print pageUnearned income is the root cause of poverty. I searched the internet for this phrase (and dozens of variations) and came up empty. Why has no one said this before?
I have been including a 5-minute crash course on “what is money” in my presentations for several months now. Here’s the 5-second version: Money (whether represented by cash or by database entries in a bank) is just an accounting system, keeping track of who is entitled to how much goods and services.
If you look at it that way (from a societal system engineering point of view), everything else comes clear. For example, banks can (and actually do) create money every time they make a loan, simply by changing the borrower’s database entry (“account balance”) to a larger number. Banks are allowed to lend out ten times the amount they originally receive from depositors and investors. This concept, that banks can create money, is nothing new but it has been the hardest piece of the common good bank plan for people to understand and accept.
Life of Luxury
Seeing money as an accounting system also makes the causes of inflation clear. Looking at the whole global economic system at once, there is a certain finite amount of goods and services available in the current generation, roughly speaking. The total amount of money in existence represents the total entitlement to those goods and services. Do the division and you know how much a buck is worth. More dollars means lower value per dollar. Less goods and services means lower value per dollar. In particular, the value of the dollar goes down every time someone gets paid for unproductive or counterproductive activity like stealing, bombing, arson, and (here’s the big one) making unearned income.
For a final example, seeing money as an accounting system makes the cause of poverty clear. The world’s wealth in the current generation is a finite pool of goods and services. In any finite resource environment (like Earth), someone getting richer without making any productive contribution to the world’s wealth means that someone else gets poorer. This is certain. Unearned income is the root cause of poverty.
Economists keep trying to excuse unearned income by arguing that human ingenuity is unlimited, so our pool of goods and services is unlimited, so unearned income hurts no one. This is (a) a misunderstanding of infinity and (b) playing with words. Human ingenuity is extremely large, but finite. More importantly though, there is a big difference between the two senses of “is unlimited”:
- “can get larger” (The world’s wealth CAN get larger through productive activity.) and
- “is infinitely large” (The world’s wealth is NOT infinitely large.).
Unearned income does not increase the world’s wealth, it simply funnels wealth from each of us to someone who has a bit more — and ultimately to those who already have the most, leaving less and less for those who have the least.
For a longer discussion of the evils of our current economic system, with pictures, stories and diagrams, see this article.
10 Comments
William, I wasn’t talking about my personal situation, wish I DID have houses to rent out.
But the question is whether people should be allowed to own property and get income from it.
Most people with an orchard EMPLOY others to do the harvesting. Do they deserve a profit?
And that’s of course what Dan is talking about, the willingness to take RISKS.
It all comes down to each individual’s opinion of what others DESERVE.
Most people, and almost all who’ve been subjected to those fees agree that banks do NOT deserve $40 for a $1 overdraft or a payment one minute late.
Few have the slightest clue about credit scores and Dan is the exception.
I recently had the opportunity to tell the credit bureau lawyers under oath at my deposition what I thought of them. I’ve determined that the lawyers are the root of all evil, NOT unearned income.
The lawyers legitimize wars, torture and any vile practice one can imagine. Anything the banks do, the bailouts, atrocious fees, whatever — some “genius” has an idea and the lawyers make it happen, write the contracts and defend the most unconscionable practices in court.
And that’s how it is in all “democracies” with constitutions.
Lawyers are corrupt people. Lawyers are not banks, corporations or countries – they are people like me and you and they are EVERYWHERE.
So what this really means is that the problem is the PEOPLE. Too many are corrupt and are willing to do anything for a buck.
Today I contemplated what I could do for the people in the California camps who are losing their children, pets, vehicles, dignity, freedom and humanity.
I’d have room for several RVs on my property and 20 or 30 years ago, I wouldn’t have hesitated.
Now I evaluate the risk. Little to gain and everything to lose.
How many of you opened your homes to the homeless?
What do you think of people?
J.W. Smith has written volumes about “unearned income as the root cause of poverty” — and his ideas are planted firmly in Henry George theory, which is about 100-years old. So the idea has been around for a while, even if it’s not to be found on our contemporary Internet.
