15:  Socratic Ownership of Real Estate

 

FRANCES HAS MADE HER PITCH to us and told us the advantages we will get from socratic leasehold ownership of the Pastland Farm.  Someone calls for a vote and we approve the measure.  We will try the socratic leasehold ownership system by selling a leasehold on the Pastland Farm to Kathy for $10 million, with a $2 million yearly leasehold payment.

After the meeting ends, Frances meets with Kathy and the investors to sign the documents.  Frances didn’t write these documents or make up their terms. She had them on her laptop; they were the same documents she used for the Hawaii Organic Rice Farm back in the United States.  She has gone through them and changed a few of the names, of course.  For example, the original documents stipulated that the leasehold payments had to be made into ‘the working bank account of Castle and Cooke, Incorporated.’  She changed this to the ‘working account of the treasury of the human race.’  The old documents stipulated that the owner of the document had to follow any rules and regulations that Castle and Cooke posts to protect the land.  She changes this to ‘follow any rules and regulations that the human race posts to protect the land.’   But, other than these minor changes, the terms of the agreement are the same.

Kathy will have to sign a lot of documents.

The first set of documents deal with the mortgage loan she will take out to pay the price.  Kathy will be borrowing $10 million from the investors.  The loan documents are designed to protect the investors, to prevent things from going wrong, and to make sure that the investors can step in, if necessary, to deal with any problems that may come up that may possibly place them at risk.

The first requires Kathy to agree to operate the farm in a responsible, prudent, professional, and businesslike manner, in full conformity with the provisions of her leasehold agreement. It tells her that the lenders will be monitoring her all the time.  (Remember the risk managers?  They are watching her, so they can catch any mistakes she might make early and fix them before they lead to problems.)  If the risk managers see that Kathy is doing anything they think is too risky, they will go out and talk to her to try to see why she is doing it and figure out whether the actions are likely to harm them.  If the risk managers come away from this meeting feeling that the steps Kathy is taking are too risky, they can issue her with a ‘notice of noncompliance,’ stating that she is out of compliance with her agreement (which requires her to operate the farm in a ‘businesslike’ manner) and giving her a period of time to bring herself back into compliance.  If she doesn’t comply, the risk manager can take various other steps. All of these steps are outlined in the loan documents she signs.  There is a lot of small print.  Perhaps you, the reader, have signed mortgage documents in the past and didn’t bother to read the small print.  If you had done so, you would find provisions like the ones in Kathy’s loan documents.

The investors need to protect themselves.  But they can’t protect themselves without also protecting the human race.  Their very first priority is to make sure that the money that has been promised to the human race gets to the human race.  If this doesn’t happen, they will lose all of the money they invested. They need to make sure this happens. Next, they worry about the rules that the human race has passed to protect the land.  If Kathy violates these rules, she is out of compliance with the leasehold agreement and the human race has the right to take her to court; in the event of a serious violation that offends the sensibilities of the court, the court may cancel the leasehold agreement, without recourse. This isn’t likely to happen, but it can happen, and the lenders want to make absolutely sure it doesn’t happen. The loan documents require her to understand and follow all laws and rules that the human race passes to protect the land.  They (their risk managers, actually) will be watching.  They are being paid to watch.

The lenders are only protecting themselves.  They don’t want to lose their money.  If nothing goes wrong, they will sit back and get rich, rich, rich: they will collect millions of dollars in interest, over the years, on this loan.  If something goes wrong, they will lose.  The human race has set up a system where the interests of the lenders are totally aligned with the interests of the human race.  They are basically our servants.  If they do a good job protecting us, they will get rich. If not, they will get very poor, very quickly.  Since our interests align with theirs, we will all hope that they get rich.  As long as they are getting rich, we know that we are protected, our world is safe (they will protect it from harm), and our income is safe.

The Ownership Documents

After Kathy signs all of the loan documents, she signs another set of documents that involve her agreement with her landlord.  The human race is not the owner of this land.  We are, however, the dominant species on this planet and the only species capable of organizing efforts to protect it and use it in a reasonable manner. This makes us the rule-makers, landlords, and custodians of the world.

The agreement with us is designed to protect the interests of the landlords.  (In Hawaii, Castle and Cooke was the landlord.  They hired teams of professionals to draw up documents to protect their interests.  Frances knows she won’t be able to draw up better documents here; she doesn’t have anything close to the resources Castle and Cooke had.  So, she will simply use the documents she brought back from the future, changing the names as necessary.)

The first document she signs is her leasehold agreement.  It is a very simple document.  It states that she has agreed to purchase a leasehold on the Pastland Farm for a price of $10 million with a leasehold payment of exactly 20% of the price she paid, or $2 million a year.  She will own all rights to alter the land and keep increases in production, provided she follows all of the rules of her landlords (which includes her in this case) that are designed to protect the land.  She also has the right to sell the land.  She has the option to sell back to the landlord any time she wants (after the leasehold payment has been made for that year) for $10 million.  She can sell to anyone else she wants for more than $10 million, but the leasehold payment will reset, for the new owner, to 20% of the price that the buyer paid.

She will not own certain rights. She will not own the right to the first $2 million the farm produces; this production will belong to the landlord. She will not own the right to build a high rise or factory on this land.  The human race has created a zoning plan for all private property. This land is zoned ‘agricultural.’ She must follow this plan.  She will own the right to use the land in accordance with the plan and the rules of the human race, and to keep all revenues the land produces after paying her operating costs and giving her landlord $2 million each year.

She signs the documents at an office called an escrow office.  The escrow officer is paid a small sum to make sure everything is done properly in the closing.  The escrow officer checks each page carefully to make sure there are no errors. After she finishes checking, she passes them to her assistant, who checks them again, to make sure the first officer didn’t miss anything.  Many escrow offices have a third checker.  It is very, very important to them that all the paperwork is done right.  They will be recording these documents and these offices will be on file for the rest of time.  They are establishing a ‘chain of title’ that people in the future, perhaps thousands of years in the future, can use to determine who owns this property.

Improvements Part One

After she finishes signing the documents, she goes back to her cabin.  The next day she gets up and goes to her computer to check on the cameras on the farm.  She goes back to work.

At first, she has no reason to change anything she does.

She has always run the farm in a professional manner.

She continues to run it professionally.

But as she is looking at the field though the camera, she thinks about the way it looked back in the future, when it was an even ocean of green poking above the water.  When the land was all level, all the rice plants were the same height and same stage of development.  The land looked beautiful.  Now, it is a bunch of knobs and valleys at all stages of development, depending on the depth of the water.  Some areas have no plants at all; they are too deep.  In other places, the rice is already starting to wilt from the heat, because the water is too shallow.  She takes out some paper and does some calculations.  What will happen if she does level the land?  If production goes up as much as it was back in the future, her income will go up by truly incredible amounts.  She will be rich, probably the richest person on Earth.

She thinks about how nice it would be to have a mansion down by the river, with her own swimming pool, gardens, and servants.  If she were the richest person on Earth, she could have these things.  She picks up the phone and starts making calls.

She isn’t going to do the physical work herself, but she starts talking to people who might do it to find out what they would charge.  Several people have the ability to move dirt and tell her that it depends on how much dirt she has to move.  She needs to give them a plan that tells where the dirt is now and where she wants to move it.  She hires a surveyor to make a map of the land and talks to a landscape engineer about creating a plan that the people who will work can use to determine how much work it will take so they can give her prices.

I need some numbers to work with for the sake of example so let’s say that she eventually finds she will have to spend $460,000 to do everything associated with leveling the land.  Her consultants tell her that if she does this, she can expect her harvest and costs to both increase by 20%.  Her operating profits will go up to $2.94 million a year.

Kathy’s leasehold payment will not go up.

She has locked in the leasehold payment of $2 million for the entire time that she owns the leasehold.  It will not change until someone else owns.

 

Why the lenders will be happy to advance the $460,000:
          They currently have $10 million loaned out on a property with a market value of $10 million, a 100% loan to value ratio.  If they advance the money and the improvement is made, the market value of the land will go up to $12 million.  They only have $10.46 million loaned out on it and Kathy has $1.54 million in ‘equity’ in the land.  Kathy has a very strong incentive to make sure the leasehold is not repossessed: if it is, she will lose her entire $1.54 million.
          What if it is repossessed?  The lenders know that they can sell it for the $12 million even though they only have $10.46 million invested.  They are taking on less risk with the higher loan than with the lower loan.

 

She will have to borrow the $460,000 so her loan balance will go up to $10,460,000 and her interest payment will go up from $400,000 to $418,400.  After she makes these payments out of her profits, she will end up with $521,600 a year for herself.

If she keeps operating the farm like always, she will continue to get $50,000 a year from the land.  But if she improves it, her income will go up to $521,600 a year.

What does she have to do to cause her income to go up by more than 1000%?  All she has to do is call her contractors and tell them to get started.

What would you do?

Of course, Kathy is going to make the call and the property will be improved.

Further Improvements

As soon she finishes the improvement, she starts getting calls from people who want to buy the leasehold. They are making offers that are far higher than the $10 million she paid for the leasehold.

One of the callers, named Kelly, has been studying some old books on organic chemistry that were left in the ship’s library by a former college student.

The books explain that, before chemical fertilizers, people used guano (bird poop) extensively for this very purpose. The books explain how to test the soil to find out if it is deficient in the nutrients.  (Take two pots with soil in them, put guano in one and leave the other natural, plant the same number of seeds in both; then measure the output of both pots.) Kelly has tested this soil and found it to be badly deficient in the nutrients the guano contains.

Some cliffs border the north side of the Pastland Farm.  Many birds make their nests in crevices on the cliff walls.  Over the years, the birds have come down to get rice to eat and to feed their chicks.  Mostly, they poop when they are on the cliffs.  Guano—bird poop—falls to the bottom of the cliffs.  Over the years, many thousands of pounds of guano have accumulated in piles at the bottom of the cliffs.  The guano contains nutrients that were removed from the soil by the growing grain and moved by the feeding birds.  After thousands of years, the soil is deficient in the exact nutrients the guano contains.

Kelly realizes that she can replace the nutrients and the land will produce more rice.

Kelly is able to offer Kathy $12 million for the leasehold.  She has arranged financing at a rate of 4%, so her interest will be $480,000 a year. The leasehold payment will reset up to $2.4 million a year (20% of the price she pays), so her total payments will be $2.88 million.  The farm now produces operating profits of $2.94 million a year.  After her payments, she will end up with $60,000 a year.

Kelly has found another farmer with skills who is willing to run the farm for $60,000 a year.  She will hire him, and he will run the farm.

Before making the improvements, Kelly is just breaking even.  The land creates a lot of profit; she has to pay all of the profits out to other people. She gets no personal benefits from buying and owning this leasehold yet.

Why would someone buy a property just to break even?

People do this all the time in our 21^st century world.  They intend to make money on improvements.  I have known a lot of people in a business called ‘flipping homes.’ They buy homes that are distressed, often at foreclosure auctions. They then fix up the properties and sell them for much higher prices.  During the time they are fixing the houses, they are always in a big hurry: it costs them money each month to own the property.  They have to pay the bank (most of these people borrow most or all of the price), pay taxes, pay insurance, pay for utilities and, if it is a leasehold property, they have to make the leasehold payments.

But these people have worked through all of the numbers in advance.  They have all the work planned to the day, and they know how much they will have to pay to own the property during this time (called the ‘carrying costs’).  They have already done a marketing analysis to determine how much of a gain they will make on the price from the improvements.

Socratic leasehold ownership is a true ownership system.  It doesn’t grant all of the same rights as freehold ownership systems, but it does grant rights to increases in production and to capital gains.  Kelly expects to make money from this leasehold two different ways.  First, she will improve the land, its profits will go up, and she will be able to keep the extra profits. Second, she will sell the improved leasehold and make a capital gain on the sale.  All the numbers work out if she pays $12 million and she is willing to offer this amount.

Kelly doesn’t want to risk losing the deal with a ‘lowball’ offer that may offend Kathy, so she offers her the full $12 million she is willing to pay.

Kathy accepts.

Who Benefits from the Improvements Kathy has Made?

Kathy uses $10,460,000 of the $12 million to repay the loan she originally took out to buy the property and the other $460,000 she borrowed for the improvement itself.

This leaves her $1.54 million.

 

We could tax this income.  But why should we?  We live on a bountiful world. We have a system that leaves the great bulk of the bounty unowned and under the control of the human race.  We don’t need the money.  If we tax gains like the one Kathy made, we reduce the incentives that people have to work hard to find ways to improve the ability of the planet to produce wealth.  If we want these incentives to be as strong as possible, we won’t tax these gains.

 

She is now the richest person on Earth.  She is free of responsibility: someone else is in charge of the farm.  She can do whatever she wants.

Kelly has purchased the right to get all money the land generates above the first $2.4 million a year.  She has agreed that she will collect the 2.4 million pounds of grain this money represents and put it into the treasury of the human race (the cargo hold of the ship).

She will get ‘storage receipts’ for this: we use $1 bills as storage receipts.  She will not own this money; she will have already agreed that she will not own it.  She has agreed to turn it over to the treasurer of the human race as a leasehold payment.

Our income goes up.  We now get $2.4 million a year, rather than the $2.4 million that Kathy had paid us.

It is true that Kathy gets enormous benefits from her improvements.  She is now the richest person on Earth, with funds that will allow her to pay people to build things specifically for her and minister to her needs.  She can build a mansion (if she can get us to sell her a leasehold on the necessary land), she can hire someone to build her a car, she can hire servants.  She gets great benefits.

But she is not the biggest beneficiary of the improvement.

We, the members of the human race, will get far more than she will get.  She just gets a one-time lump sum payment.  Our income will go up and stay up for year after year after year.  Her gain was $2 million.  We will get this much just from the additional income from the land over the first five years after the sale takes place.  Then, we will get an additional $400,000 a year for as long as the land remains level, which should be for the rest of time.

This money is not meaningless pieces of paper with numbers on them.  They are receipts for treasure, real value that already exists and is in the treasury of the human race.  Our lives are better.

Alignment of Interests

In this case, Kathy may have only cared about her own interests.  She may have been making the improvement out of greed.  But if she sells for more money than she pays, in other words, if she makes a capital gain, our income goes up totally automatically.  (Kelly will have to sign the documents and the rule is that the leasehold payment is always 20% of the price the buyer paid for the leasehold.  She offered $12 million and was therefore offering us $400,000 more than we got before.  Our income goes up and Kelly has the same incentives to make sure we get paid as Kathy had.  We will never have to send Kelly a notice because she will lose five times more by not making the payment than by making it; she will make absolutely sure we get our money, even if she has to sell her soul to get it.)

We get far, far more in benefits than the people who make the actual improvements.

Further Improvements

Kelly may or may not be altruistic.  She may or may not be trying to increase the wealth of the human race for the future. But it doesn’t really matter: her interests are aligned with the interests of the human race.  If she gets what she wants, we get what we want.

Before she even made an offer on the leasehold, Kelly worked out the details of her fertilization project and got bids on the job.  As soon as conditions allow, she brings in contractors to do the work.  The next year, the rice is healthier than it had been before, with the plants growing large with heavy heads of grain.  At the harvest, she finds the land has produced 10% more.

She had to pay her harvesters for their work and, since they took in 10% more, they charged her 10% more. Both her operating revenues and costs were 10% higher, so her operating profit was also higher; it had gone up from $2.94 million to $3.234 million.

Various people come by to talk to Kelly about buying the leasehold.

Why would anyone want to buy a leasehold that has already been improved?  Kathy improved it the first time and quickly became the richest person on Earth.  Kelly came in and made a different improvement; we can see that her income is one of the highest on Earth and she will soon join Kathy as one of the super-rich.

You live in Pastland.

Are you interested in possibly buying?

Why would anyone want to buy the leasehold rights to a farm that has already been improved?

You can’t level it again; the land is already level.  You can’t fix the soil nutrients; Kelly has already done this.  But these are not the only two ways to drive up the amount of wealth the land produces.

You could cut costs by automating production.  You could have computers monitoring the water levels and adjusting them through electronically-controlled gates.  You could get rid of humans in harvesting and have automated, solar powered tractors guided by computers take in the rice and haul it to the granary.  Perhaps the land won’t produce any more rice than it already does, but it will not require as much human effort for production. You won’t have to pay as much, your costs will be lower, your profits higher.

Buyers will look at the new triple-improved farm and realize they can justify paying a much higher price than former owners of this leasehold paid, and still make good money.

Even you didn’t want to improve the land further, you could justify paying Kelly a price of $13.2 million.  At this price, your leasehold payment will be $2.64 million.  Your interest will be $528,000, for a total yearly payment of $3.168 million.  After all your expenses, you will end up with $66,000 a year.  This is still a lot of money for making a few phone calls and watching a few workers.

If you can find some other way to improve, you can do better than this.  You can join the super rich.

Someone will buy at a price of $13.2 million.  When the property rights sell for this higher price, the income of the human race will reset to a higher level.

If we had kept our natural law society, improvements would almost certainly never be made.  The income of the human race from this land would have remained the same.  Our population would have grown, and we would have divided the same yearly income among more and more people.  Our personal incomes and the per-capita contribution to common projects would have fallen and fallen until eventually we wouldn’t have enough personal income to eat and wouldn't have enough common income to make much of a difference.

If we had converted to a hundred percent ownability society, selling a freehold on the land or allowing whoever had the biggest army to take and own it, the improvements almost certainly would also be made.  However, none of the wealth the land produces would go to the human race so we wouldn’t benefit from the improvements.  We, the people of the planet Earth, could only sit back and hope that the wealthy hire us to shine their silver and build their mansions so that their increased wealth trickles down to us.

If they aren’t generous enough to turn us into their servants, we will have nothing and will starve.

The socratic leasehold ownership system can provide a foundation for a society that has something that neither of the two extreme societies can have: prosperity for the entire population of the planet Earth.

14:  Incentives That Lead To Rapid Improvements, Progress, And Growth.

Frances is explaining to the human race why we are better off to vote in favor of the socratic leasehold ownership system.  She has presented one argument: if we vote for it, our risk will be absolutely gone.  We will have a very large number of skilled and talented professionals managing risk.  They will take on all of the risk.

This is one of the benefits we will get by approving this property sale, but not the only one and, as we will see shortly, not even close to the most important benefits.

Frances set up this system because she knows that natural law societies have very serious flaws.  They have no flows of value that encourage progress, growth, and advances in technology.  If we keep our natural law society, we will lose our technology: we won’t be able to replace the items when they were out.  We will revert to primitivism, basically the same as that of the pre-conquest American people.  Eventually, someone somewhere in the world will create a different system and it will probably be a sovereignty-based society.  (Sovereignty-based societies are consistent with certain very simplistic belief sets: people may believe that an invisible spirit being in the sky created the planet, then created humans, then gave the planet to the humans and they now own it.)  She wants this system because it will allow progress and growth.  If we vote for the leasehold sale, we can expect progress, growth, and very rapid increases in the wealth available to share by the members of the human race, starting virtually the second the ink is dry on the paperwork.

Frances wants us to know about this benefit.  She talks about the issue from Kathy’s perspective:

Kathy has known that this land could be improved from the moment we arrived.  Back in the future, her aunt and uncle owned this land.  When they first bought it in 1950, the real estate listing called it a ‘wild-rice swamp.’ The land was pretty much as it is now. There were high spots where the rice plants were left without water to support them late in the summer; these spots didn’t produce much rice.  There were also low spots where the rice couldn’t get high enough above the water to get the sunlight and air they needed; these spots didn’t produce much rice either.

The first year her aunt and uncle owned the land, they waited until the water was low and the land was dry and started moving dirt from the high spots to the low spots.  They did this until they had made the land level.  After they had finished leveling the land, the land produced 20% more rice than it had before.

Their harvesting and other operating costs were also 20% higher.  Since both operating costs and operating revenues were 20% higher, the operating profits and free cash flows were also 20% higher.

When we arrived here a decade ago, and Kathy saw the farm, it was as if time had reversed the improvements her aunt and uncle had made.  She knew it could produce more if it were leveled and actually tried to get us to agree to level it.  In a general meeting, she told the group this and suggested we consider leveling it.

A few people favored progress enough to back Kathy.  They suggested that Kathy draw up some plans for the project, get some bids from people who may want to do the work so we will know how much it will cost, and then come back with a firm proposal.

However, not everyone thought it was a good idea.  Some people thought it was bad karma to mess with nature, when nature is taking such wonderful care of us.  They criticized Kathy’s suggestion and did their best to make her think she was doing something immoral to even consider altering nature.  (You might expect a lot of people in a natural law society to feel this way; even people raised in sovereignty-based societies often feel this way and do their best to shame people who try anything new.)

Still, Kathy thought it was a good idea and started doing the work.  She stayed up nights drawing up plans, and she made connections with people who might do the work and tried to get them to put together bids on what the work would cost.  She was fighting an uphill battle, however, because the people she talked to knew that the project would probably never happen.  They knew it would cost a lot of money to get the project done and any expense of leveling would come out of money that was currently distributed among the people.

For improvements to take place in natural law societies, every single person in society must suffer.  If it costs $300,000 to get the land leveled, we won’t be able to simply print up the money.  Money is receipts for rice.  We will have to take this money out of the amounts that would otherwise be distributed among the people.  Everyone here will see a reduction in their income.  If we had been dividing the surplus free cash flow equally, we must each contribute $300 to the project.  Some people here don’t make a lot of money.  This is more than a month’s income for some people.  Some people are living from day to day.  They can’t afford to give up a month’s income in the hope that Kathy’s proposed change might work..  Some of the people who believe it is immoral to change nature will also have to give up more than a month’s pay to have this project.

They are going to fight tooth and nail to make sure the project doesn’t happen.

 

In the socratic leasehold ownership system, Kathy will pay the costs with money investors provide and the members of society will never pay a dime.  The investors will invest out of self interest; as we will see shortly, they will get greater returns at lower risk if they invest in improvements than if they don’t invest in improvements.

 

They can fight this a number of different ways.  A simple one would be to just make the job so hard for Kathy that she gives up. They can ask for a study, then another study, then another study.  They can ask her to vouch for all her workers, to post a performance bond to guarantee that the work is done properly, and to conform to impossible standards.  They can harass her personally and they can even vote to reduce her pay when she doesn’t back down.

The people who oppose change may be only a small minority of the population.  But they will fight very hard and make any changes so difficult that most people will give up.  It is better to get along and they can get along with everyone if they don’t even try to do anything different.  (To understand how powerful the forces against change are in natural law societies, just consider that the pre-conquest American people had no change for tens of thousands of years.)   Soon, young people with ideas will realize it doesn’t even make sense to talk about change: they know there is no chance of getting anything approved.

Kathy wanted the change, but she eventually realized it didn’t make sense to fight for it.  Why bother?  She would do all the initial work, supervise the project, make sure everything went smoothly, and wind up with 100% of the blame if anything went wrong.  If things went well, production would go up, but she would only get 1/1000^th of the increase that she fought so hard for. The people who opposed it and fought her at every step of the way would get the same amount as she would get. Why fight them to do something that won’t bring her any significant benefits, even if everything goes perfectly?

If we decide to approve socratic leasehold ownership, we will have created an entirely different set of realities for everyone.  Kathy will own the right to do anything she wants with the land, as long as it is not against the rules that have been put into place to protect the land and human race and as long as she gives us $2 million a year.  In this case, we may come up with a ‘list of prohibited activities.’  Kathy can do anything that is not on this list.

Let’s say that some people believe that Kathy should not be allowed to move dirt from place to place (and remember, this is all Kathy wants to do).  They propose we put ‘moving dirt’ on the ‘list of prohibited activities.’ To have this actually added to the list, however, the majority of the members of the human race would have to agree that moving dirt is harmful.  The people in our group are mostly highly educated people who understand that we can’t really do anything to make our lives better if we don’t even allow people to move dirt.

Certain things are clearly dangerous. For example, spraying toxins like herbicides and pesticides on the land (something nearly all 21^st century rice farmers do) is clearly dangerous.  A lot of people will probably want this to be on the list. But not many people are going to want to prohibit anyone from picking up a shovel full of dirt and moving it to a different location.  If this doesn’t go onto the list of prohibited activities, Kathy can do it. She has purchased the right to do anything to the land that is not on the list; she owns this right.

The farm now produces $2.45 million a year in net profits.  If both production and costs go up by 20%, it will produce $2.96 million in operating profits, $510,000 more than before.

 

Don’t be intimidated by the numbers.  Most people in our group aren't going to think much about any number except the numbers that determine our incomes.  Kathy and potential buyers of the leasehold are going to care about the details, but for you and me, the only important thing is this: if the land is improved and the leasehold sold, our incomes from our share of the bounty of the land will increase by 20%.  We will all get more money than we got before.
          This is particularly important to people who don’t get any income other than their share of the bounty.  If you are living on $2,000 a year, the increase to $2,400 is going to have a huge impact on your standard of living.
          You probably aren’t going to go over the numbers to figure out how this happened, but if you know it can happen you will definitely want it to happen.

 

This causes the operating revenues and operating costs to go up by 20%.  If both revenues and costs go up by 20%, the operating profits also go up by 20%.  Now the farm generates $2.94 million in operating profits.

Let’s say that she does this the first winter, spending a total $460,000 on the project.  She borrows this money at 4%, so she has to pay $1,800 per year as interest on her improvement loan, in addition to the $400,000 she pays on her mortgage.

After the interest on her improvement loan, Kathy puts $509,200 more into her pocket than she would have gotten without the improvement.

Kathy is now fantastically rich.

A lot of people are going to see that there is a way to get very rich in this system: they can buy leaseholds and improve them.  There is only one leasehold that is private at this time, the Pastland Farm.  Many people are going to be interested in buying it from Kathy.  People are going to start making offers.

How much can a person afford to pay for this leasehold?

Due to the improvements, a buyer could pay a lot more than the $10 million Kathy paid and still make a very good living from the farm.

You are in Pastland.  If you have good credit and can borrow the money, you could pay $12 million for the land.  At this price, your leasehold payment would be $2.4 million (the leasehold payment for any buyer is always 20% of the price that buyer paid) and your interest will be $480,000, for a total in payments of $2.88 million. This is a lot higher than the payments that Kathy made but it is still a reasonable amount to pay, because the farm now generates $2.94 million a year in operating profits.  After your payments, you will get $60,000 a year (20% more than Kathy got) for operating the farm.

That is the amount that you will get if you don’t make additional improvements so it will produce more. As we will see shortly, there are a lot of things people can do to improve land and make it more productive. When Kathy improved, she got a huge increase in income and made so much on the gain from the sale that she is now the richest person on Earth.

Think about this.

This could happen to you.

Sorry, I have you daydreaming while Frances is making her presentation.

You aren’t the only one who is going to daydream.  Frances is telling us we can all get rich.  Not only will we personally get rich, but each time we make money, we increase the wealth and income of the human race by an enormous amount: we get rich as individuals and the entire human race gets very, very rich as a result of our efforts.

A lot of people are going to think about what they might do if they could buy the leasehold to the Pastland Farm.

Frances is trying to tell the human race what will happen if we allow the land to be private.  She has set up leasehold ownership systems before.  She knows that people who own leasehold rights that are structured this particular way can get very, very rich investing their own money in projects that ultimately will bring far more in benefits to the human race than they bring to the private owners.

She tells us about Hawaii.  She shows us pictures of the beautiful luxury hotels along Waikiki Beach, the shopping malls, and luxury condominium developments.  The people who built these facilities don’t own them.  The big five of Hawaii own the land and own the developments on them.  The people who built all of these things put their own money into them.  They built wonderful things even though they didn’t own the land.  Here in Pastland, we can have all of these wonderful things but there is an important difference: in Hawaii, the leasehold payments didn’t benefit the human race because they didn’t go to the human race.  The leasehold payments benefitted a few fantastically wealthy people, the owners of the big five corporations.  Here in Pastland, we will get the progress and growth and we will each get increases in our incomes, as time passes, that we can use to benefit from all of the wonderful things people will build.

We need to take a first step: we need to set up her trial leasehold ownership system and approve this particular sale. Then we can try it out.

If it works out as she claims, people will begin to make improvements.  Most of the improvements will involve people trying new things. They will look for new and better ways to do everything that they can do.  They will discover technologies that they wouldn’t have discovered if they hadn’t had incentives to look for them.  We can expect innovation, invention, intelligent analysis of the risks and rewards of implementing new processes.  We can expect progress and growth in production.  Our lives will be better.

Total Reversibility

Frances has saved her most powerful argument for last: the system she is creating is a trial system.  It is totally reversible at any time.  We can try it for a year, a decade, a generation, a lifetime, or a thousand years. It doesn’t matter how long we have it, we can reverse it if we, or any future generations, don’t want it anymore. This system exists at the pleasure of the human race.  If the human race wants it, it exists; if ever a majority of the members of the human race don’t want it, we merely have to vote to end it and it will go away.

Since we have this option, we are not taking any risk voting for the sale.  We can try it just like trying on a pair of shoes.  If we like it for a year or a decade, we can keep it for a year or a decade.  If we don’t like it, we can get rid of it and come back to a natural law society, where nothing is owned or ownable.

Kathy is waiting impatiently. She has signed a ‘letter of intent’ to buy if the human race approves the sale.  The investors are waiting patiently.  They want to start getting returns and have all signed ‘letters of intent’ agreeing to provide the funds as soon as the vote is final.  All we need to do is vote.

