In George Monbiot’s book Out of the Wreckage, he describes how the word ‘investment’ can take two different forms.
Investment means two quite different things. One is the funding of productive and socially useful activities, the other is the purchase of existing assets to milk them for rent, interest, dividends and capital gains. Using the same word for different activities ‘camouflages the sources of wealth’, leading us to confuse wealth extraction with wealth creation.
The distinction between wealth creation and wealth extraction is an important one. We all want investment that makes new things happen in the world, that creates jobs and builds something out of nothing. But not all wealth is that kind of investment. Some of it is extractive – it relies on charging others for access to an existing asset, rather than creating anything new.
The difference is perhaps clearest in housing. If I build a new house, I have created something new. If I buy a house to rent out, I am extracting wealth from an existing thing. As the owner of that property, I am making money without doing any work for it. Likewise, investing in a start-up or building solar power creates something new. Buying shares or speculating on land value does not.
Monbiot is drawing on the work of Andrew Sayer here (who introduces his ideas here). He puts it this way:
Unearned income is derived from control of an already existing asset, such as land, buildings, technology, or money, that others lack but need or want, and who can therefore be charged for its use. Those who receive it are ‘rentiers’. Mere ownership or possession produces nothing, and so any return to an owner merely for access or use is something for nothing.
There is language for describing these different kinds of wealth, and the distinction between the two has been better understood in the past. Ricardo talked about rentiers and landlordism and how to rebalance the economy of his own time. Keynes talked about ‘functionless investors’. Henry George had the harshest words for the unearned income of rent, describing it as a “fresh and continuous robbery”.
If we are able to distinguish between these forms of wealth, we can treat them differently. We can lower taxes on earned income and reward those taking genuine risk. And we can raise taxes on unearned income, through measures such as a financial transaction tax or land value taxation. In shifting the tax base this way, we would reward wealth creation, and capture a greater share of wealth extraction for redistribution. We could lower the tax burden on work, winding down our reliance on income taxes and making work pay better. (In doing so, we would increase the incentive to work, and potentially reduce the benefits bill). It’s not a silver bullet for a fairer and more sustainable society, but it’s a useful step in that direction.