There are plenty of other perfectly reasonable ideas that don’t find much popularity on the Internet, which makes me wonder about the actual function and powers of “Google”. Hmmm…
Meanwhile, I watched the video, “Money as Debt”, William. It was excellent. Thank you. Others can do the same at the following URL:
http://www.youtube.com/view_play_list?p=E7EA7BFA2A625324
I highly recommend this to everyone, and you’ll be hearing more from me about it, William.
However, what we have to guard against is the community as a whole taking on the risks while a few individuals reap the rewards of success. It’s not easy, as this has been the ultimate fate of nearly every attempt in history to do things for “the common good”. (Some attempts, of course, have been more successful at forestalling this ultimate fate than others).
Whether it’s fair or not, we must realize that even common good banks will succeed or fail based on decisions “made by those who have money to invest.” The goal then, must be to persuade those who have money that it is a good idea to use it to benefit the community–that benefits to the community are ultimately in their own benefit as well. And this is helped by the realization that real wealth should not be measured in currency or material acquisitions, but in things like productivity, innovation, education, health, intellectual pursuit, knowledge, freedom, and happiness.
Dan,
Ah! This question of whether income that rewards risk is earned or unearned is a tricky one. Partly this is due to variations in what we mean by “income” and “earned”, depending on whether the activity benefits others, whether the activity makes a productive contribution to the wealth of the world, whether the activity requires an effort proportional to the reward, and whether the reward is monetary or direct.
In any case, under our current dysfunctional economic system, decisions about what society should invest in are made by those who have money to invest. Those who have the most have the most say. Whether or not we call it “unearned” income, it ain’t fair.
Common Good Bank will change the game so that everyone has an equal say and communities as a whole take on the risks of failure and the rewards of success.
This is just my opinion, but I would say that even interest beyond the inflation rate can be considered “earned”, if it is proportionate to the risk that one is taking with one’s own assets. So investing in a “safe” bank should get you close to the inflation rate, but investing in loans to a risky startup venture for example, can legitimately earn a higher interest rate. Rather, I see unearned income as when someone take risks with other people’s assets and gets rewarded for it, sometimes regardless of success or failure (huge bonuses for CEOs of failing companies come to mind; or huge government bailouts going to the very people who created the mess they’re being bailed out from). In other words, corporate executives getting handsomely rewarded while their shareholders, employees, and customers are getting screwed. Another big source of unearned income I believe comes from using a power advantage to get people to agree to unconscionable contract terms, such as “we can raise interest rates on your existing loan any time we feel like it” or “we can charge disproportionate late fees or overdraft fees if you miss a deadline by a minute,” and using phony risk factors (the so-called “credit score”) for evaluating risk. Even most credit unions are playing that horrible game, and its sucking the life out of the most vulnerable in society, as well as the working middle class. One of my big reasons for wanting to see Common Good Bank succeed is that I’d expect that it would never to resort to such tactics.
Sue, yes and no. Interest from a bank is unearned income if it exceeds the inflation rate. (Interest less than the inflation rate is not really income, even though the IRS treats it that way.) Common Good Bank precludes unearned income to individuals.
Certainly, production of products that do more damage than good is not just unproductive — it is counter-productive.
What is interest in any bank? un-earned income? “Un-productive” activity is categorized how- ford trucks, BMW suv’s, smaller Ipods? smaller computers? Bigger televisions?
Seems pretty unproductive to me…
Christine,
By no means did I intend to suggest that YOU are the root cause of poverty. What type of payment you except has no bearing. An individual contributes to poverty if and (normally) only if that individual consumes more goods and services than he or she produces. From what I know of your work, I think it safe to say that you produce much more than you consume.
In general, owning land is not a productive activity, but gathering nuts and making them available to people IS. So whatever income you get from that mixture is partly earned and maybe partly unearned (depending on how much you charge).
I think it’s a little more complicated.
I own a house and rent it out. Is that unearned income?
How about selling walnuts from the many acres I own. Is that unearned income?
And maybe I don’t take accept money, but gold, does make it better?
Or bread?
I like that explanation – simple and effective!