If we had granted anyone full ownership (hundred percent ownership, or freehold ownership) rights to of a part of the world, we would be making a permanent commitment that grants enormous rights to the owners without them having any responsibility to the human race at all after the sale (they own the land and can do whatever they want to it), and without giving the human race any revenue it can use to enforce its will (they own all rights to any wealth the land produces, even wealth they did nothing to create).  But this system doesn’t grant freehold rights.  It only grants the right to own a marketable document called a ‘leasehold title.’  This title gives the owner of this document the permission to operate the Pastland Farm as private property, provided she follows rules the human race has created to protect our world and provided she shares the bounty the land produces in the ratio discussed above (we get $2 million which is 83⅓% of the current bounty; she gets the rest).  She doesn’t own this right forever.  She will lot live forever. She can keep it for the rest of her life, but she can’t give it away, either while alive or by bequest.  This leasehold will have to sell at some point. When it is offered for sale, we can decide if we want it and, if we do, we can buy it back.

If it doesn’t bring the benefits she claims, or if we simply don’t like it for any reason at all, we can return conditions to what they were before by simply waiting until the leasehold is offered for sale and buying it back.  We will be holding the $10 million that Kathy pays.  If Kathy doesn’t improve the property, and offers the leasehold for sale, we can buy it with this money.  If she does improve the property, the leasehold may be worth more than $10 million and we may have to pay more than $10 million.  But we will have plenty of money to pay the difference.

Let’s look at the reason:

Say that Kathy improves the farm and makes it worth $12 million, then offers it for sale.  Some in our group decide that we need some time to digest the data to make sure everything has worked as claimed and ask that we buy this back for $12 million, examine the data, and, if we find everything really did work out as Frances claimed, we can then sell another leasehold on the farm.

If we buy it back for $12 million, but we were only paid $10 million for it, it may appear that we have ‘lost’ $2 million.  But we haven’t really lost anything; we have gained a great deal.

When we get the property back, it will produce $400,000 more in free cash flow than before, because of the land leveling which drove up profits and free cash flows by 20%.  If we borrow the $2 million to pay the extra money to the price at 4%, we can pay off the loan with the extra income the farm produces in slightly more than five years.  In other words, we don’t have to cut our spending by even one dime to get this extra $2 million.  Kathy has improved the farm so that it generates more free cash.  We can use this additional free cash to repay the $2 million.  After a little more than 5 years, it will all be repaid.

Then, we can start using the additional $400,000 a year in free cash that the farm produces (representing its much higher bounty) for things that benefit the entire human race.  If Kathy does not improve the farm, our lives are no worse; if she does, our lives will be better, whether we keep the socratic leasehold ownership system or revert to the natural law society.

 

Some technicalities:
          What if Kathy does not sell?
          Then, wouldn’t we have to force her to sell or take the property if we should change our minds?
          This might be a problem with freehold ownership because freehold ownership is perpetual and lasts forever.  But it not a problem with a leasehold because the group that writes up the leasehold agreement—in this case, the human race—decides on the terms of the agreement.
          We may put in a provision that the leasehold can be sold at any time, but it can never be given away, either while the leasehold owner is alive or by bequest. This means that the leasehold will be offered for sale on a regular basis; if Kathy doesn’t offer it for sale during her lifetime, her estate will have to sell it;  the estate can sell the leasehold in the market and give the money to Kathy’s heirs, but can’t give property rights to them. 
          I believe very strongly in auction markets.  If we want to make absolutely sure that leaseholds sell for the highest prices possible, we can simply create a provision in the leasehold agreement that requires all leasehold sales take place in auction markets that meet certain standards.  (We, the members of the human race, want all leaseholds to sell for the highest possible price because the leasehold payment is always 20% of the price; the higher the price, the higher the leasehold payment that goes to the human race.)  People who want prices in markets to be artificially high can do this by creating what is called ‘shill bidders.’  These bidders offer higher than market prices in an attempt to get regular buyers to pay more than they otherwise bid.  Say Kathy knows we are trying to buy back the leasehold and puts in a shill bidder that offers a price that is clearly more than the cash flows of the land justify.  For example, say that Kathy brings in several shill bidders who bid against each other to get the price up to $20 million with the theory that this will force the human race to offer more than $20 million, even though the cash flow is only enough to make a leasehold payment on $10 million.  If our bidding manager sees this, she can simply let the shill bidder win.  The leasehold will sell for $20 million, causing the leasehold payment to the human race to go up to $4 million.  Since this is clearly unaffordable—the farm only produces a total of $3.15 million a year and there are costs to pay out of this—the shill bidder will have to immediately offer the leasehold for sale again, this time without shill bidders so it goes for a reasonable price, or default and let the human race have the property for nothing. 
          I don’t think it is very likely that the human race will want to buy back leaseholds. But if we do, we can always do this: we have the money in reserve to pay the price the market will set, and properties will always be offered for sale on a regular basis.  Leasehold ownership is not a ‘forever system’ where people can own properties for the rest of time without paying the human race for the right to own.

 

Frances tells us she is creating a ‘trial system.’  We can try it for a while and decide if we like it.  If we change our minds before the trial period ends, we can vote to buy back the leasehold and then no rights to the land will be private anymore.  We will be back to a natural law society.

How long will the ‘trial’ last?  In other words, what is the latest date that we can exercise our option to ‘reverse’ the system and make it a natural law society again?

This is the great part:

It will always be a trial system.

We can convert back to a natural law society at any time.  If thousands of years go by and we decide that we should have never sold this particular leasehold, this is not a problem.  We are holding the original price paid for the property in reserve.  If it hasn’t been improved, its market value will be the same and we can buy it back for this.  If it has been improved, we can borrow the additional money to buy it at the higher market value and we will always be able to repay the loan on the money we borrow in slightly over five years out of the additional cash flow from the land that is due to the improvement.

 

The price is always going to be 5 times the leasehold payment; this is the definition of socratic leasehold ownership, and all properties will be sold this way.  If the free cash flow goes up, people can afford higher leasehold payments and will therefore be able to afford higher prices.  The higher free cash flow will translate into a higher price for the leasehold in accordance with a very strict formula; if the free cash flow goes up by 5%, the market price will go up by 5%.  If the free cash flow goes up by 20%, the market price will go up by 20%, and so forth.  Because this relationship has to hold, we know exactly how much the price will go up from each improvement in the property.  We will look at this with many examples below; it is much easier to understand with examples than with general discussions.

 

Later, we may decide to sell additional leaseholds on other properties.  We may have thousands or may even have billions of leasehold properties.  If we ever decide any single one of these sales was a mistake, we can change our minds and buy back that leasehold.

If we sell properties through socratic leasehold ownership, we will have created a type of society called a ‘socratic society.’  I will show that the socratic is a stable system that is inherently non-destructive and naturally encourages harmonious interpersonal and social relationships with the other people of the world; it incentivizes peace and environmental responsibility. It is designed as a society that can be used to move us off the path to extinction.  I am not claiming it is a perfect society or a utopia.  It just meets the specific needs we have right now.

At some point in the future, we may want something else.  If we do, we may want to get rid of socratic leasehold ownership entirely and move to some other method of interacting with the land. When this time comes, we won’t need a revolution.  We won’t need to kill anyone and take their property.  We won’t need to ‘overthrow’ anything or use violence or take steps to dramatically alter the realities of people’s lives.  We merely have to vote to start buying back leaseholds.  We will use money that we already have for this: the reserve funds are being held specifically to buy back the leaseholds.  The entire process will be completed within a century and we will be back to the natural law society.  The natural law society is basically a blank slate system: once we are there, we can choose any kind of relationship we want with the world around us and different groups of people around the world.

At this point, Frances must want to convince the people in our group that we aren’t taking an irrevocable step by choosing to allow Kathy to buy the leasehold rights to the Pastland Farm.  We can try it.  If we like the way it works, we can keep it; if not, we can get rid of it.

This is Frances’s pitch to us.

She tells us that everything is already set up.  If we approve, she will make some calls and get some people together to sign the documents; tomorrow morning, when we get up, we will have a system based on private property, a socratic leasehold ownership system.

The Rest Of The Story

The next few chapters explain the evolution of the type of society I call a ‘socratic.’ This society is built on the principles that Socrates explained some 2,400 years ago.

It is not built on the idea of countries gaining absolute rights to parts of planets in wars, and then using the land they gain for the benefits of the people of their countries.  It is based on a logical analysis of the needs and desires of the human race and the structures and institutions that can meet these needs.

The socratic leasehold ownership system is built on alignment of incentives.  The land produces wealth over time.  The socratic leasehold ownership system allows all the people who help bring in this wealth and make it available for the benefit of the human race to get rewards that depend on how good a job they do at their various tasks.  Kathy will make money if she can run the farm well and keep production high. She can make more if she can run the farm better than before so she will have incentives to do anything she can to make sure she doesn’t pay even a single dime more than she has to for any inputs and creates the greatest amount of wealth for the human race the land is able to create.  If she can improve the farm so it produces more, she can make enormous amounts of money.  She can make some of this money before she sells and will get a huge pile of money as a gain on the property when she sells the improved land.

The human race benefits from this: the more she gets when she sells, the more we get over time.

The investors will make money if they can manage risk and make sure nothing goes wrong at any point.  As long as nothing goes wrong, they get richer and richer each year.  If anything at all goes wrong, they will cover any losses out of their own money.  If something major goes wrong, they will raise additional money, if necessary, to make sure that nothing affects the human race.  We will always get our share of the wealth this land produces (in this case, we get 83⅓% of the free cash flow).  This comes in automatically and without risk.  We never have to ask for it.  The investors will make sure that we get it.

Since the investors take on all risks of production, they will hire risk managers to protect them.  They will hire the best people available and make sure these people know what they are doing.  Risk management is a skill that can be learned.  The investors will want to make sure this skill is always evolving: they will fund research into the field to find new and better methods to keep things from going wrong.  If these people know what to do and do their jobs, the human race will be safe.  We can all sleep safe at night knowing that our children will have enough to eat and that, when our children get ready to have children of their own, they will have a clean, safe, peaceful, and prosperous place to raise them.

The socratic system is dramatically different than the systems we were raised in. I think the best way to understand something that is far removed from our normal experience is the same way we learned to understand the very strange world we live in now: experience it. Think about how your life would be if you lived in such a society.  What would you care about?  What would you want to do with your time?  You will see that the socratic has entirely different election systems that deal with entirely different matters than those we vote on now. Think about what you would do with your vote.  Think about how this will affect the society around you.

You will see that people can make a lot of money in a socratic society by buying leasehold rights to properties, improving the properties, and selling them.  Think about this: are you interested in trying to grab some of this money for yourself?  Would you want to buy the rights to the Pastland Farm, or the various other properties that will become available, to improve them?  If you do, how will your actions affect the rest of the people of society?  Try to accept that if you feel pressure to act certain ways—if the incentives are binding on you, personally—these same incentives are going to be pushing other people to act the same way they are pushing you to act.  Incentives have been compared to invisible hands, pushing you to act certain ways.  Think about the incentives as invisible hands: what are these invisible hands pushing you to do?

Try to understand the society described in the next few chapters the same way you have come to understand the society that was in place when you were born and that you have lived in your entire life.

13:  Risk

All investments are risky.  If you absolutely are unwilling to lose any of your savings under any circumstances, don’t invest it, period. There is a chance that you can lose your money.

However, Frances has set up a lot of money market funds like this one in the past and has a lot of experience with them.  She knows that the risks are extremely low.  Since she is going to be taking steps (described shortly) to actively manage risk, and since she is going to be setting aside ‘reserves’ to cover losses and protect the investors from risk, she doesn’t expect anyone to ever lose money on this money market fund.

 

The steps described here are standard steps that risk managers take in our 21st century world.  You can learn about them by reading any book or taking classes on the topic.  Frances isn’t inventing the wheel here; she is merely using a wheel that she already knows works.

 

She just wants prospective investors to know it is possible and she will explain what must happen for them to lose money shortly.

Frances is going to do two things to protect the investors from risk.  First, she is going to hire people to manage risk and give them a budget. In this case, she is going to set aside ½ of 1% of the amount of money invested in the fund per year to manage risk. Basically, this means hiring three professionals with experience in risk management for a risk management team. She will give them a budget of $50,000 a year.  Of this, $12,000 will go to the salaries of the risk managers ($4,000 each).  The other $38,000 a year is available to them to pay the costs of steps that need to be taken to manage risk.  Their jobs will be to anticipate things that can go wrong in farming and take steps to prevent them from going wrong.  Here is an example so you can see what they will do:

The Pastland Farm is by a river that hasn’t flooded since we have been here.  But it can flood.  If it floods, and there is no system in place to protect the farm, the farm could sustain damage and lose part of the crop.  The risk managers will examine the situation and figure out the best way to prevent damage.  They may decide that they can do this best by building a levee (a high ridge on the bank of the river).  If a flood comes, the levee will divert the water to areas where it can’t harm the crop. They may also set up a network of people who will be willing to help in the event of a flood and make sure they have sandbags, sand, and shovels so that they can work to protect the crop.

The risk management team’s job will be to manage risk of all kinds, prevent things from going wrong if they can, and to make sure that if things do go wrong, the damage to the farm is as small as it is possible to make it.

Kathy is going to pay $400,000 a year in interest on the $10 million loan.  Frances is going to set aside $50,000 of this, or ½ of 1% times the loan balance, to pay professional risk managers (we happen to have people with these skills with us) to actively manage risk.  With this budget, the risk management team should be able to prevent most of the things that might go wrong from going wrong.  As long as there are no problems, Kathy will be able to operate the farm as always and the farm will produce plenty of money to pay make her payments, including the interest that will go to the money market fund.

Frances says that it is not always possible to prevent problems.  Certain things are beyond our control.  We know that, given enough time, something will happen that is beyond our control. We can’t stop this, but we can make sure it doesn’t hurt the investors.  The second step she will take will be to set up something she calls a ‘loss reserve fund.’ She will set aside ½ of 1% of the amount on loan to the loss reserve fund.  In this case, this works out to $50,000 a year.

What will happen to this fund?

If nothing goes seriously wrong in production, it will just sit there.  Each year, the reserves in the fund will grow by $50,000.  In ten years, the fund will have $500,000 in it, again, if nothing goes wrong.  Perhaps nothing will ever go wrong, at least nothing that the risk management team can’t handle.  If this happens, the money in the fund will grow and grow.  At a certain point, the fund will have so much money in it that the investors may decide that they don’t need anymore.  The investors own the money in this fund.  If they think it has more in it than is need, they can take whatever money they want out of the fund and divide it among themselves.  They will call this a ‘special dividend.’

Investment funds in our 21^st century world do this all the time; if the members of their risk management team are good at their jobs, the fund will have set aside far more reserves than they need and will divide the excess among the investors.

However, say that something serious goes wrong in production and the farm doesn’t produce nearly as much as normal. Kathy will naturally try very hard to prevent this from happening; as the leasehold owner, she only gets whatever is left after her payments and if the farm doesn’t produce enough to make her payments, she won’t get anything.  But say that she tries and tries to prevent the problem, but she can’t.

Of course, the risk managers will do what they can too.  They have skills and talents and a very big budget.  They have taken every precaution they can and are ready to deal with any emergency that they can deal with.  But say that they can’t do anything either.  Say that even with all of the efforts of the leasehold owner and the risk managers, the farm still doesn’t produce enough to make the leasehold payment to the human race and pay the interest to the investors.

If this happens, the risk managers will step in and work with Kathy.  They will tell her that they want to take over the farm; if she signs it over to them, they will work with her to keep the incident from ruining her credit.  If she won’t work with them, they will repossess the farm under the terms of the lending agreement and force her to turn it over to them.  Once they have control, they will collect whatever they can get from the land.  If this is enough to make the leasehold payment to the human race, they will make this payment.  (They have to make the leasehold payment to keep the farm private.) If there isn’t enough, they will take whatever is necessary from the loss reserve fund to make sure the human race gets paid.

The human race always has to get paid.

That is their primary priority.

Nothing else matters if they can’t make this happen because, if they can’t make the payment to the human race, in full and on time, they will have violated the terms of the leasehold agreement. The human race will not care.  We will be holding $10 million of the investors’ money in the reserve account.  It is not our money as long as we get the leasehold payment.  But if this payment is even one second late or one penny short, this becomes our money.  We get it and the investors lose every single penny they invested. They need to make absolutely sure this doesn’t happen.

 

Notice that the interests of the investors align with the interests of the human race: we want our money and their highest priority is to make sure that we get it, on time, in full, without ever having to ask for it.

 

If they can put together enough money to pay the human race and the investors, using whatever is left of production from the farm plus whatever is in the reserve fund, they will not only pay the human race its full amount, they will still pay their investors the 3% returns they have been promised.

To the human race, it will be as if nothing even went wrong.  We will get every penny.  To the investors, it will be as if nothing had gone wrong.  They will get every penny.

Frances says that she has set up a lot of funds like this in her life.  She knows that these systems work to protect investors and, with them in place, the investors will get their returns when nothing goes wrong, they will get their returns when things go wrong that the risk managers can handle, and they will almost always get their returns even in the event of a major catastrophe.

It is possible, but unlikely, that a catastrophe will be so large that there isn’t enough in the reserve fund to pay the human race and pay the investors their returns in a given year.  If this happens, the money to the human race is always going to be paid.  But the investors may not get their full 3% return that year.  They may get less.  Frances wants everyone to know that there are risks in investments of any kind.  If you don’t want to take the risks, don’t invest, period.

It is even possible that the investors may lose money.  A catastrophe can be so great that there isn’t enough available, after scraping everything the farm produces together, doing everything the risk managers do, and diverting the entire loss reserve fund to the human race.

If this happens, the human race is still going to get paid.  But the investment fund will have to raise additional money to do this.  It will issue additional shares, at whatever price the market will bear, to pay the human race.

How will they lose money from this?

Eventually, the farm will get back on its feet and the returns will come in again.  The fund managers will still divide the returns among the shares. But because there are more shares outstanding, each person will get less.  For example, if the fund has to issue an additional 100,000 shares (to raise an additional $1 million), the fund will have 1.1 million shares, rather than 1 million.  The managers will still pay out $300,000 among these shares.  But since there are 10% more shares, each person will get less. You will get $0.27 per share in dividends, rather than the $0.30 you got before.  Because the return is less, people will pay less money for the shares. If people still feel they need a 3% return on their money, they will only pay about $9 a share for shares in the fund in the secondary market.  If you own 1,000 shares, you will have lost $1,000.

These are real risks and she wants us all to know about them, but she also wants us to know that they are very unlikely.  Almost always, investors can expect their 3% a year, year after year, without fail.

Is This A Good Investment?

Most of the people who show up at the meeting were investors back in the 21^st century.  Remember, the people here were mostly luxury cruise passengers; most people who can afford this lifestyle are pretty good with money and have at least some experience with investments.  These people understand the basic principles of investing and the know this particular investment is actually a very good one.

If you want to find a similar investment in our 21^st century world, look up the security symbol AGM; this is the ‘Federal Agricultural Mortgage Corp.’ class C shares. As of early 2020, they yield 3%, the same amount that Frances says we can expect to get, with the same basic risk profile.  AGM has attracted hundreds of billions of dollars of investment money.  Frances is only trying to put together a fund with $10 million.

No one has to invest.  But the investment is going to be extremely safe and people can use it to ‘park’ their money when they don’t need it, with the full expectation of a 3% yield.

Frances’s final sales pitch is this: she has set up a lot of investment funds in the past.  Most of her investment funds have sold out within a few days after her initial public offering.  After she sells 1 million shares, she isn’t going to sell any more.  If people want to invest after this, they will have to wait until people start selling in the market and buy shares from people who want to sell.  She says that, as long as things are going well on the farm, people aren’t going to be very anxious to sell so there won’t be many shares offered.  Because few people will be selling and a lot of people will probably want to buy, the shares will almost certainly go up (this happens almost all the time with funds like this in our 21^st century world; you can find many examples in the financial headlines where people make staggering amounts of money buying at the ‘initial public offering price’ and then selling shortly after, when the price goes up).

Frances tells people that if they want to get in for the offering price, they need to act quickly.  Even before the meeting is over, people are logging on to Frances’s website with their phones to reserve some shares for themselves.  A few hours after the meeting is over, the fund is fully subscribed and closes.

Frances has a buyer in place, Kathy, who has signed a ‘letter of intent’ to buy this leasehold, if it is offered for sale.  She has financing in place with all of the investors having signed ‘letters of intent' to invest if the project is approved.  All she has to do now is convince the human race that this is a good idea to approve the sale of the leasehold.

The Benefits to the Human Race

Our community is the entire human race.

The human race will have certain advantages with the leasehold ownership system that we would not have without it.  Frances posts information about these advantages on her website.  She also posts a notice that she will hold a meeting where she will answer any questions that people have so that we can all make informed decisions about whether to allow the leasehold to be owned.

Her website posts the following information about the advantages that the partial ownability system will bring to the human race as a whole.

The End Of Production Risk Forever

The first advantage of accepting her proposal involves risk.

In natural law societies, everyone shares in the food and other good things that the land produces.  If production is low, everyone gets less. This will clearly happen in Pastland: the income for the human race is exactly equal to total production minus production costs (operating and management costs).  If production is low by 1 pound (or $1) our income is lower by this exact amount.  Any reduction in production harms the entire human race.

So far, we have been lucky. Nothing has gone wrong that Kathy couldn't deal with.  But reasonable people can’t depend on luck for their daily food forever.  If we don’t move to a system that works differently and provides some protection, eventually something major will go wrong, we won’t have any reserves to protect us, and we will have serious problems.

How serious?

We have a great deal of historical evidence to show that natural law societies go through a kind of natural cycle with prosperity for as long as nothing goes wrong, and utter devastation when things do go wrong.  Anthropologists have studied a great many sites where people who lived in areas before societies built on ownability of land came to dominate those areas. Nearly all of these sites show cycles where large numbers of people live in prosperity for years or even decades.

Then, suddenly, everyone disappears.

Then, no one lives in these areas for years or even decades.

Because these are generally nice places to live, eventually, a group that had split off from an overpopulated area looking for a new place to live will find the site.  They live there and prosper for a period of time.  Then, they are all gone again.

To understand how such a thing could happen, we have to understand certain key differences between natural law societies and the sovereignty-based societies that we were raised in and live in now:

When a group of people with a natural law society first moves to a bountiful area, people will get very high incomes from the land because they will be dividing a lot of wealth among a small number of people.  People will have sex and, with no birth control, sex leads to pregnancy.  If they have plentiful food the mothers will eat well and have healthy babies.  The babies will eat well and grow up healthy.  More and more babies will come and grow up and the population will grow.

The people will divide the wealth the land produces into smaller and smaller portions.  At some point, a large part of the population will get barely enough to keep them alive, even in years when nothing goes wrong and production is at its normal level.

At some point, something will go wrong and production will be low.

The people who had been barely getting by on their share of the bounty of the land, and had no other source of income, will not get enough to eat and will begin to starve to death.

 

In sovereignty-based societies, the owners and rich will always have enough money to buy enough food to keep them alive.  This will happen even if production falls by an enormous amount. If production is short, people compete for food by offering to pay more for the limited supply; food prices rise until they get so high that the extremely poor can’t afford to buy enough to keep them alive.  They will either starve to death or, more likely, die of poverty-related diseases like dysentery, or opportunistic diseases like influenza.
          If production is very low, a very large percentage of the working class will die. (During certain times in Europe, the population fell by half due to food shortages.)  The upper classes will still have enough for food and will survive and continue to rule.  Eventually, when enough of the lower class has died, wages will rise enough so that even workers can afford to eat.  If the food shortage ends, food prices will fall, and the workers will have prosperity for a short time.  But only for a short time: with more money for food, the worker population will grow until the supply of workers is greater than the demand; then, wages will have to fall again.  The rich don’t suffer during food shortages, but a very large percentage of the working class population may starve to death.

 

Now another characteristic of natural law societies comes into play: natural law societies have powerful incentives that encourage both personal and social responsibility.  In such societies, people are raised to believe that no one owns the land or its bounty; they share it in some way that the group as a whole agrees is fair, and the group will naturally want to make sure people who cause problems for the group as whole get less so they will have incentives to reform their behavior.  People will grow up realizing that social and personal responsibility bring great rewards and will feel psychological pain when they do things that harm others, because they know this will likely come back and harm them in the long run.

Some people in these societies have savings.  You can save your money, if the system uses money (as the Aztec and Inca systems used money), or you can save food if there is no money.  In such societies, people find it very hard to continue to stuff their faces and get fatter and fatter (by consuming their savings) while they hear children around them crying through the night with hunger.

Some people in these positions may have taken their wealth with them and left, so that they could continue to eat without having to witness the starvation and misery around them.  The ones who remained appear to have shared their savings with others.  This has to have been true or the areas where they lived would have fallen to low population levels, but not to zero; the evidence shows they did fall to zero, over and over and over again.  This is the only way that an area could have gone from ‘densely populated’ to ‘totally unpopulated’ in a short time.

If food is short in a certain area, most likely the people in that area rationed their food in some way, finding some way to share the shortage.  If there isn’t enough food to last through the year, everyone will eat (with adults only getting enough to survive while children get enough to keep them from crying in hunger) until everything is gone.

Then, when everything is gone, everyone will die together.

This explains what anthropologists see in site after site after site.

The people shared what they had during good years.  But one year something bad happens and the population falls to zero.

All production is inherently risky. Things can go wrong.  This can happen in any society.  In sovereignty-based societies, lower production drives up prices so that only the upper class can afford necessities; members of this class survive while a large percentage of the members of the lower class perish.  (European history shows that there were times when more than half of the people died in a decade as weather patterns changed and farm yields declined.) Natural law societies work differently, and shortages often lead to the total extermination of all the people in a certain area.

If we have either of the two extreme systems, the population (at least the working class population) will bear risk.  The socratic system has several important systems that work together to protect society from risk.  Let’s consider the forces that will be working to protect the human race from risk that wouldn’t be working to protect us if we had either of the extreme systems:

 

1.  The Owner’s Interest.

 

Kathy has signed contracts that lead to obligations for her.  She must pay her workers and suppliers.  She must give us (the human race) $2 million a year as a leasehold payment.  She must pay interest on her loan to the investors. She gets whatever money is left over after she makes all these payments.

She obviously doesn’t want anything to go wrong.  If something does go wrong, she takes 100% of the loss up to $50,000.  She will lose her entire income before anyone else on Earth loses even a dime.  If production is 10,000 pounds low in any given year, she will still have to pay all her costs and make all her payments.  If production is low by 10,000 pounds, $10,000 that would have gone into her pocket will not go into her pocket.

 

If she had bought a freehold on the property for $60 million in a hundred percent ownability system, she would have the same incentives; her mortgage payment would still be $2.4 million a year and if she misses it, she will lose everything she put into the property and her credit will be ruined.  The difference: if she had a freehold, she would NOT be protecting the human race because we wouldn’t be getting any of the wealth the land produces.

 

If production is low by 50,000 pounds, she will be working for free that year.  If production is still lower, she won’t be able to make her payments and the leasehold will be repossessed, taking her out of the picture. She will not only lose the $50,000 a year she would have made that year, she will also have her credit and reputation ruined.

She obviously does not want this to happen.

She will do anything she can to prevent it.  If she has to stay up and work around the clock for day after day, slaving away in the hot sun or freezing rain to prevent a problem, she will do this.  If she has to sell her laptop, her phone, and all her clothing to prevent this, she will sell it all.  If there is anything she can do to prevent missing the payment she will do it.

She is doing these things to protect herself.

But to protect herself, she must also protect the human race.

We get everything we have been promised before she gets anything at all.  Her interests, to make sure the payments get made, are the same as ours. As long as she can meet her needs, our needs are met automatically.

Kathy is the first line of defense protecting the human race against risk and possible loss.  But she isn’t the only protection we have.

 

2.  Professional Risk Managers.

 

In this case, Kathy didn’t have $10 million in cash to pay the price of the farm.  She had to borrow the money.  Frances set up an investment pool that was very similar to investment pools that she set up to provide money for buyers of leaseholds in Hawaii.

The investors want a consistent income from their money.  They don’t want anything to go wrong that might keep Kathy from paying them.

Back in the 21^st century, Frances set up these investment pools so that they would have active risk management.  (In many cases, the risk management is done by insurance companies in our 21^st century world; the investors buy insurance, the insurance companies work with the owners to minimize risk.  Since we don’t have insurance companies yet in Pastland, the system Frances creates will perform the same function.)  Frances knows what can go wrong in farming and how to deal with each of the things that can go wrong.  She is going to train the risk management team herself and expect them to do a very good job preventing problems.

The risk managers work for the investors and are protecting the interests of the investors.  But the investors’ most important priority will be to make absolutely sure that the human race gets its share of production. We have been promised $2 million a year.  If we don’t get it, the leasehold will terminate, and the investors will not be legally entitled to anything back.  They have to make absolutely sure that the human race gets its wealth, or they lose all power and control.  The risk managers are working for the investors, but the investors can’t protect their own interests without also protecting the interests of the human race. Their interests are the same as ours: to make sure that the income of the human race remains at the promised level no matter what happens.  They can do this by making sure nothing goes wrong that they can prevent and, if something does go wrong, by fixing it as quickly as possible so that there is no significant loss for anyone.

The risk managers are the second line of defense protecting the human race against risk.

