8: 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 21st 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 21st 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 1/1,000,000th (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 21st century world.  Many trillions of dollars are invested in these funds and most savings or checking accounts are actually money market funds.)

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 21st 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 21st 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 21st 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 21st 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 21st 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 21st 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 21st 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 21st 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 21st 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. 

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 1/1000th 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 21st 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.