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.” 
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).
 Ellerman, David. Economics, Accounting, and Property Theory. Lexington: Lexington Books, 1982.