Possessed of a Certain Mutuality

May 17, 2012

In the Mutualism group on Facebook, a user posted the following Proudhon quotation:

‎”Every possessor of lands, houses, furniture, machinery, tools, money, &c., who lends a thing for a price exceeding the cost of repairs (the repairs being charged to the lender, and representing products which he exchanges for other products), is guilty of swindling and extortion.” – Proudhon

The quotation was accompanied by a skeptical set of examples (following Proudhon’s list) meant to appeal to the reader’s intuition and, I presume, lead them to conclude that Proudhon was full of it and that there is nothing wrong with charging for the use of something you own. The upshot is that today’s mutualists, if they agree with Proudhon, are full of it too.

With regard to “land” (actually improvements to such), the example was a parcel of land converted into a parking lot that then charges locals a parking fee. How could mutualists think this is “swindling and extortion”?

Proudhon doesn’t appear to be saying anything more or less here than that rental prices should be in line with competitive arbitrage:

C – S/(1+r)n = RKa(n,r)

where C is the current market value of the capital asset, S is the scrap value after n years of use, R is the current market rent for K units of capital services, and a(n,r) is an ordinary annuity of one. If no one is “guilty of swindling and extortion,” viz. “under competitive conditions, arbitrage between buy and lease markets would enforce equality between the present values of the outlays to obtain the same real services through buying and leasing.” [1]

So in the case of improvements to land? Let’s say you could sell the lot for $300,000 immediately on the market. So C = $300,000. Let’s say you plan for the lot to operate for 50 years, so 50*K units of capital services will be used by those parking on the lot. If the market indicates that you could expect $50,000 for a lot in that condition in 50 years, the present value of the scrap would be $18,397.65 if r is, say, 2%. Doing a little algebra, your arbitrage-enforced annual rental income RK = $8,961.49. At this level of annual nominal income, you would essentially be slowly selling the lot, and it’s hard call that “swindling.”

This all amounts to an income stream of about $448,000 (plus “scrap”) over the whole time horizon before repairs, which the possessor may or may not choose to do. But arbitrage assures that this is equivalent to $300,000 in present value. Seen in this way, it’s no more true that no one would ever build such a lot if all they got in return was what Proudhon allows than that no one would ever build such a lot if they were only allowed to sell it outright. Which you choose to do would be determined by whether you want your labor to manifest as wealth or income.

As for repairs, if you kept the lot up, you would be producing what amounts to a new asset, C’, worth $250,000 to add to your scrap value. This would renew your income stream but it would have been the result of additional labor and cost as it should be. I realize this is grossly oversimplified but the general point isn’t changed.

It should be clear from this example how it plays out with houses, furniture, machinery, and tools. The same goes for money, where the stream reduces to r, as you would expect.

So am I just saying that Proudhon or mutualism in general is just capitalism described in socialist-sounding language? After all, nothing I’ve said so far about capital assets yielding an income stream wouldn’t be enthusiastically endorsed by most bourgeois economists. In short, no, because there are different ways in which owning an asset can do this. What we’ve considered thus far is the “passive” use of a capital asset. Capitalism, however, legitimizes another “active” way. Capitalist economists apply this capitalization theory to cases where, instead of hiring out capital, capital hires in labor, a product is produced and the income generated in imputed to the capital asset. This capitalized value is C + profit*a(n,r) or (what amounts to the same thing) the capital asset plus the value of the stream of labor’s whole product. By doing this, they are “guilty of swindling and extortion” because that stream is not what you are purchasing when you buy an asset. That stream depends on future contracts that may or may not be made and furthermore, those contracts (i.e. employment contracts) aren’t even legitimate. This stream must be appropriated as new property based on the actual satisfaction of a legitimate contract of hired inputs.

Now, I’m not claiming that mutualists are never heard decrying passive capital asset income streams, or even that Proudhon didn’t. What I’m saying is that separating passive and active income streams in the theory is important to any analysis of the matter of lending and that, in my opinion, the passive streams don’t conflict with the spirit of mutuality and reciprocity central to mutualism.

