You should stop paying other people’s rent and the interest on their loans
It is very enticing, seductive even, for individuals to contemplate a life where they can live off unearned income. Unearned income may take the form of interest on loans, dividends on shares, and rent. The primary assets that yield such unearned income are, respectively: banking licences, share owned corporations and land. Income may be classed as unearned if the owner of such assets do not actually contribute any kind of intellectual or physical labour towards the production of goods and services. Unearned income is basically making an income even in one’s sleep.
John Stuart Mill wrote in Principles of Political Economy (1848):
“If some of us grow rich in our sleep, where do we think this wealth is coming from? It doesn't materialise out of thin air. It doesn't come without costing someone, another human being. It comes from the fruits of others' labours, which they don't receive.”
So unearned income is not just manna that falls from the sky but is extracted, stolen even, from people who work. It is only a matter of seeing how it is extracted or stolen from working people. If the how is well understood by people; if people see how oppressed they personally are by a collective situation in which unearned income exists; then we would hasten to eliminate it from the economy.
Take a person – let’s call him Jack – who is working away at a job. Jack is not only trying to pay off the mortgage on his house; he is also thinking of buying an investment property as well so that he can live off the rent in later years; he is also contemplating how his pension fund might grow enough to sustain him when he retires. He dreams of living on unearned income one day. All of these actions are completely justified in the context of capitalism from the point of view of the individual.
Assume Jack knows that the bank he borrowed from for his mortgage created the loan money out of nothing (credit creation) and that the bank is therefore making unearned income. Jack, if he is like most people, will think that that is the only unearned income he is paying someone else. He will have no idea that he is constantly paying unearned income to other people.
Imagine he goes to his greengrocer to buy some fruit. This greengrocer pays rent to a landlord as well as interest on a loan from a bank. Well, how does she pay these things off? She has to factor her rent – which is unearned income for her landlord – into the price of her greengroceries. Her customers are paying her rent and the interest on her loan! So Jack is not only paying off his own mortgage; he is also unknowingly paying off his greengrocer’s rent and the interest on her loans. He has no choice; he either does that or he grows all his own fruits and vegetables.
(Note: even if a business owner owns her own property, she is factoring the potential rent she could get into her prices. She is in effect charging herself rent. Accountants do this in gauging a business’ profitability.)
But the situation goes even deeper. The greengrocer buys goods and services off other people – tradespeople, wholesalers and so on. They too will have rent and loan repayments which are unearned income for someone else. They too pass on these costs to their customers including our greengrocer, who in turn passes it on to her customers like Jack. So Jack is also unwittingly paying off the rent and interest on loan repayments of these people – albeit not to the same percentage. Even the employees of the greengrocer have to factor in their personal rent and interest on loans into their wage demands. These costs don’t just stop with the individual wage earners; they are passed on to their employers (as wage demands) who passes it on to their customers and so on. This chain of events where costs are passed on from one party to another goes on ad infinitum. The long and short of it is this: as consumers and purchasers of goods and services, we are all paying off each other’s rent and interest on loans (plus profits as another form of unearned income going to passive owners of businesses).
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I will not explain the mathematics but the sum total of all the suppliers’ UIC incorporated into the goods and services that Jack buys, i.e. the UIC paid by his S1, S2, S3, S4…..suppliers, can be calculated as B x 1/(1-A), where: B = the percentage ratio of UIC to sales; and A = the percentage ratio of goods and services purchases to sales.
Substituting 25% for B as above; and 65% for A,
B x 1/(1-A) = 25% x 1/(1- 0.65)
= 25% x 1/0.35
= 25% x 2.857
= 71.4%
In other words, using the above inputs, the prices that Jack pays for his goods and services incorporate a whopping total of 71.4% as unearned income costs. Without unearned income costs, everything he buys would on the whole be 71.4% cheaper. While Jack might still be dreaming of retiring comfortably on his pension fund and his investment property, he should now realise that the capitalist economy is a rigged and highly unjust game, and that the working years of his life is spent servicing other people’s debts and rents and company owners' profits. He does it every time he purchases something. With this understanding, Jack should be contemplating that a ‘quiet revolution’ is in order.
What percentage does the sum total of rent, interest on loans and shareholders’ profits contribute to our purchases? The following is a rough way of calculating it. It is overly simplistic and ignores factors such as tax; however the conclusion probably approximates to what happens in reality. It may be too conceptually challenging for some, in which case just ignore it. The last paragraph in this box is worth reading though.
In the following what is unearned income for a private party is treated as a cost of production for someone else, i.e. the person paying the rent etcetera. The sum of these unearned incomes – land rental, share dividends, and interest on loans – will be referred to as Unearned Income Costs or UIC. UIC are very much a cost of production as say the electricity bill.
Imagine that the average of all businesses and wage-earners spend the money received from sales (or wages in the case of some individuals) in the following percentage ratio:
Purchases of goods and services (or ‘survival spending’ for wage earners) – 65%. (For businesses, wage costs are included in this category – employees provide a service)
Unearned Income Costs – 25%
Profit/‘Income’ (or disposable income for wage earners) – 10%
Let’s try to make it easier to grasp the percentages with a graph:
In the example given in the main text of Jack and the greengrocer, this would mean that 25% of the greengrocer’s prices are constituted of UIC. The greengrocer may be called an S1 supplier to Jack, meaning that she supplies goods to Jack directly. The wholesaler that sells to the greengrocer is an S2 supplier which means that he is twice removed from Jack as a supplier. The greengrocer is paying the UIC of the wholesaler. She passes on the wholesaler’s UIC on to her customers, which means that Jack is also paying the wholesaler’s UIC – but how much? Based on the above hypothetical average, Jack is paying 25% x 65% of the wholesaler’s (S2) UIC. Someone who sells goods and service to the wholesaler is an S3 supplier to Jack. By the same method of calculation, Jack is paying 25% x 65% x 65% of his rent etcetera. This process continues ad infinitum with smaller and smaller amounts.
The following table sums up the UIC paid by a person like Jack to everyone in the supply chain:
Recall the John Stuart Mill quote at the beginning: “If some of us grow rich in our sleep, where do we think this wealth is coming from? It doesn't materialise out of thin air. It doesn't come without costing someone, another human being. It comes from the fruits of others' labours, which they don't receive.” In this article I have tried to clarify exactly, using Jack as an example, how 'wealth comes from the fruits of others' labours, which they don't receive'. We must realise that Capitalism incorporates into its very heart and essence the process of institutionalised theft. The onus is not on the the wealthy to give up their financial assets or to donate their unearned income; it is a moral responsibility on every one of us, if we wake up to it, to bring about a society where such theft is no longer in its beating heart.