 

3.  The Loss Reserve Fund.

 

What if something goes so wrong that even the risk managers, working with the leasehold owner, can’t fix it?

Will the human race lose then?

We have a third line of defense protecting us:

Frances charges Kathy 1% per year more in interest than she pays investors.  Half of this goes to active risk management.  The other half goes to a ‘loss reserve fund.’ In this case, $50,000 a year goes into this ‘loss reserve fund’.

If something catastrophic happens, the investors can use the money in the loss reserve fund to protect themselves, by making absolutely sure the human race gets paid.  We get paid before they get paid.  They will make sure we get paid first.  Then, if there is enough in the reserve fund to pay themselves, they will do this.  But if there is only enough to pay us, and nothing left to pay them, they will make sure that we get every dime of our money and accept nothing themselves that year.

 

4.  The Investors’ Capital.

 

What if there isn’t enough in the loss reserve fund to pay the human race the full amount we have been promised?

The investors have to protect their investment.  If they don’t have enough money to pay the human race, even with the money in the loss reserved fund, they will raise more money however they can.  They need to do this because they have five times as much money to lose by not making the payment as the payment itself.

 

The investment capital—the total that the investors put into the property by paying the price of the leasehold--is exactly equal to 5 times the leasehold payment.  This is the way Frances set up the system and is the definition of socratic leasehold ownership.
          Every leasehold that is private will be protected by an investment that is always exactly equal to 5 times the yearly leasehold payment; because investors will always lose five times more money by not making the payment than they would need to raise to make it, they will find a way to raise the money and make the payment if they can.  If they can’t raise it any other way, they will sell the leasehold itself.  Since this is always going to be worth substantially more than the leasehold payment, the leasehold payment will always, always, always be paid, if the investors are in a position to do anything about it.  The only way the human race could not get this leasehold payment is if all of the investors were dead or so incapacitated that they couldn’t manage their own affairs.

 

Even if the leasehold owner fails entirely, and the risk management team is totally ineffective, and there is no money in the loss reserve fund, and the farm doesn’t produce a single grain of rice, the human race is still going to get every penny of its money.

The investors will take money out of their own pockets to make sure this happens.  (You may see a huge contrast between the role of investors in this system and the role investors play in sovereignty-based societies.  In sovereignty-based societies, they can make enormous sums of money harming the human race; in the socratic leasehold ownership system, they are on the same team as the human race, working for us and doing everything in their power to protect us from risk and loss.)

Chances are very, very low, that every single system in place to protect the human race is going to fail, and this means that chances are very, very low that the investors will ever lose money.  But even if a catastrophe hits and every single measure that all these people put into place to prevent loss fails, the human race is still not going to lose a dime.  The investors are going to cover the entire loss.

They are doing this to protect themselves.  But they can’t protect themselves without protecting us.  This is not magic.  Frances knew that neither sovereignty-based societies nor zero percent ownership societies provide any protection to the human race, but intermediate systems do provide protection. This system works in ways that allow people to make money by protecting the human race from risk.  That is exactly what the investors are doing.

The investor’s personal capital is our fourth line of defense.  It protects the human race from shortages in production.

 

5.  The Final Line of Defense, the $10 million in the Reserve Fund.

 

What if all these horrible things happen and, in the process, all of the investors die?  They can’t raise more money to pay us because they are all dead.  You may think that this would, finally, expose the rest of the human race to risk.

But even if this happens, we will not suffer because the final line of defense will protect us:

When Kathy signed the documents, she got a loan for $10 million.  The investment fund gave her a check for this $10 million.  She then used this money to pay the seller of the leasehold, the human race.  She gave us $10 million.

We have this money, but it doesn’t really belong to us.  We have agreed to buy back the leasehold, upon request, for this same $10 million, as long as it remains in good condition and all required payments are made. Kathy can ask for this money and, if she meets these requirements, we have to give it to her.  If the investors should take over the property for some reason and they want the money back, they can ask for it and we have to give it to them.  Since we may be asked to give up this money at any time, and will have to do so, this isn't really 'our' money.

In our 21^st century world, companies and groups that may have to turn over money to others on a moment’s notice keep the money in a special account called an ‘escrow account.’ This account is set up so that even the people who put the money into the account can’t take it out unless certain conditions are met and a third party—the ‘escrow officer’ working for the escrow company—approves. The escrow officer is not allowed to authorize the release of the funds unless certain conditions are met.  We can set up the same system in Pastland. As long as the farm is private, this $10 million will remain in the escrow account; we can’t touch it.

If the leasehold is ever not private, we can take this money out of the escrow account and use it any way we want. As soon as the leasehold payment is one second late, the leasehold terminates, and it is as if the leasehold never existed.  No rights to this land are private anymore.  The escrow officer has to release the funds if the leasehold is not private so she signs off and we can take the money and use it any way we want.

This means that one of two things must happen by 1:00:00 PM on the first day of November of each year in the future: either we will receive the leasehold payment of $2 million from the farm or we will instantly become the owners of $10 million from the money that is being held for us in escrow.  The escrow company doesn’t have to collect this money: it already has it. Since it already has this money, and we automatically become the owners, there is zero chance that we can’t get this money if the leasehold payment is missed.  At one second after the close of business on the first business day of November, either we get $2 million or we get $10 million.

We can’t not get one or the other.

 

Are We Really Protected?

When we start talking about large sums of money like this, it is sometimes hard to understand what money really means.  In our 21^st century societies, this is an extremely complicated topic and you can find thousands of books that each lay out a part of the puzzle.  I have designed the system in Pastland to make the example as easy as possible to understand.

In Pastland, money is not simply pieces of paper with numbers on them.  Each $1 bill is a receipt for rice that is in the granary.  The $10 million are receipts for 10 million pounds of rice.  This rice has been harvested over the years and put into the ‘treasury,’ the cargo hold of the ship.  The people who this rice belonged to got receipts, or money, for the treasure they deposited into the ‘treasury of the human race.’

These people are not using their money at this particular time.  The human race is willing to let the property be private, but we have to have some security.  We have to have something that tells us that the people who will control the land that is the source of our wealth will be responsible.  These people have promised to pay us what works out to, in this case, 83⅓% of the bounty the land produces.  We need some guarantee that we will get it.

We are asking for $10 million in cash. Essentially, people are pledging the great bulk of the treasure of the human race (the rice in the treasury) as a guarantee that the people who control the land will follow the rules we created and make absolutely sure that we always get our share of the wealth the land produces.  As long as this $10 million in cash is in the reserve fund, the treasure of the human race remains in the treasury.  If the land is ever harmed, or if the payment to the human race is ever missed, this treasure will belong to the human race.  If everything goes well, this treasure will continue to belong to the investors.

The investors are protecting the human race against risk.  They are pledging their own wealth as a guarantee that we will not have to suffer, no matter what happens.  They will solve any problems, fix anything that has to be fixed, and make sure we get our yearly payment, no matter what happens.  They are not asking us to take their word that they will do these things. They have given us their money to hold. We hold it.  If they can’t keep their word, we can keep their money. They are happy with this: they have signed contracts accepting it.

We aren’t just holding little pieces of paper with numbers on them.  We are holding receipts for treasure.  We are holding treasure.  If we get the future treasure we are promised (the $2 million we were promised each year), we will not even touch the treasure we are holding.  If we don’t get the future treasure, we will take enough of the treasure out of the treasury (enough of the $10 million) to cover our yearly payment, we will take enough additional (if necessary) to cover any repairs the farm may need, and we will keep the rest, as our bonus.

But I hope you see that this is never going to be necessary as long as the investors, the risk managers, the leasehold owners, and every other private party involved with the process acts in their own best interests.  They don’t want to lose money.  They want to make money.  They only make money if everything goes right.  They know how to make things go right.  They were all trained in the 21^st century and worked in the various fields they are in for many years before they took this trip.  They know exactly what to do and are going to make sure it happens.

Not to protect the human race.

To protect themselves.

But, since their interests are totally aligned with our interests, the two things are going to be the same. They can only protect themselves if they protect us.  They aren’t our enemies, they are our collaborators, our co-conspirators, in working to make sure the planet Earth is safe, clean, productive, and that every single responsible member of society shares the benefits of this amazingly bountiful world.

 

12:  Forming A Socratic In Pastland

 

 

FRANCES HAS BEEN THINKING about our situation ever since we arrived in the remote past.  She knows that the human race destroyed itself, in the last iteration of history, because it had an inherently destructive society.

We are in a position to start fresh.

Frances knows that both of the types of societies that have been important parts of history have inherent problems; they are both inherently unhealthy societies. One was based on hundred percent ownability; the other on zero percent ownability.  The hundred percent ownability society transferred all rights to owners and left the human race with nothing; the zero percent ownability system didn’t allow anyone to own rights that would have given them incentives to improve the world’s ability to create wealth, to create new and better technologies and put them into place, and to do other things that any race of beings with a growing population needs just to kept its standard of living from falling.

But Frances knows that these two options, the extreme options, aren’t the only possible options.  We don’t have to choose to either allow 100% of rights to be ownable or allow 0% of rights to be ownable.  There are a lot of numbers between 0% and 100%.  We can choose to allow rights to improve the land for profit to be ownable, provided that people who own these rights share the free wealth the land produces with the human race and follow rules that the human race sets up to protect the land.

Frances knows what must be done to make this happen.  She understands all of the necessary tools and structures.

Frances knows that leasehold ownership can be used to create a partial ownability system. Leasehold ownership systems basically sell all rights to the land to private buyers except those that are reserved and unownable.  What rights are reserved and unownable?  We, the members of the human race, are the highest species on Earth.  This gives us the ability to decide what we will and won’t accept.

If we want to keep some of the bounty the land produces, we can make this happen by requiring people who control land with the permission of the human race to make yearly payments to the human race.  These payments will be made in cash, but the cash will come from the sale of the bounty of the land, so we will essentially wind up with a share of the bounty of the land.  We can set up leasehold ownership in ways that lead to very high leasehold payments. If we do this, we will get a large percentage of the bounty of the land.  But Frances knows that if we set up leasehold ownership systems that have very high leasehold payments, the buyers aren’t buying the right to a lot of the free money the land produces (the amount they will be left with after making the payments are lower) so they won’t pay very high prices for the leaseholds.  (You saw this in Figure 7.1: a higher leasehold payment means a lower price.)

Societies where the human race gets a very high percentage of the bounty of the land, but where people pay extremely low prices to gain the right to control properties, will work a lot like natural law societies.  The human race takes on a lot of risk.  (The buyers of properties only risk what they pay as prices: if they risk less, there is more risk left over for us.)  Societies where the human race gets a very low amount of the bounty of the land, but where prices of property rights are very high, work a lot like sovereignty-based societies.  (In sovereignty-based societies, the human race gets none of the bounty and all of the rights to the bounty are for sale.  Since buyers can buy the right to a lot of free money, they pay a lot and prices are high.)

But there are some options that are far away from either of the extremes that work unlike these extremes.  Back in Hawaii, before she took this trip, she created leasehold ownership systems that were pretty close to being in the middle of the range: they had fairly high prices (the people buying property rights paid a lot of money and therefore took on most of the risk; they risk whatever they pay) but the payments that went to Castle and Cooke from the land were very high and represented a large percentage of the bounty of the land.  (In the case of the Hawaii Farm, Castle and Cooke got $2 million of the $2.4 million in free cash flow, leaving them with 83⅓% of the free cash flow.)

She knows that this system ‘works.’  She has a lot of experience with it and has sold leaseholds on hundreds of properties using this system.  She knows how to set it up.  She has all of the necessary documents on her laptop: all she has to do is go to the business center and print them up.

Frances has a Ph.D. in land tenure.  She has gone to school for a very long time to learn a great many details.  She would like to go over all the key information for our group in Pastland, holding classes for about 15 years where we would all attend, so we can learn the same things she knows.  But she knows that most of us aren’t going to want to do this and it really isn’t necessary that all of us know all of the details.

 

I want to give you access to the details, but not in this book.  The book Possible Societies, available for free on the PossibleSocieites.com website, explains these things.  It shows what we can do to alter our societies, which alterations will have which effects, and what a group with all options would have.

 

She decides to demonstrate the system to us.  She wants to put it into place, for a while, so we can see what it does and how it affects us.  She will set up what she calls a ‘trial system,’ a totally reversible partial ownability system that we can try just as if we are trying out a pair of shoes. If we like it, we can keep it. If not, we can simply give her instructions and she will reverse it and put everything back as it was.

Once we have spent some time with the necessary structures, we will come to understand how they work.  Some people will be curious: they will want to know all of the different ways the structures of human societies can work, so they can understand how we might tweak or modify the society that she started with to make it even better. She will work with these people to help them understand how the different possible human societies work. The other people—the ones who don’t need or want this information—will learn how one system works, the one system that she believes provides the greatest advantages to the human race, through experience.

She has experience with the type of leasehold ownership that she used for the Hawaii Organic Rice Farm.  This system was built on the idea of selling the leasehold for the farm with a leasehold payment that was exactly 20% of the price.  (The leasehold payment on the starting purchase was $2 million, which was exactly 20% of the $10 million price.)  Then, with each subsequent sale, the leasehold payment would adjust so that it was always exactly 20% of the price that that particular buyer paid for the property.  She calls this kind of leasehold ownership ‘socratic leasehold ownership’.

She will put together a proposal that we create into a document that grants socratic leasehold ownership rights to the Pastland Farm and offer it for sale. Again, she will include a buyback clause so that it will be totally reversible: if we don’t like it, we merely have to say the word and she can make things as they were before.  She thinks that if we could live with such a system for a few years, we will all be able to see the advantages of this system with our own eyes.  We can decide if it meets our needs and, if it does, we can leave it in place and expand it, to spread the benefits to more and more areas.

We can use it as the foundation for our society.

Advance Preparation

 She wants our decision to be as easy as possible. She doesn’t want people to ask questions like ‘what if we can’t find a buyer for the leasehold’ or ‘where is the buyer going to get the $10 million that we will be asking for the leasehold?’.

She wants to find a buyer in advance, get a firm commitment from that person to buy if the leasehold is offered for sale, arrange for investors to provide the financing, and have them provide a firm written commitment to provide the funds, if the human race approves the sale.  She wants to present signed ‘letters of intent’ to engage in the necessary transactions to the human race and show that, if we vote ‘yes,’ she can get the paperwork signed the very next day and the system that she proposes will be in place.

She will need to do three things in advance:

 

1. She will need to find a buyer.

2. She will have to arrange financing.

3. She will have to make sure the people who will be voting on the project (the human race) have all of the information they need to determine how the proposal will affect them if it gets approved.

 

She starts by finding a buyer.

Kathy

Frances wants to get Kathy involved in her project.  We all know Kathy; she has been running the Pastland Farm for ten years.  We know she is a good manager, works hard, pays her bills, and is a responsible farmer. We trust her with the farm. Kathy is the most likely person to buy the leasehold for the Pastland Farm and Frances approaches her first.

Frances tells Kathy what she has in mind: if the group approves and agrees to sell the leasehold, and if Kathy buys, Kathy will own a leasehold on the Pastland Farm identical to the leasehold ownership that Frances sold for the Hawaii Organic Rice Farm back in the future.

Kathy will have to borrow money to pay the price. Frances will be working with investors to provide the money (this is discussed below).  Frances tells Kathy her interest rate will be 4% so she will pay $400,000 in interest on the $10 million she borrows.  She will also pay $2 million to the human race as a leasehold payment.

Her total yearly mortgage payment—which includes both the leasehold payment and the interest on the loan—will be exactly $2.4 million a year.

The farm generates operating profits of $2.45 million a year.

Kathy will have to pay $2.4 million of this money as her payment, leaving her with $50,000 a year for herself.

Kathy happens to be a greedy (normal) person.  Of course, in her emotional mind, she cares what happens to others.  But when she makes financial decisions, she cares mostly about herself.

How much money will she get from the farm?

If she owns the leasehold, she will wind up doing the same work she does now and getting the same reward.  She was willing to do this work for $50,000 when she had no ownership interest in the farm before.  She is still willing to do it for this amount if she is called a ‘leasehold owner’ rather than an employee.

Frances explains that Kathy will have benefits as leasehold owner that she does NOT have now.

The first benefit is that she will be her own boss.  Now, she is an employee.  She happens to have 1,000 bosses: the human race pays her, so she works for us.  Some of the people in our group take this literally and think they have the right to tell Kathy what to do.  Everyone has different ideas about how to run a farm.  Some people think that Kathy is doing things wrong.  Since they are her bosses, they think they have the right to tell her that she is doing things wrong and explain the right way that things should be done.

Kathy often gets cornered by people like this.  She is always polite and pretends to be thankful for the advice, but she knows that most of these people have no idea what they are talking about and the things they propose are terrible ideas.  She has to be nice to these people of course: we all decide on her salary for running the farm in an election and if she makes people mad, they might not be anxious to give her the $50,000 they have allocated in the past.

But she resents having to do this.

Most people don’t like to have even a single boss.  She has 1,000 bosses.

If she is a leasehold owner, she will be her own boss.  She will be required to pay a fixed amount of money as a leasehold payment to the human race each year and follow certain very specific rules designed to protect the land.  As long as she does these things, she can do anything else she wants.

The income from this land to the human race will be fixed.  We will always get the same amount, regardless of what the farm produces. (Kathy will agree to pay $2 million a year to us; she will take out a loan for $10 million and we, the members of the human race, will be holding this money in the same way that Castle and Cooke held the $10 million from the Hawaii Farm.  If the $2 million is not paid, the $10 million will become ours.  We either get $2 million or $10 million; we can’t get one or the other.)

Since we have no financial interest in the operation of the farm, and we get the same amount no matter how much it produces, we have no right to get involved in operational decisions.  If anyone bothers her after she is the leasehold owner, she can tell them to mind their own business and let her get on with her business.  (We can’t cut her pay for this: she is locked in and, as long as the farm produces as before, she will make $50,000 a year.  She owns the right to keep this money.)  She won’t work for us anymore and we won’t have any right to tell her what to do.

This has a lot of appeal to her.

She will have other advantages that she doesn’t own now, which are also very appealing to her.  She will own the right to make modifications that improve the land.  She will also own the right to benefit from whatever time, effort, talents, resources, and money she puts into the project by owning the right to increases in profits and by owning the right to sell the improved leasehold for more than she paid for it.

Frances tells Kathy what happened back in Hawaii.

She says that the first buyer of the leasehold paid $10 million for it, leveled the land, and then sold the leasehold for $12 million a few years later.  Kathy could do the same thing here.  This would make her the richest person on Earth, by a huge margin.

Kathy likes the idea and tells Frances that she will buy, as long as Frances can arrange for financing on the terms she stated (a loan at 4% interest) and as long as the human race as a whole (our group in Pastland) approves of the sale.

Now Frances has to arrange the financing.

Financing

 During the last 10 years, some of our people have made a lot of money. Dennis ran a bar with a little casino on the side.  People like to drink and like to gamble; they know the odds are always against them and they are just throwing their money away but, if they get drunk enough, they don’t seem to care and keep throwing their money away.  When they throw their money away, Dennis catches it.

Dennis has done quite well and put away a fair amount of money.

Tanya, the egg seller, was very good at marketing and has basically cornered the egg market in Pastland, selling an average of 1,000 eggs a day.  With profit margins of 5¢ an egg, this works out to $18,250 a year after all her costs. She is not a spendthrift.  She has saved more than $50,000.  A lot of other people have had incomes and have saved a bit here, a bit there.

No one has millions of dollars, but a lot of people have savings, and some have substantial savings.  The total savings of the entire human race are quite large.

So far, no one gets any interest or returns on their savings. There are no investments.  We have no private property to invest in. We don’t have factories turning out cars or other big-ticket items that people may have to borrow to buy.  No one is selling corporate stock or drilling oil wells.  Natural law societies just don’t have any significant opportunities to invest money and get returns.

People have savings.  But no one pays them to use this money.  It just sits there.  It doesn’t ‘grow’ at all.

If we agree to Frances’s plan and sell a leasehold on the Pastland Farm, we will have a private investment that can generate returns.  Some of the people with savings will be able to get returns on their savings.

Frances starts to put out the word that she will be starting a project that will require some investment and will be offering to pay returns on money that is invested in her project.  She tells people that the investment will pay a 3% return to investors.  (We will see why it doesn’t pay 4%, even though Kathy will pay 4%, shortly.)

After people have been talking about this for a few weeks, Frances puts up an ad on the internet announcing a meeting for people who may want to invest.  Anyone can come.  She will tell them about the opportunity, how much they can expect to make, go over the risks, and answer any questions that people may have.  A great many people show up.

Investors Meeting

She tells the prospective investors that their money can make money for them, just as it did back in the 21^st century.  They will be making a percentage return, so the more money they invest, the more income they will get.

She tells them the money they invest will be offered as a mortgage loan at 4% to a very high-quality borrower with excellent collateral.  (Kathy is the borrower and the leasehold rights to the Pastland Farm are the collateral.  She is a good risk; we all know her, and the leasehold on the Pastland Farm is excellent collateral, for reasons we will look at shortly.)

Kathy will pay 4% of the amount on loan. Frances wants to set up a fund to attract $10 million in investment; Kathy will pay 4% of this per year, or $400,000 a year.

Frances tells the investors that she has set up a lot of funds like this in the past (future).  She knows that there are things that can go wrong and this leads to risk.  She has found in the past that she can take a few very simple steps to dramatically reduce the risk.  In fact, she can almost eliminate the risk for investors.  (We will look at the way she does this below.)  But the two structures that she is going to use to reduce their risks have costs and this will reduce their yield.  After paying costs to manage risk, the investors will end up with only 3%, not the 4% Kathy is paying.

She says that, when she built investment funds like this in the future, the investors were always willing to pay the cost to manage risks, because it is far better to get 3% with virtually no risk than to get a slightly higher yield and have to worry about things going wrong that can potentially lead to enormous losses for investors.  Because she knows the investors will want to take advantage of the risk management systems she has developed and in place in the 21^st century, she has built them into this fund and will explain how they work shortly.  But she wants to start with the things that she knows most investors are worried about:

She is trying to put together a fund that will make $10 million available to Kathy to buy a leasehold on the Pastland Farm.  The fund will be divided into shares, each of which is 1/1,000,000^th (one millionth) of the total fund.  Each share will sell for $10 in this ‘initial public offering’ of an investment fund.  She will put up a signup sheet on her internet page and allow those who want to invest to sign up for the number of shares they want.  After $10 million has been pledged, the fund will be closed to new investors.  It won’t accept any more money.

She says that after 1 million shares have been sold, there will be no more shares sold.  Since this is the only investment available in Pastland, only people who own shares will get returns.  However, it will still be possible for people who are not in the fund to get returns, because they can buy shares from people who own them.

What price will they have to pay?

Frances says that they will negotiate the prices themselves.  She will set up an electronic market on her website where people may post bids (the amount they are willing to pay) and asks (the amount they are willing to accept). If you enter a bid that some seller is willing to accept, the sale will be take place and you will be required to pay the amount you bid and the seller is required to tender her shares in exchange for this amount.

What will the price be in this market? She doesn’t know.  If people are very anxious to get returns on their money, they may offer substantially more than $10 for shares and the value of the shares may go up.  If people feel that they need more than 3% to justify the investment, they may not be anxious to buy until the shares have come down below $10.  Although she doesn’t know for sure, she has had a lot of experience with these funds back in the future and knows that she is setting an initial price that she expects will hold: she expects the fund shares to continue to sell for $10 a share as long as the fund exists.

She calls her fund a ‘money market fund.’  If you invest in her fund, you can expect a 3% per year return on your money.  If you ever need your money back, or don’t want to be involved with the fund anymore, you can sell your shares to someone else at the market price, whatever it is at the time.  (Note: this is the same way money market funds work in our 21^st century world.  Many trillions of dollars are invested in these funds and most savings or checking accounts are actually money market funds.)

11: The Hawaii Farm

WHEN THE BIG FIVE CORPORATIONS first came to the Hawaiian Islands, they got the title to vast amounts of land.  At first, they used this land to raise tropical crops for American markets. They needed people to do the labor and wanted the cheapest workers they could find.  They went to China and found large numbers of people willing to work for almost nothing.  Most of their workers came from China.

The Chinese wanted rice to eat and the islands had no native rice.  The companies allowed the workers to bring seeds from China and plant the rice on land wasn’t suitable for the crops the companies wanted to raise for export.

In the 1950s, the big five corporations became the owners of large amounts of land in Central America.  This land was much closer to their markets in the United States and shipping costs were far lower, so they moved their agricultural operations to Central America. They sent the Chinese workers in Hawaii back to China and began converting the farmland that had raised tropical crops to other uses, mostly as sites for condominiums, homes, golf clubs, and resort facilities.

The bogs and the swamps where the workers had raised rice weren’t very desirable properties for just about anything and the companies basically ignored them so they could focus on other parcels with greater potential to generate revenue.

Rice kept growing on these lands, but humans didn’t harvest it.  The rice was left for other animals.

Frances has been looking for land that former officials of the company had ignored but that the company could use to generate revenues.  She found a parcel of land that the company had ignored where rice grew.  This parcel is 1,500 acres in size, the same size as the Pastland Farm.  As of the early 21^st century, chemical contamination from genetically modified hybrid rice (which needs chemicals to grow) was spreading throughout rice-producing lands all over the world.  Wealthy consumers wanted uncontaminated rice and were willing to pay more for it.  By the time our group took this trip, the uncontaminated rice was getting very rare, because contamination was spreading very rapidly.  As a result, the price of uncontaminated rice was much, much higher than the price of standard rice: by the time Frances did her study, pure, uncontaminated, organic rice was selling for nearly ten times the price of standard rice.  Since rice was never a common crop on Hawaii, the hybrids that needed chemicals had never been brought to the islands.  The rice that grew in the bogs was pure, uncontaminated, totally organic rice which would sell for ten times the price as standard rice.

Organic and hybrid rice:
          Rice is an internal pollinator, meaning that it pollinates itself from DNA inside of the grain.  Because of this, the standard methods used to create hybrids for other plants (to move pollen from the male plant to the flower of the female plant) didn’t work for rice.  Rice therefore remained a pure and natural crop until 1965, when Chinese scientists figured out how to get inside the seeds, remove the male DNA that would otherwise pollinate the plant, and replace it with external male DNA to make a hybrid. 
          The scientists found a hybrid that produced double the yield as standard rice. Unfortunately, the hybrid couldn’t get enough chemicals from the soil to grow so the farmers had to add massive amounts of chemicals to make the rice grow.  China was in the midst of a horrific famine at the time.  The government built the plants and basically forced the entire country to switch to the hybrids. 
          The owners of chemical companies in the United States and Europe saw a great opportunity: if they could get their people to switch to the hybrids, many new chemical plants would be needed.  They began offering free hybrid seeds to farmers to get them to switch.  The farmers didn’t realize that, once they switched to the hybrids, they would never be able to switch back to organic rice because the hybrids would damage the soil so badly that the organics couldn’t grow.  (Remember the bacteria that ‘fix nitrogen’ that Kathy smelled when she first woke up?  The chemicals kill these bacteria.  The organic rice can’t be grown without replenishing the health of the soil, which will take many years.)  This led to a one-way switch to the hybrids that spread throughout the world.
          By the second decade of the 21^st century, the chemical companies had figured out a new trick to increase the demand for their product: they learned to modify DNA to create rice plants that were totally dependent on chemicals.  They began to mix some of this genetically modified rice with regular rice, making all rice in areas they controlled dependent on chemicals. (Environmental groups took these companies to court and proved they had done it intentionally; the chemical companies had to pay multi-billion dollar fines.  But it was still worth it to them: the fines were a one-time expense they could write off; the increase in demand for their products continued year, after year, after year.) 
          The Hawaii farm doesn’t need outside seed.  Its crop is entirely organic and uncontaminated.  It can reseed from its own crop.  As long as it is not contaminated, its rice will sell for many times more than standard (contaminated) rice.

 

Several years ago, Frances began putting together an operation so that the company could generate revenue from this land.  She hired a professional farm management company to monitor the land, determine when the rice was ready for harvesting, call a harvesting company and get the rice brought to market, and arrange for replanting so it will produce more rice next year.  Each year, the farm produced 3.15 million pounds of organic rice.

Organic rice was selling for $1 a pound, so the land produced $3.15 million a year in revenue.  (The same as the Pastland Farm.) All of the workers and suppliers that the management company hired to take care of harvesting and replanting submitted their bills to the management company, which then submitted a single bill each year to Castle and Cooke. These bills totaled exactly $700,000 a year.  The company paid these operating costs out of the operating revenue and was left with $2.45 million a year, called the ‘gross operating profit’ of the Hawaii Organic Rice Farm.  (This is the exact amount of the gross operating profit of the Pastland Farm.)

The management company didn’t work for free.  Each year, it submitted a bill to Castle and Cooke for $50,000, the cost of the management services it provided.

After Castle and Cooke paid this bill, it had $2.4 million of the money from the sale of the crop left over.

This was the free cash flow of the farm.  This is the amount of money Castle and Cooke got each year from the land. Note that this is the exact same free cash flow as the Pastland Farm.

Different Ways to Privatize Land

Frances has a Ph.D. in the field of land tenure design.

She designs land tenure systems, including leasehold ownership systems.

