economic rent to nurture and maintain it on the one hand, and to pay a financial dividend to proprietor-citizens for its private use, on the other hand.

So, in its pure form, proprietorship is sovereign or public, while capitalism, the entrepreneurial activity of merchant/manufacturer tends to be private.

I hold that by its nature, the means of exchange is sovereign and proprietorial, rather than capitalist, as are increases in the permanent wealth of the nation (infrastructure, culture, learning and the knowledge Soddy would call "discovery"). There is ample historical basis for proprietorial (public) ownership of the means of exchange. It is even written into the US constitution. So the real economic revolution that has occurred this century is not so much the explosion in productive capacity of the post-industrial age, but the privatisation of proprietorship of the means of exchange. Far from maintaining purchasing power in line with the net exchange value of goods and services produced (that Soddy called Virtual Wealth, and some might refer to in terms of economic surplus), the "sterile" creators of capital have expanded the monetary base exponentially to a point where only one or two percent of financial transactions now relate to the exchange of goods and services. The rest is speculation of one kind or another under the Orwellian label of financial investment. They have done this because, boom and bust economic cycles notwithstanding, the banking system and those investing in it have legally profited enormously from it, both financially and in terms of political power.

The public fund Keith Rankin refers to is, or should be sovereign and proprietorial, while the capital fund representing the depreciating temporary investment in production, is largely if not wholly private. Economic theory in recent years has allowed the public fund to be discounted, and as a result it is being depreciated and used up in the manner of consumable wealth instead of being sustained for future generations.

While people as individuals may participate in all three "factors" of land, wages and capital, that participation has to be counted properly. Permanent wealth added as sovereign investment would be represented by an increase in the value of the public estate. The "return" from the market economy for the use by the private sector of the (expanded) public domain wealth can be represented rationally by means such as a universal payment to the people at large through the creation of public money ( enough to exchange all or part of the increased private production of real goods and services), or by a compensatory increase in taxation (for example to maintain and nurture the public domain itself). While the level of the payments and the level of taxation will always be politically contestable, there is an overwhelming historical and practical case to establish sovereign proprietorship over the "invisible" financial services sector and the public domain that have been hi-jacked by the "sterile" capital class in recent years. This is the revolution of the third millennium.

Public domain wealth cannot be sustained unless effort and resources are put into it. We can't keep taking from permanent wealth without putting something back. When factor prices like interest rates and the money supply are manipulated for private profit, the public sector doesn't get a look in, and this fundamental flaw coupled with repressive anti-wage legislation like the Employment Contracts Act is driving wealth into the hands of the capitalist- entrepreneur- merchant manufacturers and service providers at an alarming rate. Keith Rankin rightly points out that this happens because that is what the private "market" system is now set up to do; because the system encourages such capitalist wealth accumulation with scant regard for public proprietorship and labour to the detriment of individuals and nations alike.

But the sovereign income need not be from taxes alone. The net exchange value of current production representing virtual wealth in Soddy's terms does not have to come from bank debt. The purchasing power can equally arise from public (sovereign) credit as long as the money supply as a whole is just sufficient to exchange the goods and services available. In fact, one of the very real problems with the present financial system is that even leaving aside interest rates, there has been a massive increase in private sector credit (debt) that far exceeds the corresponding increases in production or productivity. This new money has been largely directed into increasing the price of existing wealth like property and shares. The increases are condoned by the financial institutions on the basis of greed: more money means greater interest income to the banking system from which its shareholders and depositors benefit.

To the extent, in a democracy, we recognise public sovereignty over the public domain, everyone is entitled to a sovereign income because everyone is a stakeholder. In a modern democracy, the sovereign "class" is therefore all encompassing, and labour and capital occupy separate sub-fields within it. However, the sovereign income might not yet be evenly distributed because there are existing residual rights and privileges of "old money" (particularly in the "old" world) whereby the use of wealth is still transmitted on the basis of inheritance.

Keith Rankin's analysis that under the present system the capitalist class is increasing at the expense of labour and sovereignty is not only correct, it is evident. As long as a sterile class capitalist is legally able to skim wealth by the nature of the financial system, human nature will do the rest, increasing the tension between labour and proprietorship on the one hand, and capitalists on the other.

As labour becomes increasingly dissociated from market production and more focused on non-market (and often unpaid) work, its position can only be maintained by receiving greater public proprietorship income or by greater participation in capital (as for example, in mutualisation and cooperative effort). The former can be achieved by a realistic national dividend or universal basic income and the latter by changes to the structure and nature of capitalist enterprise. This is why Democratic Party policy in New Zealand traditionally focuses on economic and industrial democracy.

Historically, changes to the economic and political system revolve around power. They still do, and in my view, always will. Until Colonial times power resided in the Crown and the Church, bestowed upon an establishment elite that largely claimed the public domain for itself as of right. The growth of the Guilds and Merchant class from the middle ages and through the colonial period began to change the power base. Labour never got a look in until it became necessary to sustain production during the industrial revolution. With automation, the power base has undergone a sudden and dramatic shift to a new capitalist elite who literally hold the purse-strings of power. In this system, even the manufacturer/merchant of consumer goods and services has become servant to the most sterile of all, the private creator of credit whose actions are conducted on a world wide scale (BIS, WB, IMF etc). It is a world in which sustainable profit growth depends on huge multinational companies (whose economic product often dwarfs that of many nation states) (ab)using the proprietorship and labour of lessor developed nations . It is a world where the money supply of nations has become a plaything of multinational banking institutions rather than exchange value of the nations producing the wealth, depriving the nation-state, almost by definition, of proprietorship over its own wealth and destiny.

Labour has lost its power (which really flowered only briefly in historical terms). The only practical solution is for the people of the world's democracies to claim proprietorship over their own money supply, so they can optimise their sustainable production and exchange of market goods and services. This will enhance the incomes and well-being of the vast majority of the people, if not everyone, and enhance efficient allocation of available resources within their economy.

In essence, the sovereign class, (now comprising the public at large in a modern democracy rather than the old landed elite) has to assert the power mistakenly vested in part of the capitalist sector centuries ago. While the Green movement (though inherently ultra conservative) may help identify the loss of proprietorship in the public domain, it is doomed to fail unless it first takes a long hard look at how its goals can be achieved. We need a dramatic shift towards real economic sovereignty that displaces rather than opposes what Keith Rankin calls the "ultra-imperialism of international capital".

Since everyone is included in the sovereign class, the radical movement of the third millennium will be a mass movement of people demanding a fair deal - proprietorship in the common wealth of the nation. By and large, the movement will be qualitatively different from previous revolutions in that, being sovereign, it will cross traditional class boundaries. How quick and painless the revolution will be depends on us. The only certainty is that the existing "sterile" capital power base will not cede its authority without a fight.

Lowell Manning

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