Where does occupancy and use fit into this, you might wonder? In the language I’ve been deploying, occupancy/use theory is usually seen as arguing that the only legitimate enjoyment of a capital asset is in realizing it as wealth (“use it or sell it”), but not a stream of income (“but don’t rent it out”). I would argue that the spirit is better captured by arguing that the only legitimate enjoyment of a capital asset is by realizing it as wealth or a stream of passive income (viz. by realizing either the market value C or rental-plus-scrap), but not active income. To put that in occupancy/use language, the whole product stream cannot accrue to a party that isn’t occupying and using the capital asset, viz. whoever hires the asset appropriates the  whole product, which includes the “negative” product (liability for the passive stream to the owner) and the “positive” product (the residual from its use as an input to production).

[1] Ellerman, David. Economics, Accounting, and Property Theory. Lexington: Lexington Books, 1982.

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4 Responses to “Possessed of a Certain Mutuality”

  1. Derek Says:

    I agree completely with your analysis, but I’m not sure Proudhon would go for your extended definition of “possession” or “occupancy and use.” If he did accept it (and you could probably tease it out of his writings), perhaps he would even say that through the “organization of credit” renting would be unnessecary due to the availability of cheap credit. Regardless, what’s important from the perspective of the labor theory of property is that labor should always have democratic control of the production process, which is fully compatible with renting capital goods as you describe. In the context of a mutualist economy, for example, one labor-managed firm renting capital goods from another could hardly be described as exploitative. How often this would happen in practice is another question, but it is important, as you say, to differentiate in theory between passive and active income streams. This analysis could also be useful with regard to recent trends toward a sharing economy or “collaborative consumption” (e.g., tool libraries), although this may go beyond simple private property.

  2. Neverfox Says:

    My reply certainly was not intended to be “exegetical,” but rather “exploitative” and “creative” (to use Rescher’s categories of interpretation). I presume the OP didn’t bring this all up to argue that a dead man was economically naive, but rather than modern mutualists are themselves naive for believing both that products of labor can be exchanged for equivalents and that capital may not yield an income stream lest they be “guilty of swindling and extortion.”

    However, if the question is, as Rorty might put it, “Which interpretation best establishes what Proudhon would, under ideal conditions, reply to questions about the terms of his analytical arguments which are phrased in terms which he could understand right off the bat” then I think we have to ask what is to be our criterion for a successful interpretation, given that Proudhon is dead and we can’t ask the man? I’d propose in that case a criterion of coherence, viz. interpretations that make the text make sense are more plausible that those that don’t.

    When you defend your point by appealing to “what Proudhon is saying,” you are actually appealing to your own interpretation, which is question-begging, circular and dogmatic. I’d rather talk about what interpretation makes Proudhon’s work as a whole make sense (a body of work that includes defenses of exchanging equivalents). That’s not to say that Proudhon can’t be genuinely inconsistent, but that inconsistencies or implausible naivete should be regarded as prima facie evidence of a misinterpretation.

  3. Derek Says:

    Well, I was actually trying to say two different things here. My first point was merely expressing some skepticism that Proudhon would view passive income streams as legitimate, without giving any reason why. I think you could make a pretty good argument either way so I’ll just leave it at that. But I do agree, personally, that passive income streams are compatible with Proudhon’s overall vision of mutuality.

    My second point was meant to be separate from the question of whether or not Proudhon would view passive income streams as legitimate. I was simply making an observation about the practicality of renting capital goods and it was not meant as defending an interpretation of Proudhon that views passive income streams as illegitimate. Starting from the premise that they are legitimate, I was simply asking why firms wound rent capital goods when they could own them outright relatively easily in the context of a mutual credit system. Given that Proudhon was a fairly practical thinker and given the centrality of mutual credit in his economic thought, I think he would say something along these lines. But again this was meant to be separate from my first point. I can certainly imagine situations where renting capital goods would make sense. I was just pondering how prevalent this would be.

  4. ErikM Says:

    The parking lot example seems ‘interest’ing as it seems the parkers would occupy and use the land. In that sense, why should they pay? Or how much? A portion of the improvement cost? Once the investment (if any) was paid, where should the money go, or would parking be free after this point?


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