She is not a rice farmer, she has no interest in farming, and has no time to devote to analysis of rice farming.  Her department deals with thousands of different kinds of properties.  Most of the properties her department deals with are residential, commercial, and resort facilities, like hotels, condominiums, shopping malls, and housing developments.

Her department has ONE rice farm.

Often, the management company taking care of the Hawaii Rice Farm has questions: it needs to know what Frances wants done with the waste straw and other plant materials generated from farming, how to deal with birds and pests that eat the rice, and other details.

Frances has a lot of properties to deal with.  She can’t deal with the details of every single property.  This one is taking up too much of her time.  She needs to get someone else involved with the property, preferably someone who will have very strong incentives to make the decisions that would be in the best interests of Castle and Cooke, take care of the land, keep it productive, and improve it if this is possible.

She has a kind of standard leasehold system that she often uses for properties that generate free cash flows.  This works for residential properties, commercial properties, resorts, golf courses, restaurants, and just about any other property she wants under private control. In this system, she sells the rights to the property in a way that causes the great bulk of the free cash flow to flow to the company in the form of a leasehold payment.

Some of the free cash flow will be available for the buyer of the leasehold to keep. Because the buyer will be buying the right to some free money, the buyer will be willing to pay a price.  Frances wants this to happen because if a buyer has to put up large amounts of her own money in the property, she will have incentives to make absolutely sure that she follows all of the rules and makes the leasehold payment as promised.  (If she doesn’t do these things, her rights to the property may be cancelled ‘without recourse,’ meaning that she won’t be able to get back the price she paid. People don’t want to lose money. They will pay their leasehold payment and follow the rules to avoid this loss.)

She looks over her portfolio and finds a golf course that the company offers through leasehold ownership.  The golf course charges people to play golf.  They charge a lot because a lot of people move to Hawaii specifically to play golf: the weather is perfect there almost all year long. They use part of this money to cover the cost of maintaining the facility.  The rest of the money is the free cash flow.

This particular golf course generates a free cash flow of $2.4 million a year. Frances created a leasehold on this property and sold it under these terms: the buyer of the leasehold would have to turn over $2 million of the free money to Castle and Cooke each year as a leasehold payment.  This would leave the buyer with $400,000 a year in free cash.  Interest rates were 4% at the time so the buyer wanted to buy on terms that would generate a 4% return on the money they invested.  (If you pay a price for a document that grants you rights to a golf course, you are investing your money.)   They realize that if they invest $10 million, they will get exactly a 4% return on their invested money.  ($400,000 is exactly 4% of $10 million.)  Frances found a golf course operating company that really wanted this particular course added to their portfolio.  (Hint: the company name starts with the letter T, ends with P and has um in the middle.)  The company thought that, with its brand, it could charge more to get people to play and make lots of money.

Since the golf course operating company would be buying the right to $400,000 a year in free money, it could afford to pay $10 million for the rights to the golf course.  Frances wanted this because she knew that, if the company had $10 million invested, it would never be late on the yearly payment of $2 million.  If it was late, Castle and Cooke could cancel the leasehold ‘without recourse,’ meaning the operating company would lose $10 million.  No one would try to come up with excuses for missing a payment of $2 million knowing that they might possibly lose five times this amount ($10 million is five times $2 million), so Frances was sure that the golf course operating company would never miss its payments and never violate any of the rules that Castle and Cooke put in place to protect the land.

You might intuitively realize that Frances could set up many kinds of leasehold ownership systems that work differently.  She could ask for an extremely high leasehold payment (even higher than $2 million), transferring more of the free cash flow of golf course to Castle and Cooke. But if she did this, the buyer would be buying less of the free cash flow and wouldn’t pay nearly as high of a price.  For example, if she asked for $2.39 million, rather than $2 million, as a leasehold payment, the buyer would only be buying the right to $10,000.  At a 4% interest rate, the most the buyer could pay for the price of the leasehold would be $250,000.  (Why is this the most she could pay?  If she invests $250,000 to buy the right to $10,000, she will get exactly a 4% yield on her invested capital.  She can’t pay more because if she paid more, her yield would be less.  For example, if she paid $1 million, her $10,000 yield would only be 1%.  Since she can get 4% in the market, it doesn’t make sense for her to accept only 1% and Frances will not be able to sell the leasehold if she asks $1 million for it with a leasehold payment of $2.39 million.)

Her company sells a lot of leaseholds and it has a division that makes calculations to show what combinations of prices and leasehold payments would work.  This division starts with the free cash flow of the land.  It calculates how much of the free cash will be left over and buyable at each different leasehold payment that Frances may set.  It then determines the price the right to get this ‘leftover free cash’ will bring in the market, at the interest rate in effect at that time.

This division creates a chart so that Frances can see her options for the Hawaii Organic Rice Farm.  She can set a very high leasehold payment and therefore get a very high percentage of the free money the land generates but get only a very low price.  She can set a very low leasehold payment and therefore leave a lot of free money offered for sale.  Or, she can set something in between, a system that will lead to a high leasehold payment and a very high price.  Here is the chart this division gives her:

 

Chart 7.1

 

Amount of Leasehold Payment Frances Sets	Price that leasehold will bring in a market, if interest rates remain at current level of 4% on farm loans	Amount of Free Cash Flow Offered for Sale	Percentage of free cash flow that will go to buyer	Percentage of free cash flow that will still be owned by Castle and Cooke
$0	$60,000,000	$2,400,000	100.00%	0.00%
$1	$59,999,975	$2,399,999	99.99996%	0.00%
$1,000	$59,975,000	$2,399,000	99.96%	0.04%
$10,000	$59,750,000	$2,390,000	99.58%	0.42%
$100,000	$57,500,000	$2,300,000	95.83%	4.17%
$1,000,000	$35,000,000	$1,400,000	58.33%	41.67%
$1,500,000	$22,500,000	$900,000	37.50%	62.50%
$2,000,000	$10,000,000	$400,000	16.67%	83.33%
$2,200,000	$5,000,000	$200,000	8.33%	91.67%
$2,300,000	$2,500,000	$100,000	4.17%	95.83%
$2,350,000	$1,250,000	$50,000	2.08%	97.92%
$2,375,000	$625,000	$25,000	1.04%	98.96%
$2,399,000	$25,000	$1,000	0.04%	99.96%
$2,399,999	$25	$1	0.00004%	99.99996%
$2,400,000	$0	$0	0.00%	100.00%

 

She is eventually going to settle on the shaded line in the middle; this give her the best combination of price and leasehold payment.  Let’s consider why the other options aren’t optimal to her, starting with the first line.

Frances can decide to sell a leasehold where the leasehold payment is $0.  If she does this, she is essentially selling a freehold on the farm, not a leasehold.  She is offering to sell the entire $2.4 million in free money the farm generates. If she does this, she will get the price that a freehold on this farm will bring, or the price that this farm would bring if it were sold in a state that didn’t do leasehold ownership, like Texas.

Note that it would bring $60 million.

 

This is the price that leads to yield of 4% on the invested capital. No one would pay more than this price because, if they did, would get a lower yield than the 4% market yield.  For example, if you paid $61,000,000, your yield of $2.4 million a year would only be 3.934%.  Why would you accept a yield of 3.934% on this farm when you could get a 4% yield in the market?  
          Of course, a lot of people want to pay less and wish they could pay less.  But they will bid against each other, forcing the price up.  If anyone can buy it for less than $60 million, that person will get more than a 4% yield. This violates our starting assumption that the market interest rate is 4%: if anyone could buy in a market and get more than 4%, the market rate can’t be 4%.  If the market rate is 4%, a freehold on this farm can only sell for one price: $60 million. 
          If you want more information about pricing of freeholds on real estate, you can find many college courses that explain it in detail (look for courses on ‘real estate appraising’ or ‘real estate investing’).

 

Frances would like to have this $60 million for her company.  But there are two reasons she isn’t going to choose this:

First, if she sells the land this way, she is selling a freehold on the land. Castle and Cooke doesn’t sell freeholds: if it sells a freehold, it loses its rights to this land forever. The company wants to keep its land forever.  It is not going to authorize her to sell a freehold on this or any other land.

Second, this option doesn’t bring in one dime of revenue for the corporation. Frances works for a company that wants revenue.  The more revenue she can generate for Castle and Cooke, the more the company will value her as an employee.  Each year, the company shows how much it values employees with bonuses.  Very valuable employees get multimillion dollar bonus checks.  Frances wants this to happen to her.  She wants a system that generates some revenue for the company, so she isn’t going to choose this option.

She could offer a leasehold with a leasehold payment of $1 a year.  Note that, if she does, she isn’t going to get as high of a price.  She will only get $59,999,975, or $25 less than she would have gotten if she had sold a freehold. (There is a reason for these numbers; they are not made up but come from standard formulas which work for very understandable reasons.  See endnote 2, at the end of the chapter, for an explanation.)

This will get her a $1 a year increase in the company’s income.  This is better than nothing, but not much better.  She can’t expect the company to go crazy with their bonuses when they find she only increased their income by $1 a year from a property that generates $2.4 million in free cash each year.

Socratic Leasehold Ownership

Frances goes down the chart until she gets to the highlighted line.  She can sell a leasehold with a leasehold payment of $2 million a year.  If she does, her appraisers say she can get a price of$10 million.

This particular leasehold ownership system has a leasehold payment that is exactly 20% of, or 1/5^th of the price paid for the leasehold.  We will see that leasehold systems that work to make this happen have certain very special properties that no other leasehold systems have.  I will need a name to refer to leasehold ownership systems that sell property rights with a leasehold payment that is 20% of the price, so I can refer to it in discussions.  I will call this kind of leasehold ownership ‘socratic leasehold ownership.’

I want you to consider one important reason why this particular leasehold ownership option might appear to be very attractive to Frances:

Let’s say that someone buys a leasehold on this property for $10 million.  The buyer promises to pay $2 million a year to her landlord.  What if the buyer gets lazy and decides not to collect the rice this year and not make her leasehold payment?  If she doesn’t make the leasehold payment, she has violated the terms of her leasehold agreement and her landlord can cancel the remaining term of the lease.  She will not get her $10 million back.

If someone buys this leasehold under these terms, you can be very sure she is going to make absolutely sure she always makes her leasehold payment on time and in full, without any need for anyone to notify her or ask for any money.  She knows that if she doesn’t make this $2 million payment, she instantly loses $10 million.  No sane person would miss a $2 million payment knowing that, if she misses it, she will be out five times this amount of money.

You could think of the price of the leasehold as having the same function as a deposit would have in a regular long-term lease.  If she makes her payments on time and follows the rules the landlord sets, she can ‘get it back’ by selling the leasehold to someone else; if the farm is in as good of condition as it was when she buys it, she can get the same amount (we will see why this is true shortly), so, from her perspective, it is the same as a deposit and, as we will see, performs the same function.  In this case, the ‘deposit’ is 5 times the yearly ‘rent’ (the leasehold payment) so no sane person would ever miss the ‘rent’/leasehold payment.

 

The buyer of the leasehold will make sure the leasehold payment is made every year even if the farm doesn’t produce enough to make it.  She has $10 million to lose if it is not made and will sell her personal possessions, if necessary, to get the money.  She will borrow, if necessary, to get the money.  She will sell her blood to a blood bank, if necessary, to get the money. If all else fails, she will find someone who wants to buy the leasehold and sell it, always making sure the leasehold payment is made.  (Note: not all leasehold ownership systems work this way, but the one that Frances set up in Hawaii did work this way.)   Frances wants to get this particular property off her back so that she can worry about other things.

If Frances sells the leasehold under these terms, she will never have to worry or lose a second’s sleep about possible problems that might make her drive out to the farm to figure out why she isn’t getting paid.  She will never have to do it.  In fact, the company will actually come out ahead if the leasehold payment is not made so they have no reason to even send out a notice or ask for it.  They might even hope that the leasehold owner forgets.

Why? If the leasehold payment is missed, they can cancel this leasehold and immediately sell another one for $10 million, which is five times the amount of money they missed out on.

There is another reason that Frances likes this option: it provides very, very powerful incentives for the leasehold owner to protect the farm from damage and to repair any damage, at the leasehold owner’s own expense, if it happens. Consider the reason: say the leasehold owner has not taken any precautions against floods and a massive storm floods the farm, doing $5 million worth of damage.

A renter or someone with no money on the line might just walk away. But the leasehold owner is NOT going to walk away.  If she does, she loses $10 million.  If she can raise the $5 million by any means, and fix the farm, she will still lose, but she will only lose $5 million.  If you have ever lost large amounts of money, you will know that it hurts you a lot and the loss will haunt you the rest of your life.  People are not going to take this risk if they can avoid it.  There are things she can do to protect the farm from floods.  She is going to do them.  Although she is only doing this to protect herself, her interests are the same as the interests of her landlord in this case.  (This is true if the landlord is a giant corporation or if the landlord is the human race, as we will see.)   As long as the farm remains healthy and productive, the landlords will get their money.   The leasehold owners will make absolutely sure that the landlord’s interests are protected.

This system is designed to align the interests of the leasehold owners with the interests of the landlords.  In socratic societies, discussed later, the human race will be the landlord of the world.  The interests of the people who own rights to and control properties will align perfectly with the interests of the human race.  If they do the things that make them money, they will make our lives better. (This is what the term ‘aligned incentives’ means.)

 

If the leasehold owner can’t prevent the loss, the landlords still aren’t going to suffer as long as she can fix the damage for anything less than $10 million. There is very, very little that nature can do to this farm that can’t be fixed for $10 million.  The owners of this land (Castle and Cooke, in this case) don’t have to watch the weather forecast and wonder if their land is safe. The leasehold owners will make absolutely sure that no harm comes to the land if they can help it.

We will see that the price plays an important function in leasehold ownership systems.  They place this money at risk. They will lose this money if something goes wrong.  Frances particularly likes the socratic leasehold ownership system because in this system the price is five times the leasehold payment.  (If the leasehold payment is 1/5^th of the price, the price is 5 times the leasehold payment; this is saying the same thing two different ways.)  Since the leasehold owners always have five times more money at risk than they have agreed to give to the landlords, they will never leave their landlords hanging; the landlords will always get every cent they have been promised, on or before the due date, and never even one second late.

Even if the leasehold owner should somehow miss this payment, Castle and Cooke (the landlords) still can’t lose.  As soon as the payment is missed, they can cancel the leasehold and will again own all rights to the property.  They can then sell another leasehold on the same property for another $10 million, getting 5 times more money than they missed out on.  The landlords take on no risk whatsoever.  Since they take no risk whatsoever, they never have to collect anything, never have to send out notices, never have to bother anyone. They will always get their money. We will see that this is a very important issue when the ‘landlords of the Earth’ are the ‘members of the human race.’  Money will flow from the land, to us, totally automatically, and totally without risk.

I know that people will have a hard time understanding systems that give people incentives to do things that protect outsiders, including the human race, because these systems are very far from the systems that we live in.  We will look at all of this later in great detail; here, I am just trying to lay out the basics of a system that we know is possible because it exists: many properties in Hawaii are held under the exact same terms.

 

Systems Below Socratic Leasehold Ownership in the Chart

Frances goes back to the chart that her analysis department gave her (see chart 7.1, above, for details).  She has decided that she doesn’t want to use any of the systems above the shaded line (the one that suggests she sells the leasehold for $10 million with a yearly payment of $2 million).  The system at the shaded line has some great advantages.  But what about the systems lower than socratic leasehold ownership in the chart?  If going down from the top brings ever-greater advantages, why not keep going down, to the bottom of the chart, with the assumption that lower is better?

She looks at options that are lower on the list, below the shaded line, to see if they might be even better than the one that is shaded.

She could get even more as a yearly leasehold payment than $2 million by choosing one of these options.  But if she does, she will have to worry about things that she doesn’t have to worry about if her leasehold payment is $2 million.  These problems come because the buyers of the leasehold won’t have as much money at risk, and therefore won’t have as much money to lose if they don’t make their payments or if something damages the farm.

To see this, consider the next to last line on the chart.   Frances could offer a leasehold on this farm with a yearly payment of $2,399,999.  If she does, she won’t be able to get much as a price.  The buyer is not going to be buying the right to get the full $2.4 million in free cash flow.  She is only buying the right to whatever free cash the farm produces that she doesn’t have to give to the landlord.  In this case, she has to give all but $1 a year of the free cash flow to the landlord, so she is only really buying the right to get $1 a year in free cash. The standard formulas show that a person buying the right to get $1 a year in free cash is only going to pay $25 for it, if interest rates are 4%.  (This is the price for buying a $1 cash flow that generates a 4% return on the invested money; if you want more information, see notes 1, 2, and 3, at the end of the chapter.)

In the socratic leasehold ownership system (the one marked by the shaded line) the buyer had to invest $10 million in the property by paying $10 million as a price; the buyer had $10 million to lose if she didn’t make her $2 million yearly payment.  No one would ever miss an $2 million payment knowing they would lose $10 million if this happened.

But in the second to the last line system, the buyer only paid $25 for the leasehold. At the end of the year, she will be sitting there with $3.15 million in her hands.  She might feel honor bound to pay her workers and suppliers, and if she does, she will be left with $2.45 million.  Her contract with Castle and Cooke requires that she give Castle and Cooke $2,399,999 of this money.  If she does this, she will wind up with $1, for a year of work with $25 of her own money invested.

What if she doesn’t make this payment?

What if she keeps the entire $2.45 million?

If this happens, Castle and Cooke will cancel her leasehold.  She will immediately lose $25.

But why care about this?  She has $2.45 million.  Perhaps Castle and Cooke will file a suit against her and try to get this money. But she can easily use a pretty standard excuse for people who get money that that doesn’t belong to them: it is gone. She had some bills and spent it. If she doesn’t want to make this excuse, she can simply open an account in Switzerland, wire the money to that account (at the rate of $10,000 per day, to avoid reporting to the IRS, which happens if you wire more than this), and then move to some other state.

Frances realizes that the price acts like a deposit to the buyer of the leasehold.  If she offers the rights to the farm under the terms on the second to the last line, the buyer is basically posting a $25 deposit to protect a $2,399,999 million yearly payment.  It just doesn’t make financial sense to make this payment if all you lose for not making it is $25.

I consider myself pretty honest, but I would have to think pretty hard about this situation if it were me.  Should I keep the full $2.45 million, get myself to Switzerland where I could put the money into a bank and live in luxury on the interest my money will generate for the rest of my life.  (At 4% I will get $98,000 a year; since Switzerland doesn’t tax interest for foreign nationals and doesn’t report it to the United States so the IRS can tax it, this will be tax-free.)   Or should I be honest and make my payment, leaving me with only the $50,000 that I need to justify the work on the farm and a $1 return on my $25 investment? It is a hard choice.  I think a lot of people would be on the next plane to Switzerland.

Frances doesn’t want people to get into a position where they will make more money defaulting on their payments to Castle and Cooke than they would make if they kept their promises.  True, perhaps she will get an honest person who will pay. But perhaps not.  Why take the chance?  She can avoid this problem entirely by choosing one of the other leasehold ownership systems, one that is higher on the chart.

If Frances wants to protect her company’s interests, she is not going to sell with options that are either very high or very low on the chart.  The options close to the top don’t get her company enough money over time to make it worthwhile; the options close to the bottom don’t give her company security and safety and don’t give the leasehold owners incentives to work hard to protect the interests of the landlords.  The only leasehold systems that make sense are those close to the shaded line on the chart.

In this example, Frances has been in the field for many years.  She has sold a lot of leaseholds.  She has been studying land tenure systems for her entire life. She manages thousands of leaseholds for Castle and Cooke and knows how they work.  She isn’t going to waste a lot of time; she knows what works and want doesn’t.  She knows that the option called ‘socratic leasehold ownership,’ the one on the shaded line of the chart, creates the particular set of incentives she wants to create.  (Again, don’t worry if you don’t get this now: this is a complicated issue and I just want to introduce it here; we will go over the details in the far simpler system in Pastland, when we sell an identical leasehold ownership there.)

The Sale of the Leasehold

She calls her company’s real estate agent and says she wants to put a listing on the property.  She will offer it on these terms:

 

1. Price: $10 million.

2. Leasehold payment: $2 million a year.

 

A Different Perspective

Now let’s change perspective a to see why a person buying a leasehold might like this particular system too:

Imagine that you have just moved to Hawaii and are interested in possibly getting some property.  You have some experience in farming and would like to find a farm where you could tinker around a little, be in touch with the land, and possibly make some money.

You decide that you don’t really want a very small farm (one that is only a few acres in size, or a ‘garden farm’) because you are experienced with operating a farm that is 1,500 acres in size.  You know how to make things work on a farm this size.  You know how to find contractors to bring in the harvest and how to negotiate prices, fees, and contracts.  You know how to monitor contractors and draw up contracts that make sure they perform.  You know about planting, negotiating the sale of production, and other details of a farm that is this size.  You don’t want a few acre ‘garden farm’ because you don’t know anything about putting together the workers and getting things done on a small farm.  You are looking for something at least 1,000 acres in size.

You call a real estate agent and she tells you there is a farm that is ‘in the pipeline.’ The agent has put up a notice on internet websites that post farms for sale (most common is Loopnet.com) that a farm will soon be listed but hasn’t listed any details.  On the notice, this farm is called this the ‘Hawaii Organic Rice Farm.’ It produces $3.15 million worth of organic rice a year.  The farm has operating costs of $700,000 so it makes operating profits of $2.45 million a year.  The farm has been under professional management for five years.  The current owner, Castle and Cooke, has paid the management company $50,000 a year for its services.  In exchange for this money, the managers arrange contractors to do all of the work (the management company doesn’t do any work itself), makes sure production gets sold in a competitive bidding process, takes care of all the paperwork, and has an outside auditing firm come in to make sure that the people who deal with money, equipment, and anything valuable associated with the farm are all being honest and accounting for everything properly.

After all these costs, the company is left with $2.4 million a year.  This is the free cash flow of the farm.  If you go to any site that offers rights to farms for sale in our world today (on any terms at all) you will see that the free cash flow is a very important number to buyers: most of the ads put the amount of free cash flow the land generates in the headline of the ad.

You drive out and look at the farm.  There is no one onsite at the time; you just walk around and look at the land to see if the ad has represented it properly.  You call the management company and set up an appointment to examine their books.  You find all the numbers are exactly as claimed.  You tell the real estate agent that you might be interested, depending on the terms of the deal.

The agent calls you the next day and says that the terms are this: the owner is offering a perpetual leasehold on this property (perpetual means ‘no termination date’).  You will have to pay $10 million as a price to buy the leasehold and a $2 million leasehold payment each year you own the leasehold.  This particular leasehold has an unusual provision called an ‘option to sell the leasehold back to the seller:’  Castle and Cooke will buy back the leasehold at any time for the full $10 million you paid for it, provided the farm is in as good or better condition as when you bought.

If you buy this leasehold and then later change your mind, you can basically return it to the seller and get all of your money back, at any time.

Is this a good deal for you?

There are two ways people can pay the price that they have to pay to purchase property rights.  They can pay it with money they already have in their pockets, or they can borrow the money with a mortgage. Let’s consider both options to see how the numbers look.  We will start with what would happen to you if you already had the money and could pay cash.

A Cash Purchase of the Leasehold

Say that you have $10 million in a money market fund paying 4%.  You get $400,000 a year in returns on this money.

If you take $10 million out of this fund to buy the leasehold, you will no longer be getting the $400,000 a year in returns that you now get.  But after you give this $10 million to Castle and Cooke as the purchase price of the leasehold, you will own the right to keep all but $2 million of the $2.4 million free cash flow this farm produces.  If it continues to produce as it has in the past, you will wind up getting $400,000 a year, exactly enough to replace the $400,000 in returns you had been getting on this $10 million before.

You will basically break even on this part of the transaction.  You had been getting a 4% yield on your money.  You will still get a 4% yield on your money, you will just get it from the income of the farm, not from the investment fund.

If you had left your money in the investment fund, you could take it out any time you wanted by selling your shares in the fund.  If you put your money into the farm, you can also get it back any time you want by selling your interest in the farm.  (Castle and Cooke has agreed to buy it back for the same amount if you ask for it.)

The farm is currently under management.  The managers don’t do any physical labor on the farm.  They just have a database of suppliers; they monitor the farm and, when something needs to get done, they call the appropriate supplier.  They get $50,000 a year for this.  If you want, you can leave it under management.  If you leave it under management, you will have to continue to pay them.

However, your entire reason for looking for property is that you want to manage it yourself.  You intend to go to the farm frequently. You will deal with the contractors yourself.  You will take care of selling the rice the land produces yourself.  You will write the checks and audit the books yourself.  You have experience in these things.  If you are working for yourself, you have stronger incentives to make sure you get the best prices than the management company does: the employees of this company don’t really care how much things cost, because they don’t pay the costs. You will pay these costs and you think you can manage the costs much better than the disinterested management company.  If you can keep costs down, or do things that drive up revenues, you will get all of the additional revenues. You will also save $50,000 a year on management.  This is a lot of money for doing something you already know how to do and which you know will only take a few hundred hours each year.

The real estate agent tells you that there is another way to make money from this land. You can improve it.  You saw for yourself, when you went to the land, that the land has never been leveled.  There are high spots and low spots, neither of which produce the amount they would produce if they were exactly the right level.  You can level the land and production will go up.  You can keep all additional money.  Quite often, leveling rice land causes production to go up by 20%. If this happens, you may end up with hundreds of thousands of dollars a year in income.  Your leasehold payment will not go up: it is locked in and will never change as long as you own the leasehold.  You will be able to keep all of the additional money the farm generates.

The real estate agent tells you that if you improve the farm, you can offer the leasehold for sale in the market and it will bring more money.  In this system, the amount people are willing to pay for leaseholds depends on the free cash flow.  If the free cash flow is 20% higher, and the terms of the leasehold remain the same, you can sell the investment for 20% more than you paid for it, leading to a $2 million gain.  (We will look at examples below to show why this is true.)

Here is the bottom line:

If you buy the leasehold on the farm, you can get your $10 million back any time you want by taking advantage of the option to resell the farm.  This is really no different than your current deal, with the money in the money market fund.

If you leave the money in the farm, it will generate a 4% yield, the same yield you get on the money market fund.

If you don’t want to manage the farm, you don’t have to: the management company is happy to take it over any time.

If you want to manage the farm, you will make $50,000 a year from this, plus any increases in profits that you can create by driving up production or reducing costs.

If you own the leasehold, you can improve the farm and may possibly wind up with hundreds of thousands of dollars a year without doing any additional work in the future.

If you improve the farm you can then sell it and pocket $2 million, increasing your wealth by an enormous amount.

If you have enough money to pay cash for the farm, this is clearly a very good deal: you get all of the benefits you want, and really don’t have any downside, as long as you take care of the farm and keep it in good condition.

What if you aren’t rich?

If you don’t have the $10 million, you will have to borrow it.  At the time, interest rates are 4% so, if you borrow, you will have to sign a loan agreement that requires you to pay $400,000 a year to the lenders as interest.

If you take over management, you will end up with a $50,000 a year income for yourself. If you can cut costs or drive up revenues, you will get more.  There is no limit to how much you can make.

If you level the land, your income will go up by whatever extra cash flows you generate. If you drive up production and costs by 20%, you will end up with $500,000 in additional income each year you own.  If you decide to sell, you can sell for $12 million.  You can use $10 million to repay the loan and be left with a $2 million gain.

Is this a good deal?  I hope you can see that Frances isn’t really taking any chances here: someone will definitely buy this leasehold.  She added the option to resell the leasehold to Castle and Cooke as an extra attraction: since people know that they can always sell the leasehold for $10 million, they never have to worry about the leasehold to this farm falling in value.  Investors love this: it is very nice be offered the right to gain money but be protected from loss.  Lenders also love it: they know that, if they should have to repossess the farm, they will be able to sell it for $10 million, so they aren’t very likely to lose any money on this farm.

Everyone wins.

And that is the general idea of this system.  It is possible for everyone to win because the world gets richer each year due to the existence of this farm.  If Frances sets up the land tenure system right, everyone will win.

Land Tenure Systems

Now that we are in Pastland, Frances is going to be in a position to design a land tenure system for the benefit of the human race.  She understands how to align the incentives: to her, the alignment of incentives is a technical task.  She can work out the incentives that would exist with each possible land tenure system that she might design.  She can figure out the interests of the human race and design a system that has the closest possible alignment between the ‘incentives of the people who control the land’ and the ‘interests of the human race.’  This is what she has done her entire life.

In our 21^st century Earth, the land tenure systems were not designed to meet the needs of the human race.  Most of the land tenure systems were not designed at all: they came to exist after warlords conquered land and used it entirely for the benefit of the warlords (who became ‘kings’ and were eventually deposed by ‘governments’ which took over the flows of value that had gone to the warlord-kings), or they were designed to meet the needs of certain corporations (like Castle and Cooke).  In a way, we can be thankful that these companies existed because we can study the tools they used to get private individuals who did not own the land to make truly massive investments in the land they controlled, without having to ever sell any of the land to any of the improvers.

Our group in Pastland can take advantage of these things.  As long as the moratorium is in effect, we have a natural law society. Once the moratorium ends, we may create any kind of land tenure system we want, including one that grants partial rights to private buyers provided they agree to rules we have passed to protect the land, and provided they share the bounty the land produces with the members of the human race.

What If You Don’t Pay Cash And Have To Borrow?

If you don’t have the $10 million, you can borrow the money.  If interest rates are 4%, you will have to pay $400,000 a year in interest.  You will also have to make the leasehold payment of $2 million to Castle and Cooke, so you will pay out $2.4 million of the $2.45 million in profits to others.

If you keep the farm under management, you will also have to pay $50,000 a year to the management company.  But, again, in this example, you intend to manage it yourself.  If you take over management, you will gain an income from the farm of $50,000 a year.  You will have to manage.  But it won’t be really a very difficult or time-consuming job for you.  You will basically have to make a few phone calls, do a little paperwork, and make sure everything goes smoothly.

You can also make the improvement.  If you do, you will gain the same benefit you would have gained if you had paid cash for the farm.  Say that you level the land and all the numbers (costs and revenues) go up by 20%. The profits go up to $2.94 million. You will be paying $2.4 million a year as payments ($2 million as a leasehold payment and $400,000 as interest on the loan you took out to pay the price).  You will be able to keep the other $540,000 a year in operating profits.

After you improve, you could also sell the leasehold for the same $12 million, leading to the same $2 million gain on the sale.

Either way, you will be able to get a $50,000 a year net increase in your income by buying the leasehold and managing the farm yourself.  You can improve the land and will get the same benefits from improvements whether you have cash to pay for the leasehold or have to borrow.

The ending numbers are the same whether you pay cash for the leasehold or borrow, we just get there by a little different way.

Of course, if you aren’t rich, this is going to be a more attractive deal.  Why?  If you are a multi-millionaire, you may want to dabble a little in the farming, but you aren’t going to really care much about the $540,0000 per year you can gain through improvements.  So what? You can already have everything you want.  If you aren’t rich, that $540,000 is going to be a huge ‘invisible hand’ pushing you to get the improvements made as quickly as possible.  Most people (those who aren’t already multi-millionaires) will stay up nights just thinking about this.  They will make the plans as they go to sleep and dream about the workers moving dirt from spot to spot.  They will be there before the workers show up in the morning to move the dirt and make sure they do everything exactly properly.  Chances are that someone who is not already very rich is actually going to buy this leasehold, because the money that can be made from improvements is going to be a bigger draw for these people.  But the point here is that, in the end, the actual incentives are the same for rich people and poor people.  They have incentives to take care of the land, to protect it from harm, to make absolutely sure that the share of the free cash flow that belongs to others (the leasehold payment, which belongs to Castle and Cooke) gets where it is supposed to go, and to improve the farm if they can do this.

Frances set up the leasehold ownership system specifically to make sure all of this happened.  As we saw earlier, she had a lot of choices.  She could have set up leasehold ownership systems that had higher payments to Castle and Cooke but didn’t give Castle and Cooke as much in security.  She could have set up systems that gave Castle and Cooke even more security than they had now, but at the expense of lower payments to Castle and Cooke.  She chose this one because it was a kind of Goldilocks system, from her perspective: it aligned the interests of the buyer/owner of the leasehold with the interests of Castle and Cooke in a perfect way.

Details Of Socratic Leasehold Ownership

What about the buyback option?

Why did Frances put this option into the system?

We will see, later in this book, that the buyback option is a key provision in socratic leasehold ownership systems.  If we, the members of the human race, include it, we will never have to worry about many things we otherwise would have worried about and we will guarantee an orderly and ‘liquid’ market for leaseholds.  We will know that they will always sell, very quickly, and will have a reserve of funds that we can use, if necessary, to deal with any problems that may possibly come up in production.

Let’s consider why Frances included this provision:

First, she wanted the leasehold to sell quickly.

If not for the buyback agreement, people may have wondered about the price.  Is it too high?  They don’t want to pay a price that is more than the market value for the leasehold because, if they do, and they ever want to sell, they may not get their money back.

With the buyback agreement buyers don’t have to worry about this.  The market value of the leasehold cannot go down as long as they keep the farm in at least as good of condition as when they bought.  If you buy this leasehold and, a week later, you decide you made a mistake, you can basically return the farm to the seller and get your money back, just as if the farm were an item you bought at Walmart that you decided you didn’t want.  Adding in a ‘money back guarantee’ is going to make people realize they don’t have to worry about whether the price might be too high: if they find it is, they can always ‘return’ the farm and get their money back.  Since there is no limit on the time for the buyback agreement, they can do this in a year, a decade, or at the end of their life if they want.

The money back guarantee is also going to make lenders far more willing to make a mortgage on the loan.  Lenders can lose money if the price of the thing they are lending on falls.  In 2007, the housing markets collapsed in large parts of the world and housing prices collapsed.  If your house is worth less money than you owe on it, it is better just to walk away: why pay more for the house than it is worth, by continuing to pay the mortgage?  Lenders lost trillions of dollars when this happened and the result was a collapse in the lending market (it doesn’t make sense to lend money in a situation like this).

Why do markets collapse?  The problem is that there is really no true or correct value for the pieces of land in a freehold system.  What is the Hawaii Farm ‘worth?’  It will produce $2.4 million a year in free cash flows forever.  How much is $2.4 million times infinity? The farm will produce food for humans as long as there are humans.  How much is it worth to the human race?  Clearly, there is no finite amount of value that can match the value of a piece of productive land: no pile of pieces of paper with numbers on them or metal disks, no matter how large, would ever truly compensate the human race for the loss of a part of the planet.  There is no true value.
          If there is no true value, then any value set in markets can only be artificial.  It is a made-up number.  In practice, this made-up number is determined mostly by something called the ‘money supply’ at the time.  If there is a lot of money in the economy, it can support very high prices; if there is less money in the economy, prices have to be low.  The problem is that the amount of money in the system changes from day to day due to very complicated factors.  If the money supply falls, prices of real estate fall, and vice versa. Because the price of the land is artificial, when prices start to fall, people start to panic (a low artificial price makes just as much sense as a high one) and they start to sell, trying to get their properties sold before the price collapses.  Of course, this leads to a glut of properties on the market that drives down prices. 
          Leasehold ownership systems work differently, setting prices that actually mean something.  (In this case, the price is an exact multiple of the free cash flow.  With the leasehold payment at 20% of the price and the interest rate at 4% of the price, the price must be exactly equal to the free cash flow divided by 24%.  This must happen because it is the only affordable price that is also ‘not too high’ (not so high that a person buying a property will get a windfall).  This is a complicated topic that I will discuss later and in great detail in other books in this series, but as long as there is a buyback agreement in place, no one has to worry about it: prices can’t go down after the sale so lenders never have to worry about the market value of the collateral falling below the value of the loan.  As long as they make sure the owner keeps the property in good condition, this can’t happen.

 

The other reason Frances set up the system in Hawaii with a buyback option was that she wanted security.  She wanted to protect herself and her boss.

The socratic leasehold ownership system has a price that is always 5 times the leasehold payment.  This system works very much like a rental with a deposit system where the deposit is 5 times the rent.  When Frances sells the leasehold, she can’t simply give the $10 million to Castle and Cooke to spend.  She may have to give this money back, so she has to hold it in a reserve fund.  If the leasehold owner wants the money back, Castle and Cooke must have it available to pay.

What if the leasehold payment is missed?  If this happens, the leasehold owner will have violated the terms of the leasehold and the leasehold will simply expire.  The (former) leasehold owner will lose all rights. She will not have any right to ask for the $10 million back:  as soon as she missed her leasehold payment, she gave up this right.  The company will get all rights to the farm back, just as if the leasehold had never been sold.  But the company will have $10 million sitting in a reserve fund that it no longer has to hold; there is no longer any chance it will have to use this money to buy back a leasehold, because it already owns the leasehold. This money is just extra.

Before the leasehold payment was missed, this money didn’t really belong to Castle and Cooke.  The leasehold owner could ask for it at any time, so it really belonged to the leasehold owner; Castle and Cooke was simply holding it in reserve.  The very second the leasehold payment is missed, however, this $10 million belongs to Castle and Cooke.

Let’s say that the contract requires the leasehold payment to be made by 1:00:00 PM on the first business day of November of each year. This money must be paid into ‘the working account of Castle and Cooke’ in cleared funds to be considered paid.

Say that the first of November is a business day.  At 12:59:00 PM on November 1, the $10 million is still in reserve; it doesn’t belong to Castle and Cooke.  At exactly 1:00:00 PM, the computer checks to see if the leasehold payment is in the working account in cleared funds.  If it is, nothing changes: the $10 million must remain in reserve.  If the money is not there, the computer realizes that the reserve account has a surplus of $10 million.  It has $10 million in the reserve account but will never have to buy back the leasehold to the Hawaii Farm, because the farm is no longer private. The computer transfers the ‘surplus reserves’ to the ‘working account of Castle and Cooke.’

This means that, by 1:00:00PM on the first business day of November each year, one of two things must happen: either the $2 million leasehold payment will appear, as if by magic, in the working account of Castle and Cooke, in cleared funds, ready for the company to spend, OR $10 million will appear in the working account of Castle and Cooke, ready for the company to spend. It is not possible for one of these two things to not happen.

Later, we will look at the idea of using socratic leasehold ownership in our system in Pastland.  In that system, we may eventually have billions of private properties.  You might think it would be a lot of trouble for us to go through each one and make sure the payments are made as required.  But, if we set up our system the right way, we will never have to do this.  Our money will come in completely automatically and without any risk at all, just as happened in Hawaii.  Frances is never going to send out a notice or bill for her leasehold payment.  She doesn’t have to.  She doesn’t care if it is missed.  In fact, she would be happy if it is missed: if this happens, her company will get an $8 million windfall. (It will get $10 million rather than $2 million.)  She may have a dozen, a hundred, a thousand, or even a million separate leaseholds out there.  As long as she sets them all up the same way, her company can never not get its share of the value the land produces.  It is not possible for this money to not come in.

Selling Leaseholds

Say that you buy the leasehold to the Hawaii Farm.  You paid $10 million for the price and have agreed to pay $2 million for the leasehold payment. Note that your leasehold payment is exactly 20% of the price.  Your price is exactly 5 times the leasehold payment.  (This is saying the exact same thing two different ways.)

If you want to sell the land, you can sell it back to Castle and Cooke for $10 million. You can also offer it to some other party for some other amount.  Obviously, it doesn’t make sense to sell it to anyone else unless you can get more than $10 million from it.  The leasehold agreement allows you to sell to anyone you want, any time you want, for any price you want that is $10 million or higher. However, if you sell it for more than $10 million, the leasehold payment for the new buyer will adjust upward to be 20% of the price you get, whatever it is. For example, if you sell it for $12 million, the leasehold payment will adjust upward to $2.4 million, which is 20% of $12 million.

Why did Frances put this provision into the contract?

Her company is in this land for the long run.  The company has owned this land for more than a century, longer than anyone alive on Earth has been on this world.  The company never intends to get rid of this land entirely.  It wants to benefit from this land for the rest of time.

 

The next chapter discusses what happens if the human race is basically in the same position as Castle and Cooke in this example and we decide to sell partial rights to the land.  We—the members of the human race—are in it for the long run. We want to benefit from the existence of all private land for the rest of time.

 

Frances put this provision into the contract because she wants the company to benefit from the incentives that private buyers of leaseholds have to improve properties.  If you buy and improve, you will make money.  When you make money, she wants her company to make money too.

It may seem that you are getting the biggest part of the benefits and the company is only getting crumbs.  You get a one-time gain of $2 million.  The company will only see its income go up by $200,000 a year, and this increase won’t even start until after you sell.  But remember that the company is in this for the long run.  Over the long run, it will get far, far more benefits from the improvements than you will get.  In the next century after the land is improved, the company will get $20 million, or 10 times the amount you got.

If our group in Pastland sets up a system like this, we will have created incentives that lead to improvements.  These improvements will not just benefit the people who make these improvements. They will make money but since our income depends on the amount of money they make, the more money they make, the more our income from the land will increase.  We don’t have to just use this system for the Pastland Farm: we can use it for any properties we want improved.  The buyers of the leaseholds make benefits that seem huge initially and really are huge compared to the incomes most people would otherwise get.  But when they make money, we make money.  Since our increases in income last for the rest of time, we will always get far more from improvements than any of the private parties involved.

In Hawaii, Frances set up this system for a very specific reason.  She worked for a company that was in business to make profits. If she could drive up the profits of the company, she would be seen as a very valuable employee.  Castle and Cooke had a long history of rewarding people who can drive up their profits with handsome bonuses.  She wanted to help her bosses because she knew her bosses would reward her for this.

Frances is also going to set some common sense rules to protect the land, just as the Forest Service sets rules to protect its land.  Frances wants to make sure no chemicals are used on this land so it will remain uncontaminated.  (Chemical-free rice sells for five times the price of chemical-dependent rice and the chemical-free rice is getting rarer and rarer, because chemical contamination is spreading in areas where rice is commonly grown.)  If she had sold a freehold on this land, she wouldn’t be able to protect it; as soon as the land was sold, the new owner would be in charge. But since she created a leasehold, instead, she can protect this land for the rest of time.

Why Does Anyone Care About Any of This?

We have seen that the societies you and I were born into are diseased societies. They work in ways that allow people to get very rich harming the land and harming other people.  The incentives of the individuals in this society conflict with the interests of the human race.

These systems were not thought out.  They weren’t the result of scientific analysis.  They basically evolved, and they evolved in ways that often made them worse, not better.  They started out very dangerous and primitive, and they are just as dangerous, and nearly as primitive now as they were when they were first formed.

These systems divide the land surface of the world into entities we were raised to call ‘sovereign countries.’ The leaders of these countries realized that if they could use their armies to ‘conquer’ land, they could then generate revenue from this land in various different ways.  They could gain personal wealth and power by creating the conditions needed for wars to take place and then starting the wars.

They hired experts to manipulate the emotions of the people of their countries to make them feel the emotions needed for the war.  If the experts the leaders hired could make the people live in fear and believe that the people that they would be asked to fight are horrible monsters worthy only of misery and death, the people would be more likely to make the sacrifices needed for wars and to participate in the wars.  The leaders had powerful incentives to find ways to generate hatred, fear, and the strange emotion called ‘patriotism’ that makes people believe that the entity called their ‘country’ provides all wonderful things that exist and is worthy of any sacrifices necessary to defeat the ones the leaders tell the people to hate.

Not all national leaders respond to these incentives.

Incentives are psychological pressures, like an invisible hand pushing people to do certain things.  Many people thought the things the incentives were pushing them to do were wrong and refused to do them, even though they could make themselves far better off, gaining both wealth and power, if they responded to the incentives.  Not everyone responded, but some did and that is all it takes.

The conditions necessary for war became a reality.  Wars became constant.

In these systems, the people and organizations who have control over the world and make day-to-day decisions over the land are notpartners with the human race.  The entity we call the ‘human race’ has basically been banished, made to appear that it isn’t even real and has no common interests, by the paid propagandists who work for the individual clans/countries.  The only thing that matters is the territorial goals of the clans/countries; those who think of the interests of the human race are traitors to their clans/countries and are often rounded up and disposed of.

These systems are hundred percent ownability systems, meaning that everything is ownable and owned (by some clan, country, corporation, commune, collective, or individual).  Nothing is unowned and available for the members of the human race to use to meet the common needs of our race.

If we had anything at all; if any share of the wealth that flows from the land was unowned and available for us to control, we would have some power and some control over the important variables of our existence. But the people who built the societies that were here when we were born didn’t consider the needs of the human race, they considered only their instincts, superstitions, and beliefs about the invisible beings and unseen forces that they thought created a mandate for them to take the land and hold it.

We can’t do anything about the past.

We can’t do anything about the way the world worked when we were born.

But time has passed.

The people who set up this dangerous system are long dead.  The people who were in charge are going away leaving new generations. The old beliefs are dying quickly, as technology makes information about objective analysis available to everyone. We can decide to try to keep the old beliefs alive if we want.  We can choose to not allow ourselves to look at the world differently than people in the past.  We can choose to not allow our children to know they have the right to think about the world the way they want and make it work they way they want.

But we can also make a break from the past.  We can accept that there are many different paths that we can take into the future.  We can analyze the landscape, figure out where the different paths go, and find one that leads to the type of world that we want to live in, and that we want our children and their children to be able to enjoy.

We are now in a position to do the analysis that the past generations that created this dangerous system were not willing, and not even really able to do.  We have tools that include computers and the internet that can help us categorize the old beliefs and instinctual feelings as what they are: remnants of a primitive past.  We can accept that we have the ability to set up systems that allow people to buy rights to the world in ways that give them rights to do things that benefit the human race and allow them to get rich if they do these things, without also having the rights to do things that harm our world and put our race and our world at risk.

How do we put such a system into place?

Before we can even think about such things, we have to know this: ‘What system are we trying to put into place?'

You can’t plan a journey until you have first decided on a destination.

We can’t determine the specific steps we need to take to change our societies until we know how we want our societies to work after the changes are complete.

The very first step that we must take is to figure out what characteristics human societies must have in order for them to be ‘healthy’ societies and able to meet the needs of the human race.

I know it is hard to imagine us making a transition from the societies we have now to sane, stable, peaceful, sustainable, and otherwise healthy societies. This is so hard to imagine that most people just want to give up on everything and not think about the issue. It causes real mental pain to think about and we naturally want to avoid pain, so we don’t think about it.  But if we don’t think about things, we will never figure them out.  We will never figure out how to get to healthy societies if we don’t know what healthy societies look like.

Once we understand how healthy societies work, and we have a destination in mind, we can start to consider what we must change about the societies that our primitive ancestors put into place to get from where we are now to the destination we have in mind.

We will look at the idea of societal change in great detail much later in the book. We will see that if we understand exactly where we want to go and know exactly what we must change to get there, the changes themselves are actually pretty easy.  If you know where you want to go and have a map that shows how to get there, it is pretty easy to plan a route.

The illustration on the back cover is called a ‘Road Map of Possible Societies.’  It shows the terrain.  The society that is explained in the next few chapters is called a ‘Democratic Socratic’ and is on the center line of the map toward the far right end.  The bottom line is marked ‘Sovereignty-based Societies’ and we are close to the center of this line, at the point marked ‘we are here now.’  The trip we would have to take to get there would be marked by a line that connects these two points.

 

We must take this project one step at a time.  The first step is to understand our capabilities.  If we know that healthy societies are within our capabilities, we have taken the first step.  We will then be willing to take the second step and do an analysis of the possibilities.  We will see that a great many arrangements of human societies are fundamentally healthy. We can narrow down the options by looking for the specific healthy society that is the closest to the societies we have now, and therefore the easiest to get to.

Only after we know where we are going are we in a position to plan the trip itself. This, I believe, is the reason that attempts at societal change in the past have failed: the people who tried them didn’t have a destination in mind, they only knew they didn’t like what they had. (Marx basically said, ‘Kill all the evil owners and bureaucrats and destroy everything they have built; when the evil ones are gone, the good people who are left will figure out something better and put it into place.’  He had no idea about the destination and made entirely wrong guesses about how to get to better societies.)

The Pastland example is designed to make it easy to see that healthy societies really are possible.  You and I and the rest of the people in our group are in a position to start from scratch. We can form any kind of society we want.  We have incredible advantages, including all of the technology of the 21^st century, the skills of our time, and all information about the things that have been tried over the last iteration of history and the way they worked out.  We can take advantage of these things.  We are in a position to form any kind of society we want.

We have Frances and other people with skills and talents that can help us.  Let’s go back to Pastland and consider what would happen if we decided to intentionally organize our society around a method of interacting with the land that was designed to align the interests of the people who control land with the interests of the human race as a whole. We will see that it is quite possible for humans to live in a healthy, sane, peaceful, prosperous society. Once we know it is possible and we have a potential destination in mind, all we have to do is decide if we want to go there and then make the trip.

 

Endnote 1
          The farm can’t sell for more than $60 million and can’t sell for less than $60 million so there is only one price it can sell for, if interest rates are 4%: $60 million.  Let’s first consider why it can’t sell for more than this:
          If a buyer had to borrow to pay the price, she only has a certain amount of money to make the payment: the free cash flow.  She can’t make a higher payment than $2.4 million because there is no more money: all of the rest of production above the free cash flow is needed to pay costs or compensate professionals for their organization and management.  She can only afford to pay up to the price where the payment will be $2.4 million (equal to the free cash flow) and no more.  The exact price where this happens is $60 million.
          A buyer paying cash wouldn’t be able to offer any more money either.  If you have $60 million in an investment that pays 4%, you will be giving up $2.4 million a year in returns on your $60 million.  You can only break even on this investment if you can pay a price that is such that you give up no more than the free cash flow.  If you pay exactly $60 million (again, assuming return rates are 4%) you give up exactly $2.4 million and get the free money from the farm, or $2.4 million, to replace it.  Pay more than $60 million for this farm and you are going to be losing money from day one. People can’t afford investments that lose them money so no one with money can afford this investment at any price higher than $60 million.
          Now consider the other side of the coin: why can’t it sell for less than $60 million?
          The reason is greed.  If it is offered for less than $60 million, anyone with good credit can borrow the full price, collect the $2.4 million free cash flow of this farm, turn over less than this amount as their loan payment, and pocket the rest of the free money.  For example, say it is offered for $50 million.  You can borrow this money for 4% (assuming you have good credit), make the $2 million payment, and pocket $400,000 a year without doing a single thing and without investing a single dime of your own money.   Who would like to get $400,000 a year in totally free money without effort or any personal investment?  The answer is: everyone.  If the farm is offered for a figure that allows people to get free money without effort or personal investment everyone who can get the loan will want it.  People will bid against each other for it, offering a higher price.  The price has to go up as long as it is such that people can get free money without effort or investment.  In other words, as long as the price is less than $60 million, it must go up.  It can’t go higher than this, so the freehold rights to this farm will sell for $60 million, or some figure so close to $60 million that any difference isn’t important for practical purposes.
          Endnote 2
          The logic for what happens in this system is basically the same as the logic for the price of a freehold which produced a free cash flow of $2.399,999, rather than the full $2.4 million.  The buyer is not buying the right to the full $2.4 million of free money, she is only buying the right to $2,399,999.  As a result, she can’t afford to pay more than the price that would make her mortgage payment $2,399,999.  This price is $59,999,975.
          Endnote 3
          The buyer is buying the right to $400,000 a year of free cash.  The farm produces $2.4 million, but $2 million of this will continue to go to the landlord and is not for sale; only the right to the other $400,000 is for sale.  She can afford a mortgage payment up to the $400,000, and no more.  A price of $10 million leads to a payment of $400,000 if interest rates are 4%, so she can’t afford more than $10 million.  Many people would like to buy for a price lower than $10 million because, if they did, their mortgage payment would be lower than $400,000 and they could put the other free money into their pockets.   Since no one is willing to pay more than $10 million and everyone is willing to pay up to $10 million, the leasehold rights to the farm will sell for $10 million, or some figure so close to $10 million that any difference isn’t important for practical purposes.

 

10: Hawaii

 

Roosevelt created a partial ownability society for a specific reason: he wanted to protect the land, while still making it available for use.  Other people have put together partial ownability systems for entirely different purposes.  Since they had something else in mind when they built these other systems, they set them up different ways.

One important example of this involves the current United States state of Hawaii.

 

How did the corporations gain this land?  For more information look up ‘‘the conquest of Hawaii’ or simply ‘Hawaiian history’ on the internet.  Have some tissues ready; it will make you cry.

 

In the late 1800s and early 1900s, five massive corporations gained ownership of the great bulk of the land on the island chain.  These companies originally used the land to raise tropical crops.  Most of their markets were on the east coast of the United States, a very long distance from Hawaii.  In the 1950s, these corporations got tropical land that could raise the same crops in Central America, which was much closer to their markets.  They moved their agricultural operations to these new locations.  They found themselves with a lot of land in Hawaii that wasn’t generating revenue for them.  They began to look for new uses for this land.

They didn’t want to sell the land.

Land is forever.  If you sell it for a pile of money, the money will eventually be gone and spent.  But if you keep it in the form of land, you have something that will always be there.  The owners of the corporations wanted to keep the land, but they wanted to make money from it over time.

Hawaii has one of the best climates in the world with an almost perfect climate year-round.  If they had nice facilities, including hotels, resorts, condos, and shopping malls, people would pay a lot to live there.  The ‘big five corporations of Hawaii’ wanted to have other companies and private investors come to the islands and invest their own money to build these facilities on the land that the big five corporations owned. The owners of these corporations wanted to turn the islands into a paradise that would belong to them.

They hired professionals to help them analyze ways to make this happen.  They eventually found that they could use leasehold ownership to grant partial rights to the land that would allow private individuals to come in, invest their own money in the property and improve so that, when the leasehold was renewed, the rights to use the property would be worth more money and they could increase the leasehold payment rates, causing the income of the big five corporations to go up and up and up as time passed.

Roosevelt set up a leasehold ownership system to protect the land.  The big five of Hawaii set up a leasehold ownership system for a different reason: they wanted to collect revenue from the land and wanted outsiders to come in and invest massively to improve the land so it would generate more income for the big five.  The owners of the corporations were incredibly rich already, but they wanted to get even richer.

Here in Pastland, we are in a position to form any kind of society we want.  If we decide we don’t want absolute ownability (a sovereignty-based society) and don’t want absolute unownability (a natural law society) we can choose a partial ownability system.  There are actually a lot of different ways to set up partial ownability systems.  Some of them work in ways that preserve and protect the land and don’t have any particularly valuable rewards for improvements (but still offer more rewards than natural law societies, which don’t offer any).  Other systems focus less on protecting the land and more on creating incentives that encourage investment, progress, and improvement.  Before we make a final decision here in Pastland, we might want to know more about our options, by coming to understand the partial ownability structures that we know are workable because they are currently in place and operating.   Let’s consider a system that was designed around entirely different goals than the system that Roosevelt set up to protect forests:

 

Freehold And Leasehold Ownership in Hawaii

 

If you want to live in Hawaii today, you can.

If you want your own home there, you can have it.

But you almost certainly aren’t going to be able to buy a ‘freehold title’ to a home, which will allow you to own the home ‘free and clear.’  There are almost no homes available with this kind of ownership and they are so expensive that very few people can afford them.  If you want your own home in Hawaii, someplace you can live and improve to fit your needs, you will probably have to buy a leasehold on a property that is offered by one of the big five corporations of Hawaii.

Because there are two kinds of ownership in Hawaii, if you want to buy something there you have to specify what kind of property rights you want to buy so your agent will know what kinds of properties to show you.  Most properties offered for sale in Hawaii are offered with leasehold ownership. Some are offered with freehold ownership.  Prices for freeholds are extremely high and there are very few available, so unless you are among the super rich, you will probably have to focus on leasehold properties.

If you buy a condo or home or some other property with leasehold ownership, you will not end up owning the land or even the improvements on the land.  One of the big five corporations owns it and these owners are not selling, for any price.  You will be buying a permission slip generated by the owner.  This slip grants you certain rights to the property. The exact rights you will own are specified on the documents you sign on the closing and vary from property to property.  But, in general, you will own the right to use the land as a private residence with the full protections of the law that go to owners of private property, provided you follow the rules of the landlord (the freehold owner of the property, meaning whichever of the big five corporations owns that part of the world). You will own the right to improve the leasehold as long as you get the proper permits from the proper government agencies and the improvements meet the standards of the landlord as specified in the leasehold document.  You will own the right to renew the leasehold, provided you agree to have the property assessed and to determine if a higher leasehold payment is justified, and agree to pay the increases levied at the renewal.  You will also own the right to sell all of these rights to buyers who meet the standards of the landlords.

The leaseholds are set up so that the total monthly payments, which include both the monthly leasehold payment and the mortgage on the price, are affordable to people who want to have something they can treat as their own (they can improve them; this is normally not allowed for rented properties).  Most people looking for housing care about their monthly payment. If they like the property and can afford the payment, they buy; if not, they don’t.  Because most people who want to live in Hawaii can’t afford the payments on freeholds, but can afford them on leaseholds, most buy leaseholds.

 

Frances

 

We happen to have someone in our group in Pastland who has experience with different land control systems.

Her name is Frances.  Frances got her bachelor’s degree in land management and did Ph.D. work in a field called ‘land tenure systems.’ The word ‘tenure’ is from the Latin verb ‘tenere,’ which means ‘to have or to hold’. Land tenure refers to the different ways that people can ‘have or hold’ land.  It basically is a study of the different ways that we human beings can interact with the planet around us.

Freehold ownership is a land tenure system.  Because leasehold ownership can be set up many different ways, leasehold ownership is basically a large group of land tenure systems.  The pre-conquest American people interacted with the land and had land tenure systems. (They didn’t own the land, but they interacted with it.  Any interaction between humans and land is a form of land tenure.)

Frances was interested in all land tenure systems.

She studied all of the tenure systems that she could verify existed in the past, together with many that didn’t exist but which scientists in her field realized could exist if we wanted to have them.

Frances has a lot of background in many aspects of the field.  For her Ph.D., she studied the land tenure system of the pre-conquest American people.  During the period of the conquest itself, the conquering governments discouraged any study of or even any interaction with these people.  (They were the enemy.  The government wanted them defeated and any objective analysis would tend to generate empathy for them that would harm the morale of the fighting troops.)  The conquering governments wanted to take away everything from these people, and didn’t want people standing in their way, possibly trying to protect them or their way of life.  The more people knew about these people and their societies, the more likely people would be to protest the government activities, so the governments did their best to keep any legitimate researchers from being involved.

Now that the conquest is over, people are starting to study these things.  They are finding that many natural law societies actually had some rather complex systems of interacting with the land that allowed the people in them to meet their needs without having to accept ownability of the land. Frances studied these systems.

After she got her Ph.D., she went to work as a consultant for conservatorships like the Forest Service, park services around the world, and private conservatorships like the Nature Conservancy.  She helped these organizations put together systems that encouraged conservation but still allowed the people trying to take care of the land to generate revenue from the land and make improvements that didn’t harm it.  Many of the systems she set up to make this happen involved creating partial ownability societies and leasehold ownership systems.

Then she went to Hawaii and met some people from Castle and Cooke, the largest of the big five corporations of Hawaii.  The company uses leasehold ownership systems on nearly all of its properties.  There are many different ways to set up leasehold ownership.

As soon as she got to the company, she started looking at the different systems the company had set up for different kinds of properties.  She found that the company actually owned so much land that it had lost track of a great deal of it.  A lot of its land was just sitting there, doing nothing, not being cared for or protected and not generating any revenue at all for the company.

Most people in management positions at Castle and Cooke get most of their income from bonuses.  Frances knew that if she could do things that increased the income the company generates, she would be well rewarded for this. She wanted to get this ‘ignored’ land generating revenue for the company and get people involved with it that would protect it and improve it, so that it would generate even higher revenues for the company later.  She started with a little rice farm that was almost identical to the Pastland Farm.

 

Why the tangent to Hawaii?
          I will be explaining a system that generates an enormous revenue stream for the human race that comes in totally automatically and which also generates very powerful incentives that push toward progress, growth, and advancement in technology.  This system will not need or want taxes or government interference of any kind: it works totally automatically. 
          Many people have told me that this is impossible: nothing is certain except death and taxes and people will have to be pushed by some sort of government to do anything creative.  Taxes and government stimulus will always be necessary. As long as these things are necessary, very powerful governments are necessary:  some governing body must enforce the taxes and this body must have the authority to use force against ‘its own people’ to make sure everyone pays what they are supposed to pay.  In other words, critics of the proposals here claim that very powerful—and therefore necessarily oppressive—governments are absolutely necessary to the human condition and it will never be possible to have an organized and progressive human society without them. 
          I want you to see that this is not true: we live on a bountiful world with enormous amounts of value flowing from it over time.  It is true that taxes will be necessary if everything is considered to be owned (in 100% ownability societies, like sovereignty-based societies): people have been told they own everything the land produces and they will not always turn over the things they have been told they own but must go to pay for public services.  But what if there are certain flows of value or certain parts of the flow of free cash that come from the land that are not owned, were never owned, and which everyone considers to be unownable?  These flows of value can flow into a central fund (just as, in the natural law society, everything flowed into the central fund) and can be used for the benefit of the human race as a whole.  If a large percentage of the free wealth that represents the bounty of the land is unowned and unownable, and if the land is very bountiful, the human race will have an enormous income from the unowned flows of value the land produces.
          I will be explaining this system in Pastland and show how it works over the long-term to create prosperity and growth in a totally non-destructive system that works automatically and without any need for a body with the authority to ‘govern’ the people.  Many have told me that these discussions are speculative and therefore useless because they describe something that has never existed in human history and therefore almost certainly will have some hidden flaw that makes them impractical; it is as silly to pay any attention to such discussions as to pay attention to the description of the society in the 1515 book ‘Utopia.’  Why pay attention to nonsense?
          I want to show you that the partial ownability systems we will use as a foundation for our advanced and progressive society in Pastland are not speculative at all: they exist now.  Certain organizations own large amounts of land in various places and they never intend to sell this land.  They want revenue from it, and they want the land improved so their revenue will grow. They have hired professionals—like Frances—to build systems that will make this happen. Since these organizations are not governments themselves, they have no authority to impose taxes and do not tax the people who live on the land.  They simply set up systems where people who want to control land can only buy specific rights.  The rights they buy include the right to benefit from improvements (something that generates incentives to improve) and the right to a small portion of the free cash flow, but do not include the right to the great majority of the free cash flow the land produces.  This part of the production of the land is not offered for sale and does not belong to the buyers of the property rights.  The people who control the land must collect this wealth, sell it for cash, and then give the cash to the corporation.  The corporations have set up systems to make sure this happens without any need for the corporations to do anything at all over time to make sure their revenue comes in.
          In other words, the system I will be explaining for our group in Pastland is not speculative: it already exists.  All of the structures that are needed are already in place, have been in place for decades, are totally mature, well-understood, and have been tested and proven to be effective.  We don’t have to speculate about things that might exist to build a sound, stable, healthy, and prosperous society in Pastland: we have people like Frances who already understand everything; the documents and structures needed have been worked out so we don’t even have to learn anything or figure anything out: we can adopt the systems that are known to work and have been proven to work.
          Unfortunately, some of the institutions and structures needed for this system are fairly complex: we need financial systems, lending systems, risk management systems, and markets for property rights.  I want to start by explaining how these things work in our world today, mainly because I don’t want people to argue that I am being a ‘utopian dreamer’ and talking about things that are impossible and fanciful.  The truth is that none of the things discussed below could be considered fanciful because they are standard and well-understood in our world today.  You can learn about them in universities, though textbooks, and by taking internships or jobs at firms that do everything discussed below.  When we move to Pastland, we will see that we have people with all the necessary skills.  We don’t have to invent anything: we merely have to let the people with these skills do the same things they did back in the 21^st century.
          Please try to bear with me.  I will have to explain a lot of fairly complex things to make sure that every single base is covered (critics of change are always looking for weaknesses in arguments that claim a better society is possible).
          This will include discussions of interest rates, money markets, types of property deeds and titles, and the forces that determine the prices of ownership rights to farms and other productive properties when they are offered in markets.  You don’t need to understand all of the details to know that we can have societies without problems that threaten us (and therefore prevent extinction) but you do have to be convinced that these structures are not fanciful figments of a utopian imagination, but are very real structures that work in totally understandable ways.

 

New Perspective Series

 

The New Perspective Series look at key realities of the world from a non-conventional perspective.  For pretty much all of history, humans have looked at realities of this little blue world as if it is the center of the universe, the only world in existence, the only world that could exist.  Religious people have come to the conclusion that it is the work of a higher power, the only thing of any real importance that the higher power created and cared about and the center of attention of this (for monotheists who think there is only one) or these (for polytheists, who have dominated the world for most of  history) deities.   There is only one way of looking at events here on Earth:  they are the only events that matter anywhere. 

We are used to looking at events here on Earth from the perspective of insiders for a simple reason:  We are insiders.  This world may be nothing but an insignificant speck of blue cosmic dust to outsiders, looking at us from some remote world.  But to us, it is everything. 

We were all born here. 

Our people are from here. 

The way of life here on Earth is the only way of life we know. 

As far as we are concerned, it is all that exists.

The highest species on this world, humans, currently have a lot of problems.  But we don’t see them as ‘the problems that a species living on a little blue speck of cosmic dust may have.’  We see them as divine, momentous, and the result of factors that appear to be above us all, and far more complex than we (the plaything creations of some power that is unimaginably more intelligent than we are) could possibly understand.   

We can’t be objective about events here on Earth because we are too close to these events.  We look at these events through a lens, the lens of insiders.  We have our families to worry about, our bills to pay, loyalties to honor.  We live in societies that are based on the division of the human race into the entities we call ‘countries.’   Countries play a large role in the world around us.  We are raised and educated to believe we owe our allegiance to our country, that we must defend and protect it even if we must do horrible things to protect it.  For example, we may be asked to contribute to a fund that supports a military complex to build bombs that are used to kill children, by paying taxes.  We are raised to believe this is a solemn obligation we have that we must never question.  Protecting the country may require that we make incredible sacrifices, giving up our loved ones (who die or whose lives are ruined in wars) or even our own lives to fulfill this obligation.   We take this obligation for granted.  All people on Earth have an obligation to their countries.  It is the way this world, the only world we know, works. 

What are we protecting the entities called ‘our countries’ from?

We take it for granted that our leaders understand this.  We have enemies.  These enemies rape the part of the world they control to get resources to make weapons to harm us.  We can’t compete with them unless we do the same.  So, we must do this.  We have no choice. 

This would probably be seen as a very strange situation to an outsider on a world that had developed differently.  But, to us, from our perspective, it is normal.  It is the only way things have ever worked, or at least the only way we have been told things ever work.  (The truth is different, as Fact Based History shows.  The subject we are taught called ‘history’ in school is not a true, objective, and unbiased representation of past events that all members of the world would agree actually happened, and that the human race could use to build a better world for the future.) 

The books in the New Perspective Series look at key realities of the world around us as would outsiders.  These outsiders have no stake in events on this world; they have no national allegiances, they have no affiliation with any Earth religion, they have no need for the things we use for money on this world and no need to worry about the details we have to worry about.   

          Are there outsiders?   New space space-based telescopes including the Webb are showing us that there are numerous other worlds in star systems all around us.  Scientists can interpolate this data to come up with some idea of the number of other worlds that may be capable of supporting the kinds of life that exist here.  Current estimates lead to a number of about 2 septillion.  (That is 2 with 21 zeros after it). 
          By counting galaxies in a few seconds of arc in space that have no nearby stars to interfere, and multiplying by the total arc seconds in a sphere, scientists have determined there are about 2 trillion galaxies.  They have about 100 billion star systems each and the number of worlds per star system averages 1, so there are about 200 septillion worlds in the part of the universe we can see from this part of the galaxy.  If 1% of these worlds is in the ‘Goldilocks zone’ there are about 2 septillion such worlds.
          If we look closely at Earth based life forms (something done in another book in the New Perspective Series, The Meaning of Life) we can see that it came to exist here under conditions that are, well, far from optimal.  The first life forms were actually fantastically complex; they are built on the exact same genetic code as humans.  We know that they came to exist on Earth before the Earth had cooled enough to have a solid rock surface or was even close to being cool enough to support liquid water (a requirement to be in the Goldilocks Zone).  If we accept this evidence, we must conclude that whatever forces led to life existing on Earth can take place and are highly likely to have taken place on many other worlds.   

The books in the New Perspective Series look at key aspects of human existence from the perspective of outsiders.  If there are other worlds with the same kind of life we have here on Earth (life that evolves; see text box above), we would not expect the beings on these other worlds to make exactly the same decisions that we made here on Earth. 

We have a very long history, as Fact Based History shows.   (The evidence exists that show the length, but the people who claim to be historians don’t really want to accept it because it shows that just about everything people have believed about history in the past—including the foundational information they were taught in school—is wrong.  They are the experts and can decide which evidence to ignore, so they ignore almost all real evidence about past events.  Fact Based History goes over this evidence and shows it paints an entirely different picture of our past than conventional historians paint for us.)  

Events that took place millions of years ago have impacts on the way our societies operate today. 

We would not expect the exact same events to have taken place exactly the same way on other inhabited worlds.  They would have been through a different history and would look at existence from a different perspective.  The New Perspective Series is designed to look at key aspects of the realities of life for us here on Earth as would outsiders.  Specifically, it looks at these events from the perspective of objective scientists from a remote world. 

They have access to certain information about how Earth works, the same basic information you and I have. 

          Radio waves travel at the speed of light which, as far as we know, is a fixed speed that is the same for all electromagnetic waves, including light waves.  Every signal from your smart phone, every question you ask the search engines and every response you get, all signals from your WiFi, all signals from the routers of every person on Earth, all satellite signals from both civilian and military transit goes, at some stage, through radio.  These signals all spread out in all directions from Earth at a fixed speed
          We live in a very remote part of the galaxy.  It is very unlikely there are other beings with radio technology in his remoteness.  However, about 20,000 light years away is a part of the galaxy with billions of worlds that are very close together.  The radio waves our devices emit in 2025 will reach these worlds in the year 22,025 AD by our calendar.  If they have the right technology, they can receive and decode these messages.  If they wanted, they could recreate our internet on their world.  They wouldn’t be able to communicate with our internet, of course, but they could ask it questions and get the same answers we get here on Earth today. 

 The New Perspective Series is an attempt to look at important realities of existence here on Earth from this other perspective.  How would they see us? What would they think of the things we consider important? 

The book Possible Societies is about the different arrangements of existence, or societies, that are possible for beings that have evolved to a level of intellect comparable to modern humans.  We may expect that evolving beings on other worlds faced entirely different realities than we did here on Earth.  We would expect that they would evolve differently in response to these different realities.  What are the options?  Possible Societies deals with them from the perspective of beings that in a more densely populated part of the universe than we are here and who therefore have data about a great many worlds with life forms that have more or less the same general capabilities of Earth humans.  It shows that such beings can organize themselves in many ways.  Some are highly destructive and dangerous.  But others work in ways that allow the beings to live in harmony with each other and the world around them. 

The book Preventing Extinction looks a key aspect of human existence from the outside perspective.  We, the members of the human race, are currently facing existential threats.  It is pretty easy to simply give up and live as if these threats don’t exist, because we don’t have a frame of reference that would help us see there is any other option. 

Preventing Extinction on the principles of Fact Based History, Preventing Extinction, and the other books to explore the steps that the beings who live on a world that has taken the path through time that we have taken on this world would need to take to move them off of this path and onto a different path.  The book Possible Societies explains a type of society called ‘socratic societies’ that are very similar to current earth societies, but which work in ways that turn what would otherwise be a collection of billions of individual humans, all acting independently to advance their own interests, to work together to advance their common interests.  Preventing Extinction explains the steps a group of people who are in the situation we are on here on could take to turn their segmented, fragmented, and conflict-based world into one that is under the control of the beings themselves, who have tools they can use to act collectively to meet their common needs.  It shows that the problems that threaten the human race can’t be solved if they are structured as they are now, and the human race has no tools to allow its members to work together.  However, if we create these tools, we are in a position to take steps to change the path through time on which we are now traveling. 

The New Perspective Series is not about a random set of observations that an outsider would make about earth realities.  It is intended to provide practical information.  Fact Based History shows very clearly that humans are not fully evolved and totally rational beings at this point in time.  We are still very primitive in many ways.  We want to believe that we are far more capable than we actually are.  This arrogance prevents us from seeing defects in our genetic and cultural structures that must be removed if we are to survive as a race. 

The New Perspective Series is designed to open mental doors that, I hope, will allow people to see that there really is hope for our race. 

This is important.  From the perspective of insiders, the problems we face don’t appear to have any solutions.  We feel we can’t solve them.  If we feel there is nothing we can do, we won’t even try to do anything.  I do not claim that we are certain to succeed, even if we try our hardest.  I do claim, however, that if we don’t try, we have no chance at all.  The New Perspective Series is designed to help people see that it is worth exploring these issues.  It is worth trying. 

We now live societies built on the principle of territorial sovereignty,  Such societies can never be peaceful or non-destructive.   This defines the term 'territorial sovereignty' and explains how societies built on this principle work.

Territorial Sovereignty Societies

 

Humans are very capable beings. 

We can organize our existence in many different ways.

One option involves dividing our species into different groups that act like teams in a massive sport.  We can then divide the land into different territories with borders.  We can then create a set of rules that grant absolute rights to—or sovereignty over—everything  inside each of these bordered territories to one of these teams. 

Additional rules can include the standard foundation of international law called the ‘right of conquest.’   Under this principle, any land that a team conquers from another team belongs to the conqueror, together with anything on or under that land in a pie shaped wedge that goes to the center of the Earth.  They can also include the rights of bequest:  the rights of the current team members transfer to their heirs and assigns for the rest of time. 

The books of the New Perspective Series use the term ‘territorial sovereignty’ to refer to the above principle.  All societies built on the principle of territorial sovereignty are called ‘territorial sovereignty societies.’  Territorial sovereignty is one of the possible foundations that can support societies of both animals and humans. 

Humans did not invent the above principle.  It was a foundational principle of many animal societies for millions of years before humans evolved.  Obviously, these other animals did not have formal written rules for the definitions of the teams and rights they had as we humans have, but they clearly had societies that were built on the above principle.  Many breeds of wolves, for example, have societies that clearly reflect the principle of territorial sovereignty.  The breed called ‘Painted Wolves,’ for example, have fixed territories with well marked borders. (Humans wont be able to identify the borders because our sense of smell isn’t keen enough, but other wolves know exactly where they are.)  The team patrols the borders.  If they detect any members of their species that are not members of their packs in their territory, they track them down and kill them. 

Wolves are noted for their teamwork, both in hunting and defense of their territory.  If a pack of wolves has territorial disputes with another pack, the conflict closely resembles human wars.  The different packs attack each other and kill without remorse or compassion.  Often, they fight until every last member of one of the packs is dead.  There is a very good video of this in the BBC documentary ‘Dynasties, The Painted Wolves’.

 

 

These identities of the animals that are in each pack change over time as older animals die and are replaced by younger pack members.  But the pack has an identify that continues indefinitely (until the pack loses a war and gets wiped out; then the territory belongs to the conquering pack).  This works very much like the human entities called ‘countries:’ the identities of the individuals within each country changes as time passes, but the identify of the country remains the same.  (Again, this lasts until the country is conquered, at which time the conquering country gains control of that land under the principle of right of conquest.) 

Why do wolves do this?  

We can actually understand this but, before we consider it, lets look at one thing we can exclude:   Wolves do not have meetings where they get together and conduct scientific discussions of the different kinds of societies that wolves and other animals can have, then decide ‘this one is for us.’  We know wolves don’t do this because they don’t have the intellectual capability needed for this kind of analysis. 

The term ‘instinct’ basically means anything that motivates animal behavior that can’t be explained by logical analysis or intentional decisions.  This means that all animal behavior falls into the category of instinct.  Humans also have instincts, of course, but not all of our behavior is instinctive.  There are times when our instincts tell us to do one thing and our logical minds tell us to do something else.  But this conflict doesn’t come up for wolves.  Something in their genetic or cultural heratige pushes them to divide their species into packs, divide the land into territories, and allocate each territory to whichever pack can control it with force. 

 

          There is a reason for this kind of instinct.  Fact Based History goes over it in detail, but here is a quick description:  Some land is rich and can support animals under conditions that allow them to remain there and live off of a fairly small territory for their entire lives, without ever having to leave.  Anthropologists call these parcels of land ‘monopolizable.’  If a land can be monopolized by an apex animal, it must be monopolized.  Here is the reason: 
          Imagine first a piece of rich hunting land (from the perspective of a wolf) that is not being monopolized.  Any wolf can come and hunt there.  Since it is rich, a lot of wolves will show up and start hunting.  Say that, at first, the wolves are tolerant and let other wolves come to the territory.  Eventually, there will be more wolves there than the land can support.  At this point, they will start to fight.  Wolves that aren’t willing to fight (those that are easily intimidated) will be removed by more aggressive animals.  Some of the aggressive animals will form into packs that work together.  These packs will be able to easily remove individuals or smaller packs.  The packs that are better at working together will win and remove the less-organized packs.  Eventually, each territory will be controlled by a very well organized pack whose members act as a team both to exploit the resources of that territory and protect their borders.  In the right conditions, nature (the laws of evolution) will require territorial sovereignty in areas that meet certain requirements, for certain animals.
          Animals born into these areas will be raised and trained to be aggressive and possessive.  Any that have genes that prevent these behaviors will be the first to die in battles.  Their genes will go away.  Any that resist the training and are unable to work together well in fights will also perish preferentially.  Over time, only those that have the ‘instincts’ that are needed to help the pack protect its land will be left.  No matter where they come from, the instincts will be passed from generation to generation. 

 

Many animals evolve under conditions that force them into this particular ecological niche.  They divide into teams (packs, troops, teams, tribes, or ‘countries’) and fight over territory.  

Wolves provide a pretty obvious example, but many animals have territorial sovereignty societies.  This includes several species of the genus ‘Gorilla’ and several species of the genus ‘Pan,’ our closest animal ancestors.   (We share about 99% of our DNA with the Pans.) 

Some of our evolutionary ancestors clearly had societies built on territorial sovereignty.  Those on the ‘pre-human animal’ side of the evolution progression would not have been able to use logic and reason, so the forces that pushed them to act this way would be ‘instinctual,’ by definition.  As time passed (millions of years), these animals competed with each other for resources.  Some were smarter:  they had genes that cause them to grow slightly larger and more complex brains, capable of processing more information.  They were able to meet their needs better than their peers and had better chances of living long enough to breed and pass these genes to the next generation.  Each step was probably very tiny.  But over a long period of time, these improvements compounded.  If you could watch a ‘fast forward’ version of this multi-million year period, you would see that there was progress.  The intelligence level of the average member of the Pan genus got higher and higher. 

 

Evolution

 

They used their greater intelligence to do the things their instincts told them to do better than their ancestors had done.  Their instincts told them to form into tight-knit loyal troops (the name for ‘a grouping of members of the Pan genus) and fight over territory.  As they got smarter, they were able to make better and better tools to use as weapons.  They were also able to organize themselves better so they could work as teams. 

We now have tools we can use to trace the progress of our ancestors almost generation by generation.  (DNA sequencing allows us to determine when new genes are overlaid on existing genes.  We can tell which came first.)   We have dating tools we can use to understand when these animals passed certain key milestones in their progress.  (The use of fire, for example, the use of clothing, the exit from Africa to ‘the rest of the world,’ the progress across ‘the rest of the world,’ the assertion of domination over lower species, and the use of complex language are ‘milestones.’)  We can understand where they lived and how they lived at each stage in development.

Fact Based History traces this progress.  It shows that the principle of territorial sovereignty was the foundational element of the societies of some of our ancient ancestors (specifically the highly territorial Pans that are commonly called ‘Chimpanzees).  This system was still with them when some of them, living close to oil pits that were always on fire, mastered the use of this fantastic tool.  It was still with them when they took advantage of this tool to allow them to live in areas where they couldn’t live without fire, allowing them to leave Africa and travel to remote parts of Asia and Europe.  It was still with them when they built the first fortress states and walled states and then the first massive city states.  (Artifacts of these ancient city states are all over Europe, Asia, and North Africa.)  This kind of system got a great boost when horses were domesticated; with horses, they could defend far larger areas and the city states turned into the large entities that we now call ‘countries.’  The countries evolved in a very understandable way from the early systems of 6,000 years ago to the systems we have today. 

 

Territorial Sovereignty Societies 

 

The books in the New Perspective Series use the term ‘territorial sovereignty societies’ to refer to societies built on this simple premise:  the group of animals/humans is divided into teams; the land is divided into territories, and each of the teams winds up in charge of one of the territories.  If their control over the territory is absolute they have ‘sovereignty’ over it.  All societies with this absolute control of territory are called ‘territorial sovereignty societies.’ 

There are many ways that humans can organize their societies.   We can live like territorial animals if we want:  we have this capability.  But we don’t have to do this.  We can live other ways also. 

Chapter 9

Hawaii Farm

 

WHEN THE BIG FIVE CORPORATIONS first came to the Hawaiian Islands, they got the title to vast amounts of land.  At first, they used this land to raise tropical crops for American markets.  They needed people to do the labor and wanted the cheapest workers they could find.  They went to China and found large numbers of people willing to work for almost nothing.  Most of their workers came from China.

The Chinese wanted rice to eat and the islands had no native rice.  The companies allowed the workers to bring seeds from China and plant the rice on land wasn’t suitable for the crops the companies wanted to raise for export.

In the 1950s, the big five corporations became the owners of large amounts of land in Central America.  This land was much closer to their markets in the United States and shipping costs were far lower, so they moved their agricultural operations to Central America.  They sent the Chinese workers in Hawaii back to China and began converting the farmland that had raised tropical crops to other uses, mostly as sites for condominiums, homes, golf clubs, and resort facilities. 

The bogs and the swamps where the workers had raised rice weren’t very desirable properties for these uses.  The companies basically ignored them so they could focus on other parcels with greater potential to generate revenue. 

Rice kept growing on these lands, but humans didn’t harvest it.  The rice was left for other animals.

Frances has been looking for land that former officials of the company had ignored but that the company could use to generate revenues.  She found a parcel of land that the company had ignored where rice grew.  This parcel is 1,500 acres in size, the same size as the Pastland Farm.  As of the early 21^st century, chemical contamination from genetically modified hybrid rice (which needs chemicals to grow) was spreading throughout rice-producing lands all over the world.  Wealthy consumers wanted uncontaminated rice and were willing to pay a lot more for it than they paid for the standard varieties, which were likely to have at least some contamination from the hybrids. 

By the time our group took this trip, the uncontaminated rice was getting very rare.  As a result, the price of uncontaminated rice was much, much higher than the price of standard rice: by the time Frances did her study, pure, uncontaminated, organic rice was selling for nearly ten times the price of standard rice.  Since the big five corporations that ran Hawaii never planted rice, they never brought the hybrids to the islands.  The rice that grew in the bogs was pure, uncontaminated, totally organic rice which would sell for ten times the price as standard rice. 

Organic and hybrid rice:
          Rice is an internal pollinator, meaning that it pollinates itself from DNA inside of the grain.  Because of this, the standard methods used to create hybrids for other plants (to move pollen from the male plant to the flower of the female plant) didn’t work for rice.  Rice therefore remained a pure and natural crop until 1965, when Chinese scientists figured out how to get inside the seeds, remove the male DNA that would otherwise pollinate the plant, and replace it with external male DNA to make a hybrid. 
          The scientists found a hybrid that produced double the yield as standard rice.  Unfortunately, the hybrid couldn’t get enough chemicals from the soil to grow so the farmers had to add massive amounts of chemicals to make the rice grow.  China was in the midst of a horrific famine at the time.  The government built the plants and basically forced the entire country to switch to the hybrids. 
          The owners of chemical companies in the United States and Europe saw a great opportunity: if they could get their people to switch to the hybrids, many new chemical plants would be needed.  They began offering free hybrid seeds to farmers to get them to switch.  The farmers didn’t realize that, once they switched to the hybrids, they would never be able to switch back to organic rice because the hybrids would damage the soil so badly that the organics couldn’t grow.  (Remember the bacteria that ‘fix nitrogen’ that Kathy smelled when she first woke up?  The chemicals kill these bacteria.  The organic rice can’t be grown without replenishing the health of the soil, which will take many years.)  This led to a one-way switch to the hybrids that spread throughout the world. 
          By the second decade of the 21^st century, the chemical companies had figured out a new trick to increase the demand for their product: they learned to modify DNA to create rice plants that were totally dependent on chemicals.  They began to mix some of this genetically modified rice with regular rice, making all rice in areas they controlled dependent on chemicals.  (Environmental groups took these companies to court and proved they had done it intentionally; the chemical companies had to pay multi-billion dollar fines.  But it was still worth it to them: the fines were a one-time expense they could write off; the increase in demand for their products continued year, after year, after year.) 
          The Hawaii farm doesn’t need outside seed.  Its crop is entirely organic and uncontaminated.  It can reseed from its own crop.  As long as it is not contaminated, its rice will sell for many times more than standard (contaminated) rice. 

Several years ago, Frances began putting together an operation so that the company could generate revenue from this land.  She hired a professional farm management company to monitor the land, determine when the rice was ready for harvesting, call a harvesting company and get the rice brought to market, and arrange for replanting so it will produce more rice next year.  Each year, the farm produced 3.15 million pounds of organic rice.

Organic rice was selling for $1 a pound, so the land produced $3.15 million a year in operating revenue.  (The same as the Pastland Farm.) All of the workers and suppliers that the management company hired to take care of harvesting and replanting submitted their bills to the management company, which then submitted a single bill each year to Castle and Cooke.  These bills totaled exactly $700,000 a year.  The company paid these operating costs out of the operating revenue and was left with $2.45 million a year, called the ‘operating profit’ of the Hawaii Organic Rice Farm.  (This is the exact amount of the operating profit of the Pastland Farm.)

The management company didn’t work for free.  Each year, it submitted a bill to Castle and Cooke for $50,000, the cost of the management services it provided.  It did more than just manage the farm (tell what the workers to do.)  The management company had accountants, bookkeepers, lawyers, computer coders, auditors, and others working for them to make sure everything went smoothly.  They charged a total fee for all these services to Castle and Cook of $50,000 per year for this farm.  They then paid the people who did these things out of their fee. 

After Castle and Cooke paid this bill, it had $2.4 million of the money from the sale of the crop left over. 

This was the free cash flow of the Hawaii farm.  This is the amount of money Castle and Cooke got each year from the land. 

Note that this is the exact same free cash flow as the Pastland Farm. 

 

Different Ways to Privatize Land

 

Frances has a Ph.D.  in the field of land tenure design. 

She designs land tenure systems, including leasehold ownership systems. 

She is not a rice farmer, she has no interest in farming, and has no time to devote to analysis of rice farming.  Her department deals with thousands of different kinds of properties.  Most of the properties her department deals with are residential, commercial, and resort facilities, like hotels, condominiums, shopping malls, and housing developments. 

Her department has ONE rice farm.

Often, the management company taking care of the Hawaii Rice Farm has questions: it needs to know what Frances wants done with the waste straw and other plant materials generated from farming, how to deal with birds and pests that eat the rice, and other details.

Frances has a lot of properties to deal with.  She can’t deal with the details of every single property.  This one is taking up too much of her time.  She needs to get someone else involved with the property, preferably someone who will have very strong incentives to make the decisions that would be in the best interests of Castle and Cooke, take care of the land, keep it productive, and improve it if this is possible.

She has a kind of standard leasehold system that she often uses for properties that generate free cash flows.  This works for residential properties, commercial properties, resorts, golf courses, restaurants, and just about any other property she wants under private control.  In this system, she sells the rights to the property in a way that causes the great bulk of the free cash flow to flow to the company in the form of a leasehold payment. 

Some of the free cash flow will be available for the buyer of the leasehold to keep.  Because the buyer will be buying the right to some free money, the buyer will be willing to pay a price.  Frances wants this to happen because if a buyer has to put up large amounts of her own money in the property, she will have incentives to make absolutely sure that she follows all of the rules and makes the leasehold payment as promised.  (If she doesn’t do these things, her rights to the property may be cancelled ‘without recourse,’ meaning that she won’t be able to get back the price she paid.  People don’t want to lose money.  They will pay their leasehold payment and follow the rules to avoid this loss.)

She looks over her portfolio and finds a golf course that the company offers through leasehold ownership.  The golf course charges people to play golf.  They charge a lot because a lot of people move to Hawaii specifically to play golf: the weather is perfect there almost all year long.  They use part of this money to cover the cost of maintaining the facility.  The rest of the money is the free cash flow. 

This particular golf course generates a free cash flow of $2.4 million a year.  Frances created a leasehold on this property and sold it under these terms: the buyer of the leasehold would have to turn over $2 million of the free money to Castle and Cooke each year as a leasehold payment.  This would leave the buyer with $400,000 a year in free cash.  Interest rates were 4% at the time so the buyer wanted to buy on terms that would generate a 4% return on the money they invested.  (If you pay a price for a document that grants you rights to a golf course, you are investing your money.)   They realize that if they invest $10 million, they will get exactly a 4% return on their invested money.  ($400,000 is exactly 4% of $10 million.)  Frances found a golf course operating company that really wanted this particular course added to their portfolio.  (Hint: the company name starts with the letter T, ends with P and has um in the middle.)  The company thought that, with its brand, it could charge more to get people to play and make lots of money.

Since the golf course operating company would be buying the right to $400,000 a year in free money, it could afford to pay $10 million for the rights to the golf course.  Frances wanted this because she knew that, if the company had $10 million invested, it would never be late on the yearly payment of $2 million.  If it was late, Castle and Cooke could cancel the leasehold ‘without recourse,’ meaning the operating company would lose $10 million.  No one would try to come up with excuses for missing a payment of $2 million knowing that they might possibly lose five times this amount ($10 million is five times $2 million), so Frances was sure that the golf course operating company would never miss its payments and never violate any of the rules that Castle and Cooke put in place to protect the land. 

You might intuitively realize that Frances could set up many kinds of leasehold ownership systems that work differently.  She could ask for an extremely high leasehold payment (even higher than $2 million), transferring more of the free cash flow of golf course to Castle and Cooke.  But if she did this, the buyer would be buying less of the free cash flow and wouldn’t pay nearly as high of a price.  For example, if she asked for $2.39 million, rather than $2 million, as a leasehold payment, the buyer would only be buying the right to $10,000.  At a 4% interest rate, the most the buyer could pay for the price of the leasehold would be $250,000.  (Why is this the most she could pay?  If she invests $250,000 to buy the right to $10,000, she will get exactly a 4% yield on her invested capital.  She can’t pay more because if she paid more, her yield would be less.  For example, if she paid $1 million, her $10,000 yield would only be 1%.  Since she can get 4% in the market, it doesn’t make sense for her to accept only 1% and Frances will not be able to sell the leasehold if she asks $1 million for it with a leasehold payment of $2.39 million.) 

Her company sells a lot of leaseholds and it has a division that makes calculations to show what combinations of prices and leasehold payments would work.  This division starts with the free cash flow of the land.  It calculates how much of the free cash will be left over and buyable at each different leasehold payment that Frances may set.  It then determines the price the right to get this ‘leftover free cash’ will bring in the market, at the interest rate in effect at that time. 

This division creates a chart so that Frances can see her options for the Hawaii Organic Rice Farm.  She can set a very high leasehold payment and therefore get a very high percentage of the free money the land generates but get only a very low price.  She can set a very low leasehold payment and therefore leave a lot of free money offered for sale.  Or, she can set something in between, a system that will lead to a high leasehold payment and a very high price.  Here is the chart this division gives her:

 

Chart 7.1

 

Amount of Leasehold Payment Frances Sets	Price that leasehold will bring in a market, if interest rates remain at current level of 4% on farm loans	Amount of Free Cash Flow Offered for Sale	Percentage of free cash flow that will go to buyer	Percentage of free cash flow that will still be owned by Castle and Cooke
$0	$60,000,000	$2,400,000	100.00%	0.00%
$1	$59,999,975	$2,399,999	99.99996%	0.00%
$1,000	$59,975,000	$2,399,000	99.96%	0.04%
$10,000	$59,750,000	$2,390,000	99.58%	0.42%
$100,000	$57,500,000	$2,300,000	95.83%	4.17%
$1,000,000	$35,000,000	$1,400,000	58.33%	41.67%
$1,500,000	$22,500,000	$900,000	37.50%	62.50%
$2,000,000	$10,000,000	$400,000	16.67%	83.33%
$2,200,000	$5,000,000	$200,000	8.33%	91.67%
$2,300,000	$2,500,000	$100,000	4.17%	95.83%
$2,350,000	$1,250,000	$50,000	2.08%	97.92%
$2,375,000	$625,000	$25,000	1.04%	98.96%
$2,399,000	$25,000	$1,000	0.04%	99.96%
$2,399,999	$25	$1	0.00004%	99.99996%
$2,400,000	$0	$0	0.00%	100.00%

 

She is eventually going to settle on the shaded line in the middle; this give her the best combination of price and leasehold payment.  Let’s consider why the other options aren’t optimal to her, starting with the first line. 

Frances can decide to sell a leasehold where the leasehold payment is $0.  If she does this, she is essentially selling a freehold on the farm, not a leasehold.  She is offering to sell the entire $2.4 million in free money the farm generates.  If she does this, she will get the price that a freehold on this farm will bring, or the price that this farm would bring if it were sold in a state that didn’t do leasehold ownership, like Texas. 

Note that it would bring $60 million. 

 

This is the price that leads to yield of 4% on the invested capital.  No one would pay more than this price because, if they did, would get a lower yield than the 4% market yield.  For example, if you paid $61,000,000, your yield of $2.4 million a year would only be 3.934%.  Why would you accept a yield of 3.934% on this farm when you could get a 4% yield in the market?  

Of course, a lot of people want to pay less and wish they could pay less.  But they will bid against each other, forcing the price up.  If anyone can buy it for less than $60 million, that person will get more than a 4% yield.  This violates our starting assumption that the market interest rate is 4%: if anyone could buy in a market and get more than 4%, the market rate can’t be 4%.  If the market rate is 4%, a freehold on this farm can only sell for one price: $60 million. 

If you want more information about pricing of freeholds on real estate, you can find many college courses that explain it in detail (look for courses on ‘real estate appraising’ or ‘real estate investing’). 

Frances would like to have this $60 million for her company.  But there are two reasons she isn’t going to choose this:

First, if she sells the land this way, she is selling a freehold on the land.  Castle and Cooke doesn’t sell freeholds: if it sells a freehold, it loses its rights to this land forever.  The company wants to keep its land forever.  It is not going to authorize her to sell a freehold on this or any other land. 

Second, this option doesn’t bring in one dime of revenue for the corporation.  Frances works for a company that wants revenue.  The more revenue she can generate for Castle and Cooke, the more the company will value her as an employee.  Each year, the company shows how much it values employees with bonuses.  Very valuable employees get multimillion dollar bonus checks.  Frances wants this to happen to her.  She wants a system that generates some revenue for the company, so she isn’t going to choose this option. 

She could offer a leasehold with a leasehold payment of $1 a year.  Note that, if she does, she isn’t going to get as high of a price.  She will only get $59,999,975, or $25 less than she would have gotten if she had sold a freehold.  (There is a reason for these numbers; they are not made up but come from standard formulas which work for very understandable reasons.  See endnote 2, at the end of the chapter, for an explanation.)   

This will get her a $1 a year increase in the company’s income.  This is better than nothing, but not much better.  She can’t expect the company to go crazy with their bonuses when they find she only increased their income by $1 a year from a property that generates $2.4 million in free cash each year.

Socratic Leasehold Ownership

Frances goes down the chart until she gets to the highlighted line.  She can sell a leasehold with a leasehold payment of $2 million a year.  If she does, her appraisers say she can get a price of$10 million. 

This particular leasehold ownership system has a leasehold payment that is exactly 20% of, or 1/5^th of the price paid for the leasehold.  We will see that leasehold systems that work to make this happen have certain very special properties that no other leasehold systems have.  I will need a name to refer to leasehold ownership systems that sell property rights with a leasehold payment that is 20% of the price, so I can refer to it in discussions.  I will call this kind of leasehold ownership ‘socratic leasehold ownership.’ 

I want you to consider one important reason why this particular leasehold ownership option might appear to be very attractive to Frances:

Let’s say that someone buys a leasehold on this property for $10 million.  The buyer promises to pay $2 million a year to her landlord.  What if the buyer gets lazy and decides not to collect the rice this year and not make her leasehold payment?  If she doesn’t make the leasehold payment, she has violated the terms of her leasehold agreement and her landlord can cancel the remaining term of the lease.  She will not get her $10 million back. 

If someone buys this leasehold under these terms, you can be very sure she is going to make absolutely sure she always makes her leasehold payment on time and in full, without any need for anyone to notify her or ask for any money.  She knows that if she doesn’t make this $2 million payment, she instantly loses $10 million.  No sane person would miss a $2 million payment knowing that, if she misses it, she will be out five times this amount of money. 

You could think of the price of the leasehold as having the same function as a deposit would have in a regular long-term lease.  If she makes her payments on time and follows the rules the landlord sets, she can ‘get it back’ by selling the leasehold to someone else; if the farm is in as good of condition as it was when she buys it, she can get the same amount (we will see why this is true shortly), so, from her perspective, it is the same as a deposit and, as we will see, performs the same function.  In this case, the ‘deposit’ is 5 times the yearly ‘rent’ (the leasehold payment) so no sane person would ever miss the ‘rent’/leasehold payment. 

The buyer of the leasehold will make sure the leasehold payment is made every year even if the farm doesn’t produce enough to make it.  She has $10 million to lose if it is not made and will sell her personal possessions, if necessary, to get the money.  She will borrow, if necessary, to get the money.  She will sell her blood to a blood bank, if necessary, to get the money.  If all else fails, she will find someone who wants to buy the leasehold and sell it, always making sure the leasehold payment is made.  (Note: not all leasehold ownership systems work this way, but the one that Frances set up in Hawaii did work this way.)   Frances wants to get this particular property off her back so that she can worry about other things. 

If Frances sells the leasehold under these terms, she will never have to worry or lose a second’s sleep about possible problems that might make her drive out to the farm to figure out why she isn’t getting paid.  She will never have to do it.  In fact, the company will actually come out ahead if the leasehold payment is not made so they have no reason to even send out a notice or ask for it.  They might even hope that the leasehold owner forgets. 

Why? If the leasehold payment is missed, they can cancel this leasehold and immediately sell another one for $10 million, which is five times the amount of money they missed out on. 

There is another reason that Frances likes this option: it provides very, very powerful incentives for the leasehold owner to protect the farm from damage and to repair any damage, at the leasehold owner’s own expense, if it happens.  Consider the reason: say the leasehold owner has not taken any precautions against floods and a massive storm floods the farm, doing $5 million worth of damage. 

A renter or someone with no money on the line might just walk away.  But the leasehold owner is NOT going to walk away.  If she does, she loses $10 million.  If she can raise the $5 million by any means, and fix the farm, she will still lose, but she will only lose $5 million.  If you have ever lost large amounts of money, you will know that it hurts you a lot and the loss will haunt you the rest of your life.  People are not going to take this risk if they can avoid it.  There are things she can do to protect the farm from floods.  She is going to do them.  Although she is only doing this to protect herself, her interests are the same as the interests of her landlord in this case.  (This is true if the landlord is a giant corporation or if the landlord is the human race, as we will see.)   As long as the farm remains healthy and productive, the landlords will get their money.  The leasehold owners will make absolutely sure that the landlord’s interests are protected. 

This system is designed to align the interests of the leasehold owners with the interests of the landlords.  In socratic societies, discussed later, the human race will be the landlord of the world.  The interests of the people who own rights to and control properties will align perfectly with the interests of the human race.  If they do the things that make them money, they will make our lives better.  (This is what the term ‘aligned incentives’ means.) 

If the leasehold owner can’t prevent the loss, the landlords still aren’t going to suffer as long as she can fix the damage for anything less than $10 million.  There is very, very little that nature can do to this farm that can’t be fixed for $10 million.  The owners of this land (Castle and Cooke, in this case) don’t have to watch the weather forecast and wonder if their land is safe.  The leasehold owners will make absolutely sure that no harm comes to the land if they can help it. 

We will see that the price plays an important function in leasehold ownership systems.  They place this money at risk.  They will lose this money if something goes wrong.  Frances particularly likes the socratic leasehold ownership system because in this system the price is five times the leasehold payment.  (If the leasehold payment is 1/5^th of the price, the price is 5 times the leasehold payment; this is saying the same thing two different ways.)  Since the leasehold owners always have five times more money at risk than they have agreed to give to the landlords, they will never leave their landlords hanging; the landlords will always get every cent they have been promised, on or before the due date, and never even one second late.

Even if the leasehold owner should somehow miss this payment, Castle and Cooke (the landlords) still can’t lose.  As soon as the payment is missed, they can cancel the leasehold and will again own all rights to the property.  They can then sell another leasehold on the same property for another $10 million, getting 5 times more money than they missed out on.  The landlords take on no risk whatsoever.  Since they take no risk whatsoever, they never have to collect anything, never have to send out notices, never have to bother anyone.  They will always get their money.  We will see that this is a very important issue when the ‘landlords of the Earth’ are the ‘members of the human race.’  Money will flow from the land, to us, totally automatically, and totally without risk. 

I know that people will have a hard time understanding systems that give people incentives to do things that protect outsiders, including the human race, because these systems are very far from the systems that we live in.  We will look at all of this later in great detail; here, I am just trying to lay out the basics of a system that we know is possible because it exists: many properties in Hawaii are held under the exact same terms. 

Systems Below Socratic Leasehold Ownership in the Chart

Frances goes back to the chart that her analysis department gave her (see chart 7.1, above, for details).  She has decided that she doesn’t want to use any of the systems above the shaded line (the one that suggests she sells the leasehold for $10 million with a yearly payment of $2 million).  The system at the shaded line has some great advantages.  But what about the systems lower than socratic leasehold ownership in the chart?  If going down from the top brings ever-greater advantages, why not keep going down, to the bottom of the chart, with the assumption that lower is better?

She looks at options that are lower on the list, below the shaded line, to see if they might be even better than the one that is shaded. 

She could get even more as a yearly leasehold payment than $2 million by choosing one of these options.  But if she does, she will have to worry about things that she doesn’t have to worry about if her leasehold payment is $2 million.  These problems come because the buyers of the leasehold won’t have as much money at risk, and therefore won’t have as much money to lose if they don’t make their payments or if something damages the farm.

To see this, consider the next to last line on the chart.  Frances could offer a leasehold on this farm with a yearly payment of $2,399,999.  If she does, she won’t be able to get much as a price.  The buyer is not going to be buying the right to get the full $2.4 million in free cash flow.  She is only buying the right to whatever free cash the farm produces that she doesn’t have to give to the landlord.  In this case, she has to give all but $1 a year of the free cash flow to the landlord, so she is only really buying the right to get $1 a year in free cash.  The standard formulas show that a person buying the right to get $1 a year in free cash is only going to pay $25 for it, if interest rates are 4%.  (This is the price for buying a $1 cash flow that generates a 4% return on the invested money; if you want more information, see notes 1, 2, and 3, at the end of the chapter.)

In the socratic leasehold ownership system (the one marked by the shaded line) the buyer had to invest $10 million in the property by paying $10 million as a price; the buyer had $10 million to lose if she didn’t make her $2 million yearly payment.  No one would ever miss an $2 million payment knowing they would lose $10 million if this happened. 

But in the second to the last line system, the buyer only paid $25 for the leasehold.  At the end of the year, she will be sitting there with $3.15 million in her hands.  She might feel honor bound to pay her workers and suppliers, and if she does, she will be left with $2.45 million.  Her contract with Castle and Cooke requires that she give Castle and Cooke $2,399,999 of this money.  If she does this, she will wind up with $1, for a year of work with $25 of her own money invested. 

What if she doesn’t make this payment? 

What if she keeps the entire $2.45 million? 

If this happens, Castle and Cooke will cancel her leasehold.  She will immediately lose $25. 

But why care about this?  She has $2.45 million.  Perhaps Castle and Cooke will file a suit against her and try to get this money.  But she can easily use a pretty standard excuse for people who get money that that doesn’t belong to them: it is gone.  She had some bills and spent it.  If she doesn’t want to make this excuse, she can simply open an account in Switzerland, wire the money to that account (at the rate of $10,000 per day, to avoid reporting to the IRS, which happens if you wire more than this), and then move to some other state. 

Frances realizes that the price acts like a deposit to the buyer of the leasehold.  If she offers the rights to the farm under the terms on the second to the last line, the buyer is basically posting a $25 deposit to protect a $2,399,999 million yearly payment.  It just doesn’t make financial sense to make this payment if all you lose for not making it is $25.

I consider myself pretty honest, but I would have to think pretty hard about this situation if it were me.  Should I keep the full $2.45 million, get myself to Switzerland where I could put the money into a bank and live in luxury on the interest my money will generate for the rest of my life.  (At 4% I will get $98,000 a year; since Switzerland doesn’t tax interest for foreign nationals and doesn’t report it to the United States so the IRS can tax it, this will be tax-free.)   Or should I be honest and make my payment, leaving me with only the $50,000 that I need to justify the work on the farm and a $1 return on my $25 investment? It is a hard choice.  I think a lot of people would be on the next plane to Switzerland.  

Frances doesn’t want people to get into a position where they will make more money defaulting on their payments to Castle and Cooke than they would make if they kept their promises.  True, perhaps she will get an honest person who will pay.  But perhaps not.  Why take the chance?  She can avoid this problem entirely by choosing one of the other leasehold ownership systems, one that is higher on the chart. 

If Frances wants to protect her company’s interests, she is not going to sell with options that are either very high or very low on the chart.  The options close to the top don’t get her company enough money over time to make it worthwhile; the options close to the bottom don’t give her company security and safety and don’t give the leasehold owners incentives to work hard to protect the interests of the landlords.  The only leasehold systems that make sense are those close to the shaded line on the chart. 

In this example, Frances has been in the field for many years.  She has sold a lot of leaseholds.  She has been studying land tenure systems for her entire life.  She manages thousands of leaseholds for Castle and Cooke and knows how they work.  She isn’t going to waste a lot of time; she knows what works and want doesn’t.  She knows that the option called ‘socratic leasehold ownership,’ the one on the shaded line of the chart, creates the particular set of incentives she wants to create.  (Again, don’t worry if you don’t get this now: this is a complicated issue and I just want to introduce it here; we will go over the details in the far simpler system in Pastland, when we sell an identical leasehold ownership there.) 

The Sale of the Leasehold

She calls her company’s real estate agent and says she wants to put a listing on the property.  She will offer it on these terms:

 

1.  Price: $10 million.

2.  Leasehold payment: $2 million a year.

 

A Different Perspective

Now let’s change perspective a to see why a person buying a leasehold might like this particular system too: 

Imagine that you have just moved to Hawaii and are interested in possibly getting some property.  You have some experience in farming and would like to find a farm where you could tinker around a little, be in touch with the land, and possibly make some money.

You decide that you don’t really want a very small farm (one that is only a few acres in size, or a ‘garden farm’) because you are experienced with operating a farm that is 1,500 acres in size.  You know how to make things work on a farm this size.  You know how to find contractors to bring in the harvest and how to negotiate prices, fees, and contracts.  You know how to monitor contractors and draw up contracts that make sure they perform.  You know about planting, negotiating the sale of production, and other details of a farm that is this size.  You don’t want a few acre ‘garden farm’ because you don’t know anything about putting together the workers and getting things done on a small farm.  You are looking for something at least 1,000 acres in size.

You call a real estate agent and she tells you there is a farm that is ‘in the pipeline.’ The agent has put up a notice on internet websites that post farms for sale (most common is Loopnet.com) that a farm will soon be listed but hasn’t listed any details.  On the notice, this farm is called this the ‘Hawaii Organic Rice Farm.’ It produces $3.15 million worth of organic rice a year.  The farm has operating costs of $700,000 so it makes operating profits of $2.45 million a year.  The farm has been under professional management for five years.  The current owner, Castle and Cooke, has paid the management company $50,000 a year for its services.  In exchange for this money, the managers arrange contractors to do all of the work (the management company doesn’t do any work itself), makes sure production gets sold in a competitive bidding process, takes care of all the paperwork, and has an outside auditing firm come in to make sure that the people who deal with money, equipment, and anything valuable associated with the farm are all being honest and accounting for everything properly. 

After all these costs, the company is left with $2.4 million a year.  This is the free cash flow of the farm.  If you go to any site that offers rights to farms for sale in our world today (on any terms at all) you will see that the free cash flow is a very important number to buyers: most of the ads put the amount of free cash flow the land generates in the headline of the ad.

You drive out and look at the farm.  There is no one onsite at the time; you just walk around and look at the land to see if the ad has represented it properly.  You call the management company and set up an appointment to examine their books.  You find all the numbers are exactly as claimed.  You tell the real estate agent that you might be interested, depending on the terms of the deal. 

The agent calls you the next day and says that the terms are this: the owner is offering a perpetual leasehold on this property (perpetual means ‘no termination date’).  You will have to pay $10 million as a price to buy the leasehold and a $2 million leasehold payment each year you own the leasehold.  This particular leasehold has an unusual provision called an ‘option to sell the leasehold back to the seller:’  Castle and Cooke will buy back the leasehold at any time for the full $10 million you paid for it, provided the farm is in as good or better condition as when you bought. 

If you buy this leasehold and then later change your mind, you can basically return it to the seller and get all of your money back, at any time. 

Is this a good deal for you?

There are two ways people can pay the price that they have to pay to purchase property rights.  They can pay it with money they already have in their pockets, or they can borrow the money with a mortgage.  Let’s consider both options to see how the numbers look.  We will start with what would happen to you if you already had the money and could pay cash.

A Cash Purchase of the Leasehold

Say that you have $10 million in a money market fund paying 4%.  You get $400,000 a year in returns on this money.

If you take $10 million out of this fund to buy the leasehold, you will no longer be getting the $400,000 a year in returns that you now get.  But after you give this $10 million to Castle and Cooke as the purchase price of the leasehold, you will own the right to keep all but $2 million of the $2.4 million free cash flow this farm produces.  If it continues to produce as it has in the past, you will wind up getting $400,000 a year, exactly enough to replace the $400,000 in returns you had been getting on this $10 million before. 

You will basically break even on this part of the transaction.  You had been getting a 4% yield on your money.  You will still get a 4% yield on your money, you will just get it from the income of the farm, not from the investment fund. 

If you had left your money in the investment fund, you could take it out any time you wanted by selling your shares in the fund.  If you put your money into the farm, you can also get it back any time you want by selling your interest in the farm.  (Castle and Cooke has agreed to buy it back for the same amount if you ask for it.) 

The farm is currently under management.  The managers don’t do any physical labor on the farm.  They just have a database of suppliers; they monitor the farm and, when something needs to get done, they call the appropriate supplier.  They get $50,000 a year for this.  If you want, you can leave it under management.  If you leave it under management, you will have to continue to pay them. 

However, your entire reason for looking for property is that you want to manage it yourself.  You intend to go to the farm frequently.  You will deal with the contractors yourself.  You will take care of selling the rice the land produces yourself.  You will write the checks and audit the books yourself.  You have experience in these things.  If you are working for yourself, you have stronger incentives to make sure you get the best prices than the management company does: the employees of this company don’t really care how much things cost, because they don’t pay the costs.  You will pay these costs and you think you can manage the costs much better than the disinterested management company.  If you can keep costs down, or do things that drive up revenues, you will get all of the additional revenues.  You will also save $50,000 a year on management.  This is a lot of money for doing something you already know how to do and which you know will only take a few hundred hours each year. 

The real estate agent tells you that there is another way to make money from this land.  You can improve it.  You saw for yourself, when you went to the land, that the land has never been leveled.  There are high spots and low spots, neither of which produce the amount they would produce if they were exactly the right level.  You can level the land and production will go up.  You can keep all additional money.  Quite often, leveling rice land causes production to go up by 20%.  If this happens, you may end up with hundreds of thousands of dollars a year in income.  Your leasehold payment will not go up: it is locked in and will never change as long as you own the leasehold.  You will be able to keep all of the additional money the farm generates.

The real estate agent tells you that if you improve the farm, you can offer the leasehold for sale in the market and it will bring more money.  In this system, the amount people are willing to pay for leaseholds depends on the free cash flow.  If the free cash flow is 20% higher, and the terms of the leasehold remain the same, you can sell the investment for 20% more than you paid for it, leading to a $2 million gain.  (We will look at examples below to show why this is true.) 

Here is the bottom line:

If you buy the leasehold on the farm, you can get your $10 million back any time you want by taking advantage of the option to resell the farm.  This is really no different than your current deal, with the money in the money market fund.

If you leave the money in the farm, it will generate a 4% yield, the same yield you get on the money market fund.

If you don’t want to manage the farm, you don’t have to: the management company is happy to take it over any time.

If you want to manage the farm, you will make $50,000 a year from this, plus any increases in profits that you can create by driving up production or reducing costs.

If you own the leasehold, you can improve the farm and may possibly wind up with hundreds of thousands of dollars a year without doing any additional work in the future.

If you improve the farm you can then sell it and pocket $2 million, increasing your wealth by an enormous amount.

If you have enough money to pay cash for the farm, this is clearly a very good deal: you get all of the benefits you want, and really don’t have any downside, as long as you take care of the farm and keep it in good condition. 

What if you aren’t rich?

If you don’t have the $10 million, you will have to borrow it.  At the time, interest rates are 4% so, if you borrow, you will have to sign a loan agreement that requires you to pay $400,000 a year to the lenders as interest. 

If you take over management, you will end up with a $50,000 a year income for yourself.  If you can cut costs or drive up revenues, you will get more.  There is no limit to how much you can make. 

If you level the land, your income will go up by whatever extra cash flows you generate.  If you drive up production and costs by 20%, you will end up with $500,000 in additional income each year you own.  If you decide to sell, you can sell for $12 million.  You can use $10 million to repay the loan and be left with a $2 million gain. 

Is this a good deal?  I hope you can see that Frances isn’t really taking any chances here: someone will definitely buy this leasehold.  She added the option to resell the leasehold to Castle and Cooke as an extra attraction: since people know that they can always sell the leasehold for $10 million, they never have to worry about the leasehold to this farm falling in value.  Investors love this: it is very nice be offered the right to gain money but be protected from loss.  Lenders also love it: they know that, if they should have to repossess the farm, they will be able to sell it for $10 million, so they aren’t very likely to lose any money on this farm. 

Everyone wins. 

And that is the general idea of this system.  It is possible for everyone to win because the world gets richer each year due to the existence of this farm.  If Frances sets up the land tenure system right, everyone will win. 

Land Tenure Systems

Now that we are in Pastland, Frances is going to be in a position to design a land tenure system for the benefit of the human race.  She understands how to align the incentives: to her, the alignment of incentives is a technical task.  She can work out the incentives that would exist with each possible land tenure system that she might design.  She can figure out the interests of the human race and design a system that has the closest possible alignment between the ‘incentives of the people who control the land’ and the ‘interests of the human race.’  This is what she has done her entire life.

In our 21^st century Earth, the land tenure systems were not designed to meet the needs of the human race.  Most of the land tenure systems were not designed at all: they came to exist after warlords conquered land and used it entirely for the benefit of the warlords (who became ‘kings’ and were eventually deposed by ‘governments’ which took over the flows of value that had gone to the warlord-kings), or they were designed to meet the needs of certain corporations (like Castle and Cooke).  In a way, we can be thankful that these companies existed because we can study the tools they used to get private individuals who did not own the land to make truly massive investments in the land they controlled, without having to ever sell any of the land to any of the improvers. 

Our group in Pastland can take advantage of these things.  As long as the moratorium is in effect, we have a natural law society.  Once the moratorium ends, we may create any kind of land tenure system we want, including one that grants partial rights to private buyers provided they agree to rules we have passed to protect the land, and provided they share the bounty the land produces with the members of the human race.

What If You Don’t Pay Cash And Have To Borrow?

If you don’t have the $10 million, you can borrow the money.  If interest rates are 4%, you will have to pay $400,000 a year in interest.  You will also have to make the leasehold payment of $2 million to Castle and Cooke, so you will pay out $2.4 million of the $2.45 million in profits to others. 

If you keep the farm under management, you will also have to pay $50,000 a year to the management company.  But, again, in this example, you intend to manage it yourself.  If you take over management, you will gain an income from the farm of $50,000 a year.  You will have to manage.  But it won’t be really a very difficult or time-consuming job for you.  You will basically have to make a few phone calls, do a little paperwork, and make sure everything goes smoothly. 

You can also make the improvement.  If you do, you will gain the same benefit you would have gained if you had paid cash for the farm.  Say that you level the land and all the numbers (costs and revenues) go up by 20%.  The profits go up to $2.94 million.  You will be paying $2.4 million a year as payments ($2 million as a leasehold payment and $400,000 as interest on the loan you took out to pay the price).  You will be able to keep the other $540,000 a year in operating profits.

After you improve, you could also sell the leasehold for the same $12 million, leading to the same $2 million gain on the sale.

Either way, you will be able to get a $50,000 a year net increase in your income by buying the leasehold and managing the farm yourself.  You can improve the land and will get the same benefits from improvements whether you have cash to pay for the leasehold or have to borrow.

The ending numbers are the same whether you pay cash for the leasehold or borrow, we just get there by a little different way. 

Of course, if you aren’t rich, this is going to be a more attractive deal.  Why?  If you are a multi-millionaire, you may want to dabble a little in the farming, but you aren’t going to really care much about the $540,0000 per year you can gain through improvements.  So what? You can already have everything you want.  If you aren’t rich, that $540,000 is going to be a huge ‘invisible hand’ pushing you to get the improvements made as quickly as possible.  Most people (those who aren’t already multi-millionaires) will stay up nights just thinking about this.  They will make the plans as they go to sleep and dream about the workers moving dirt from spot to spot.  They will be there before the workers show up in the morning to move the dirt and make sure they do everything exactly properly.  Chances are that someone who is not already very rich is actually going to buy this leasehold, because the money that can be made from improvements is going to be a bigger draw for these people.  But the point here is that, in the end, the actual incentives are the same for rich people and poor people.  They have incentives to take care of the land, to protect it from harm, to make absolutely sure that the share of the free cash flow that belongs to others (the leasehold payment, which belongs to Castle and Cooke) gets where it is supposed to go, and to improve the farm if they can do this.

Frances set up the leasehold ownership system specifically to make sure all of this happened.  As we saw earlier, she had a lot of choices.  She could have set up leasehold ownership systems that had higher payments to Castle and Cooke but didn’t give Castle and Cooke as much in security.  She could have set up systems that gave Castle and Cooke even more security than they had now, but at the expense of lower payments to Castle and Cooke.  She chose this one because it was a kind of Goldilocks system, from her perspective: it aligned the interests of the buyer/owner of the leasehold with the interests of Castle and Cooke in a perfect way. 

Details Of Socratic Leasehold Ownership

What about the buyback option?

Why did Frances put this option into the system?

We will see, later in this book, that the buyback option is a key provision in socratic leasehold ownership systems.  If we, the members of the human race, include it, we will never have to worry about many things we otherwise would have worried about and we will guarantee an orderly and ‘liquid’ market for leaseholds.  We will know that they will always sell, very quickly, and will have a reserve of funds that we can use, if necessary, to deal with any problems that may possibly come up in production.

Let’s consider why Frances included this provision:

First, she wanted the leasehold to sell quickly. 

If not for the buyback agreement, people may have wondered about the price.  Is it too high?  They don’t want to pay a price that is more than the market value for the leasehold because, if they do, and they ever want to sell, they may not get their money back. 

With the buyback agreement buyers don’t have to worry about this.  The market value of the leasehold cannot go down as long as they keep the farm in at least as good of condition as when they bought.  If you buy this leasehold and, a week later, you decide you made a mistake, you can basically return the farm to the seller and get your money back, just as if the farm were an item you bought at Walmart that you decided you didn’t want.  Adding in a ‘money back guarantee’ is going to make people realize they don’t have to worry about whether the price might be too high: if they find it is, they can always ‘return’ the farm and get their money back.  Since there is no limit on the time for the buyback agreement, they can do this in a year, a decade, or at the end of their life if they want. 

The money back guarantee is also going to make lenders far more willing to make a mortgage on the loan.  Lenders can lose money if the price of the thing they are lending on falls.  In 2007, the housing markets collapsed in large parts of the world and housing prices collapsed.  If your house is worth less money than you owe on it, it is better just to walk away: why pay more for the house than it is worth, by continuing to pay the mortgage?  Lenders lost trillions of dollars when this happened and the result was a collapse in the lending market (it doesn’t make sense to lend money in a situation like this). 

Why do markets collapse?  The problem is that there is really no true or correct value for the pieces of land in a freehold system.  What is the Hawaii Farm ‘worth?’  It will produce $2.4 million a year in free cash flows forever.  How much is $2.4 million times infinity? The farm will produce food for humans as long as there are humans.  How much is it worth to the human race?  Clearly, there is no finite amount of value that can match the value of a piece of productive land: no pile of pieces of paper with numbers on them or metal disks, no matter how large, would ever truly compensate the human race for the loss of a part of the planet.  There is no true value.

If there is no true value, then any value set in markets can only be artificial.  It is a made-up number.  In practice, this made-up number is determined mostly by something called the ‘money supply’ at the time.  If there is a lot of money in the economy, it can support very high prices; if there is less money in the economy, prices have to be low.  The problem is that the amount of money in the system changes from day to day due to very complicated factors.  If the money supply falls, prices of real estate fall, and vice versa.  Because the price of the land is artificial, when prices start to fall, people start to panic (a low artificial price makes just as much sense as a high one) and they start to sell, trying to get their properties sold before the price collapses.  Of course, this leads to a glut of properties on the market that drives down prices. 

Leasehold ownership systems work differently, setting prices that actually mean something.  (In this case, the price is an exact multiple of the free cash flow.  With the leasehold payment at 20% of the price and the interest rate at 4% of the price, the price must be exactly equal to the free cash flow divided by 24%.  This must happen because it is the only affordable price that is also ‘not too high’ (not so high that a person buying a property will get a windfall).  This is a complicated topic that I will discuss later and in great detail in other books in this series, but as long as there is a buyback agreement in place, no one has to worry about it: prices can’t go down after the sale so lenders never have to worry about the market value of the collateral falling below the value of the loan.  As long as they make sure the owner keeps the property in good condition, this can’t happen. 

The other reason Frances set up the system in Hawaii with a buyback option was that she wanted security.  She wanted to protect herself and her boss. 

The socratic leasehold ownership system has a price that is always 5 times the leasehold payment.  This system works very much like a rental with a deposit system where the deposit is 5 times the rent.  When Frances sells the leasehold, she can’t simply give the $10 million to Castle and Cooke to spend.  She may have to give this money back, so she has to hold it in a reserve fund.  If the leasehold owner wants the money back, Castle and Cooke must have it available to pay. 

What if the leasehold payment is missed?  If this happens, the leasehold owner will have violated the terms of the leasehold and the leasehold will simply expire.  The (former) leasehold owner will lose all rights.  She will not have any right to ask for the $10 million back:  as soon as she missed her leasehold payment, she gave up this right.  The company will get all rights to the farm back, just as if the leasehold had never been sold.  But the company will have $10 million sitting in a reserve fund that it no longer has to hold; there is no longer any chance it will have to use this money to buy back a leasehold, because it already owns the leasehold.  This money is just extra. 

Before the leasehold payment was missed, this money didn’t really belong to Castle and Cooke.  The leasehold owner could ask for it at any time, so it really belonged to the leasehold owner; Castle and Cooke was simply holding it in reserve.  The very second the leasehold payment is missed, however, this $10 million belongs to Castle and Cooke.

Let’s say that the contract requires the leasehold payment to be made by 1:00:00 PM on the first business day of November of each year.  This money must be paid into ‘the working account of Castle and Cooke’ in cleared funds to be considered paid. 

Say that the first of November is a business day.  At 12:59:00 PM on November 1, the $10 million is still in reserve; it doesn’t belong to Castle and Cooke.  At exactly 1:00:00 PM, the computer checks to see if the leasehold payment is in the working account in cleared funds.  If it is, nothing changes: the $10 million must remain in reserve.  If the money is not there, the computer realizes that the reserve account has a surplus of $10 million.  It has $10 million in the reserve account but will never have to buy back the leasehold to the Hawaii Farm, because the farm is no longer private.  The computer transfers the ‘surplus reserves’ to the ‘working account of Castle and Cooke.’ 

This means that, by 1:00:00PM on the first business day of November each year, one of two things must happen: either the $2 million leasehold payment will appear, as if by magic, in the working account of Castle and Cooke, in cleared funds, ready for the company to spend, OR $10 million will appear in the working account of Castle and Cooke, ready for the company to spend.  It is not possible for one of these two things to not happen.

Later, we will look at the idea of using socratic leasehold ownership in our system in Pastland.  In that system, we may eventually have billions of private properties.  You might think it would be a lot of trouble for us to go through each one and make sure the payments are made as required.  But, if we set up our system the right way, we will never have to do this.  Our money will come in completely automatically and without any risk at all, just as happened in Hawaii.  Frances is never going to send out a notice or bill for her leasehold payment.  She doesn’t have to.  She doesn’t care if it is missed.  In fact, she would be happy if it is missed: if this happens, her company will get an $8 million windfall.  (It will get $10 million rather than $2 million.)  She may have a dozen, a hundred, a thousand, or even a million separate leaseholds out there.  As long as she sets them all up the same way, her company can never not get its share of the value the land produces.  It is not possible for this money to not come in.

Selling Leaseholds

Say that you buy the leasehold to the Hawaii Farm.  You paid $10 million for the price and have agreed to pay $2 million for the leasehold payment.  Note that your leasehold payment is exactly 20% of the price.  Your price is exactly 5 times the leasehold payment.  (This is saying the exact same thing two different ways.)

If you want to sell the land, you can sell it back to Castle and Cooke for $10 million.  You can also offer it to some other party for some other amount.  Obviously, it doesn’t make sense to sell it to anyone else unless you can get more than $10 million from it.  The leasehold agreement allows you to sell to anyone you want, any time you want, for any price you want that is $10 million or higher.  However, if you sell it for more than $10 million, the leasehold payment for the new buyer will adjust upward to be 20% of the price you get, whatever it is.  For example, if you sell it for $12 million, the leasehold payment will adjust upward to $2.4 million, which is 20% of $12 million. 

Why did Frances put this provision into the contract?

Her company is in this land for the long run.  The company has owned this land for more than a century, longer than anyone alive on Earth has been on this world.  The company never intends to get rid of this land entirely.  It wants to benefit from this land for the rest of time. 

 

The next chapter discusses what happens if the human race is basically in the same position as Castle and Cooke in this example and we decide to sell partial rights to the land.  We—the members of the human race—are in it for the long run.  We want to benefit from the existence of all private land for the rest of time.

Frances put this provision into the contract because she wants the company to benefit from the incentives that private buyers of leaseholds have to improve properties.  If you buy and improve, you will make money.  When you make money, she wants her company to make money too.

It may seem that you are getting the biggest part of the benefits and the company is only getting crumbs.  You get a one-time gain of $2 million.  The company will only see its income go up by $200,000 a year, and this increase won’t even start until after you sell.  But remember that the company is in this for the long run.  Over the long run, it will get far, far more benefits from the improvements than you will get.  In the next century after the land is improved, the company will get $20 million, or 10 times the amount you got.

If our group in Pastland sets up a system like this, we will have created incentives that lead to improvements.  These improvements will not just benefit the people who make these improvements.  They will make money but since our income depends on the amount of money they make, the more money they make, the more our income from the land will increase.  We don’t have to just use this system for the Pastland Farm: we can use it for any properties we want improved.  The buyers of the leaseholds make benefits that seem huge initially and really are huge compared to the incomes most people would otherwise get.  But when they make money, we make money.  Since our increases in income last for the rest of time, we will always get far more from improvements than any of the private parties involved. 

In Hawaii, Frances set up this system for a very specific reason.  She worked for a company that was in business to make profits.  If she could drive up the profits of the company, she would be seen as a very valuable employee.  Castle and Cooke had a long history of rewarding people who can drive up their profits with handsome bonuses.  She wanted to help her bosses because she knew her bosses would reward her for this. 

Frances is also going to set some common sense rules to protect the land, just as the Forest Service sets rules to protect its land.  Frances wants to make sure no chemicals are used on this land so it will remain uncontaminated.  (Chemical-free rice sells for five times the price of chemical-dependent rice and the chemical-free rice is getting rarer and rarer, because chemical contamination is spreading in areas where rice is commonly grown.)  If she had sold a freehold on this land, she wouldn’t be able to protect it; as soon as the land was sold, the new owner would be in charge.  But since she created a leasehold, instead, she can protect this land for the rest of time. 

Why Does Anyone Care About Any of This?

We have seen that the societies you and I were born into are diseased societies.  They work in ways that allow people to get very rich harming the land and harming other people.  The incentives of the individuals in this society conflict with the interests of the human race. 

These systems were not thought out.  They weren’t the result of scientific analysis.  They basically evolved, and they evolved in ways that often made them worse, not better.  They started out very dangerous and primitive, and they are just as dangerous, and nearly as primitive now as they were when they were first formed.

These systems divide the land surface of the world into entities we were raised to call ‘sovereign countries.’ The leaders of these countries realized that if they could use their armies to ‘conquer’ land, they could then generate revenue from this land in various different ways.  They could gain personal wealth and power by creating the conditions needed for wars to take place and then starting the wars. 

They hired experts to manipulate the emotions of the people of their countries to make them feel the emotions needed for the war.  If the experts the leaders hired could make the people live in fear and believe that the people that they would be asked to fight are horrible monsters worthy only of misery and death, the people would be more likely to make the sacrifices needed for wars and to participate in the wars.  The leaders had powerful incentives to find ways to generate hatred, fear, and the strange emotion called ‘patriotism’ that makes people believe that the entity called their ‘country’ provides all wonderful things that exist and is worthy of any sacrifices necessary to defeat the ones the leaders tell the people to hate.

Not all national leaders respond to these incentives. 

Incentives are psychological pressures, like an invisible hand pushing people to do certain things.  Many people thought the things the incentives were pushing them to do were wrong and refused to do them, even though they could make themselves far better off, gaining both wealth and power, if they responded to the incentives.  Not everyone responded, but some did and that is all it takes. 

The conditions necessary for war became a reality.  Wars became constant.

In these systems, the people and organizations who have control over the world and make day-to-day decisions over the land are notpartners with the human race.  The entity we call the ‘human race’ has basically been banished, made to appear that it isn’t even real and has no common interests, by the paid propagandists who work for the individual clans/countries.  The only thing that matters is the territorial goals of the clans/countries; those who think of the interests of the human race are traitors to their clans/countries and are often rounded up and disposed of. 

These systems are hundred percent ownability systems, meaning that everything is ownable and owned (by some clan, country, corporation, commune, collective, or individual).  Nothing is unowned and available for the members of the human race to use to meet the common needs of our race. 

If we had anything at all; if any share of the wealth that flows from the land was unowned and available for us to control, we would have some power and some control over the important variables of our existence.  But the people who built the societies that were here when we were born didn’t consider the needs of the human race, they considered only their instincts, superstitions, and beliefs about the invisible beings and unseen forces that they thought created a mandate for them to take the land and hold it.

We can’t do anything about the past. 

We can’t do anything about the way the world worked when we were born. 

But time has passed. 

The people who set up this dangerous system are long dead.  The people who were in charge are going away leaving new generations.  The old beliefs are dying quickly, as technology makes information about objective analysis available to everyone.  We can decide to try to keep the old beliefs alive if we want.  We can choose to not allow ourselves to look at the world differently than people in the past.  We can choose to not allow our children to know they have the right to think about the world the way they want and make it work they way they want. 

But we can also make a break from the past.  We can accept that there are many different paths that we can take into the future.  We can analyze the landscape, figure out where the different paths go, and find one that leads to the type of world that we want to live in, and that we want our children and their children to be able to enjoy.

We are now in a position to do the analysis that the past generations that created this dangerous system were not willing, and not even really able to do.  We have tools that include computers and the internet that can help us categorize the old beliefs and instinctual feelings as what they are: remnants of a primitive past.  We can accept that we have the ability to set up systems that allow people to buy rights to the world in ways that give them rights to do things that benefit the human race and allow them to get rich if they do these things, without also having the rights to do things that harm our world and put our race and our world at risk.

How do we put such a system into place?

Before we can even think about such things, we have to know this: ‘What system are we trying to put into place?'

You can’t plan a journey until you have first decided on a destination. 

We can’t determine the specific steps we need to take to change our societies until we know how we want our societies to work after the changes are complete. 

The very first step that we must take is to figure out what characteristics human societies must have in order for them to be ‘healthy’ societies and able to meet the needs of the human race. 

I know it is hard to imagine us making a transition from the societies we have now to sane, stable, peaceful, sustainable, and otherwise healthy societies.  This is so hard to imagine that most people just want to give up on everything and not think about the issue.  It causes real mental pain to think about and we naturally want to avoid pain, so we don’t think about it.  But if we don’t think about things, we will never figure them out.  We will never figure out how to get to healthy societies if we don’t know what healthy societies look like. 

Once we understand how healthy societies work, and we have a destination in mind, we can start to consider what we must change about the societies that our primitive ancestors put into place to get from where we are now to the destination we have in mind. 

We will look at the idea of societal change in great detail much later in the book.  We will see that if we understand exactly where we want to go and know exactly what we must change to get there, the changes themselves are actually pretty easy.  If you know where you want to go and have a map that shows how to get there, it is pretty easy to plan a route. 

The illustration on the back cover is called a ‘Road Map of Possible Societies.’  It shows the terrain.  The society that is explained in the next few chapters is called a ‘Democratic Socratic’ and is on the center line of the map toward the far right end.  The bottom line is marked ‘Sovereignty-based Societies’ and we are close to the center of this line, at the point marked ‘we are here now.’  The trip we would have to take to get there would be marked by a line that connects these two points. 

We must take this project one step at a time.  The first step is to understand our capabilities.  If we know that healthy societies are within our capabilities, we have taken the first step.  We will then be willing to take the second step and do an analysis of the possibilities.  We will see that a great many arrangements of human societies are fundamentally healthy.  We can narrow down the options by looking for the specific healthy society that is the closest to the societies we have now, and therefore the easiest to get to. 

Only after we know where we are going are we in a position to plan the trip itself.  This, I believe, is the reason that attempts at societal change in the past have failed: the people who tried them didn’t have a destination in mind, they only knew they didn’t like what they had.  (Marx basically said, ‘Kill all the evil owners and bureaucrats and destroy everything they have built; when the evil ones are gone, the good people who are left will figure out something better and put it into place.’  He had no idea about the destination and made entirely wrong guesses about how to get to better societies.) 

The Pastland example is designed to make it easy to see that healthy societies really are possible.  You and I and the rest of the people in our group are in a position to start from scratch.  We can form any kind of society we want.  We have incredible advantages, including all of the technology of the 21^st century, the skills of our time, and all information about the things that have been tried over the last iteration of history and the way they worked out.  We can take advantage of these things.  We are in a position to form any kind of society we want. 

We have Frances and other people with skills and talents that can help us.  Let’s go back to Pastland and consider what would happen if we decided to intentionally organize our society around a method of interacting with the land that was designed to align the interests of the people who control land with the interests of the human race as a whole.  We will see that it is quite possible for humans to live in a healthy, sane, peaceful, prosperous society.  Once we know it is possible and we have a potential destination in mind, all we have to do is decide if we want to go there and then make the trip. 

 

Endnote 1

The farm can’t sell for more than $60 million and can’t sell for less than $60 million so there is only one price it can sell for, if interest rates are 4%: $60 million.  Let’s first consider why it can’t sell for more than this:

If a buyer had to borrow to pay the price, she only has a certain amount of money to make the payment: the free cash flow.  She can’t make a higher payment than $2.4 million because there is no more money: all of the rest of production above the free cash flow is needed to pay costs or compensate professionals for their organization and management.  She can only afford to pay up to the price where the payment will be $2.4 million (equal to the free cash flow) and no more.  The exact price where this happens is $60 million.

A buyer paying cash wouldn’t be able to offer any more money either.  If you have $60 million in an investment that pays 4%, you will be giving up $2.4 million a year in returns on your $60 million.  You can only break even on this investment if you can pay a price that is such that you give up no more than the free cash flow.  If you pay exactly $60 million (again, assuming return rates are 4%) you give up exactly $2.4 million and get the free money from the farm, or $2.4 million, to replace it.  Pay more than $60 million for this farm and you are going to be losing money from day one.  People can’t afford investments that lose them money so no one with money can afford this investment at any price higher than $60 million.

Now consider the other side of the coin: why can’t it sell for less than $60 million?

The reason is greed.  If it is offered for less than $60 million, anyone with good credit can borrow the full price, collect the $2.4 million free cash flow of this farm, turn over less than this amount as their loan payment, and pocket the rest of the free money.  For example, say it is offered for $50 million.  You can borrow this money for 4% (assuming you have good credit), make the $2 million payment, and pocket $400,000 a year without doing a single thing and without investing a single dime of your own money.  Who would like to get $400,000 a year in totally free money without effort or any personal investment?  The answer is: everyone.  If the farm is offered for a figure that allows people to get free money without effort or personal investment everyone who can get the loan will want it.  People will bid against each other for it, offering a higher price.  The price has to go up as long as it is such that people can get free money without effort or investment.  In other words, as long as the price is less than $60 million, it must go up.  It can’t go higher than this, so the freehold rights to this farm will sell for $60 million, or some figure so close to $60 million that any difference isn’t important for practical purposes.

Endnote 2

The logic for what happens in this system is basically the same as the logic for the price of a freehold which produced a free cash flow of $2.399,999, rather than the full $2.4 million.  The buyer is not buying the right to the full $2.4 million of free money, she is only buying the right to $2,399,999.  As a result, she can’t afford to pay more than the price that would make her mortgage payment $2,399,999.  This price is $59,999,975.

Endnote 3

The buyer is buying the right to $400,000 a year of free cash.  The farm produces $2.4 million, but $2 million of this will continue to go to the landlord and is not for sale; only the right to the other $400,000 is for sale.  She can afford a mortgage payment up to the $400,000, and no more.  A price of $10 million leads to a payment of $400,000 if interest rates are 4%, so she can’t afford more than $10 million.  Many people would like to buy for a price lower than $10 million because, if they did, their mortgage payment would be lower than $400,000 and they could put the other free money into their pockets.  Since no one is willing to pay more than $10 million and everyone is willing to pay up to $10 million, the leasehold rights to the farm will sell for $10 million, or some figure so close to $10 million that any difference isn’t important for practical purposes.

 

 

Chapter 4 describes the development of a basic economy in Pastland. It details how the initial rice-based currency evolves into a more complex system with diverse goods and services. Residents use their basic income to purchase rice and other emerging products like eggs, dairy, meat, and alcohol. Entrepreneurial individuals start businesses, including farming, food production, and banking. The chapter illustrates how a simple barter system transforms into a more sophisticated economy with electronic payments and banking services. Despite the growing economy, the text emphasizes that no one needs to work to survive due to the shared bounty of the land.

 

4:  A Basic Economy

You are there in Pastland.

You get a pile of cash.

Each $1 bill is a receipt for 1 pound of rice.  If you want, you can get your rice directly from the treasury (which is our granary).  If you do this, you can get rice for exactly $1 per pound.  Most people don’t want to go to the hassle of figuring out when the treasury is open, going down with a wheelbarrow, and loading a bunch of rice.

Ordinary people look online for stores that sell rice.  They go to the stores and buy there.  The stores have to make profits.  They sell rice for slightly more than $1 per pound.  Because anyone can open one of these ‘stores,’ the stores are highly competitive and, although rice actually costs more than $1 for most people, it isn’t much more.  The additional price is enough to cover the convenience of being able to buy rice close to home pretty much whenever people want in quantities that are as small as they want.

If you don’t work at all and get only a basic income, you have enough money to buy a total of 2,400 pounds of rice a year.  This works out to be about 7 pounds of dry rice every day.  This is a great deal more rice than you could eat.  It would be enough (dry)  rice to make 15 pounds of boiled rice each day.

You could not eat this much.

You would explode.

For a few weeks, however, most people live on boiled rice, because no other foods are available.

One of our people, a woman named Tanya, used to be an organic duck and goose egg farmer back in the future, before we took this trip.  She buys several hundred pounds of rice and puts it out to attract ducks and geese.  She puts several small plates of boiled rice in the open so that birds can see them from the sky.  She then makes little trails of rice that go to nests she has built for the birds out of rice straw, in an area she can protect from predators.

Ducks and geese see the rice piles and come down to investigate.  The food is much richer than food nature produces for them.  (Boiling rice changes the sugars in ways that make them easier to digest.)  They like the nests and spend time there.  Birds have horrible night vision and have to bed down for the night; they often have a hard time finding safe places.  The nests are safe (Tanya makes sure of this).  They spend a lot of time there, eating the food Tanya puts out for them.  They lay eggs in the nests.

The birds are basically acting as protein factories.  They take in the rice, which is carbohydrates, turn it into eggs, which are mostly proteins, and then lay the eggs.  Birds’ bodies are very efficient at this conversion process.  (There is an evolutionary reason for this efficiency: eggs are very good food for many animals.  Most of the eggs that birds lay get stolen.  If they weren’t efficient at producing more eggs, they wouldn’t have enough chicks to replace them and would die out, to be replaced by more efficient birds.)

Tanya knows how to keep her egg production high.  She keeps track of the amount that each bird eats and the number of eggs it lays.  Birds that don’t have a very high ‘conversion efficiency’ of carbohydrates into proteins become dinner themselves.  Those that lay very well remain in her flock.  Those that lay extremely well may be allowed to keep their chicks and raise them, to make sure the next generation lays very well.

The ship’s internet is still working.  Tanya sets up a website she calls ‘Tanya’s Organic Eggs’ and offers eggs for sale.

Now people can buy two things with their money: rice or eggs.

One man sees some wild goats and puts out some rice to attract them.  Over a few weeks, he brings them closer and eventually he can pet them.  A few weeks later he is feeding them daily.  Some of the doe goats he feeds are pregnant; they have kids.  Doe goats produce a lot more milk than their kids need.  He milks them and opens a dairy where he sells milk, cream, and butter.  A lot of people like these things; demand is high, and the supply is low (at least at first)  so he makes a lot of money doing this.  Others realize they can make money doing the same thing.  After some time, several people are offering dairy products and the prices come down to the level where everyone who wants dairy products can afford them.

Wild pigs live in this area.  A woman puts out some rice porridge to attract them.  They love it.  (Uncooked grains are very hard for pigs to digest so they generally ignore them.  But the cooked rice is like a feast to them.)  She puts out the porridge every night.  After a week, she digs a trap, covers it with straw, and balances a bowl of porridge on some sticks on top of the trap.  A pregnant sow drops into the trap and soon she has a dozen piglets and a sow.

She puts up an ad on the ship’s internet advertising that she will pick up anyone’s food waste at no cost, to feed her pigs.  People start putting out their food waste for her to pick up.

Pigs are like living garbage disposals.  They eat just about anything and turn it into pork.  She makes a deal with a person who used to be a butcher back in the future: she will provide the live animals, the butcher can turn them into bacon, ham, pork chops, and ribs, and they will sell the meat over the internet and split the income.

A person begins to grind the rice into flour and several people start baking breads, noodles, tortillas, cakes, and cookies with the flour and selling all manner of baked goods.  You can place an order over the internet and they will deliver the baked goods to your cabin door.

One person in our group, a man named ‘Dennis,’ used to own a microbrewery back in Spain.  The main ingredient in beer is rice.  Dennis starts making beer and selling it in one of the ship’s bars.

One of our people used to make ethanol for fuel for vehicles back in Indonesia before she took this trip.  She made ethanol out of rice and understands the method: boil the rice for several days to turn it into a mash, let the mash ferment for several days until the sugars turn into alcohol, then distill the mash.  After the first distillation, she gets a mixture of rice water and alcohol, called ‘saké.’ This is an alcoholic beverage that a lot of people like to drink.  After the second distillation, she gets pure grain alcohol, called ‘ethanol.’

She makes both saké and grain alcohol.  She sells the saké to Dennis to resell in his bar and sells the ethanol to people who need fuel, like the operator of the harvesting machine.

Wild grapes grow along the river.  Several people start making wine.  They sell their products to Dennis to resell in his bar.  Crawdads, catfish, and lobster live in the waterways.  People catch them and sell them.  Various people open clubs and restaurants to serve meals and drinks.  The clubs hire musicians to attract guests.

One of our people, a woman named ‘Sally,’ used to run a bank in England before she took this trip.  She knows a lot of people don’t like carrying cash.  They would rather just have a card and pay for everything with the card.  She opens a bank here in Pastland: she will take in deposits, hold the money for the owners, and allow them to make withdrawals with cards.  (On cruise ships, people use their electronic door keys for credit cards to buy things.  Everyone already has a card and there are thousands of electronic card readers all over the ship.)

Initially, Sally charges very high fees.  Several other people open their own banks to compete with her, driving bank fees down.  You can choose to keep your money in a bank; if you decide to do this, you can decide which bank to use.

Now that we have banks, most people don’t even bother with cash: they have their incomes deposited directly into their bank accounts and pay for everything through electronic deductions over the internet or with their debit cards.

 

How Do We Live?

 

No one pays for shelter.

We all live in our cabins on the ship or in temporary shelters (tents, for people who like the outdoors and go camping)  on land.

People can work if they want.  There are a lot of jobs.  You can work for Kathy, who runs the farm.  You could work for some small businessperson.  Operators of pubs and restaurants are always hiring servers; not many people last very long in that job.

Although people can work if they want to work, no one has to work to avoid death.  The land produces a great bounty.  We share this bounty.