Modern Capitalism's Agricultural Origin
Agriculture has a storied past. Not only did it pave the way for civilization, it was integral to the formation of modern capitalism. And today, agriculture is poised to be center stage for creating a sustainable economic and ecological future.
Modern Capitalism was forged out of necessity and coincidence of several factors in the farm fields of England and Holland in the early 1600’s. Farming before this was just not up to the task of consistently feeding the population. Tightening your belt was not a budgetary term but the fact of barely making it through to the next year’s harvest. And in bad years many didn’t. Famines were a regular occurrence in Europe (and globally), but began retreating first from England and Holland and gradually from the rest of Europe over the next two centuries.
The practice of a managed commons and a lack of innovation kept farm yields low and markets nascent. Not only were harvests highly variable, but the transportation or storage of food for sale was often illegal. This resulted in regional famine when plenty was just a few miles away.
But a new way of thinking about money, assets, and production changed everything. Farmers were freed, first politically and then economically to experiment with production techniques and markets sprang to life in an economic revolution. For the first time in human history, food was not a limiting factor for the masses.
As food became plentiful, less people were needed to farm the fields. Where before, a few, clergy and nobility, could live off the excess of production, now a substantial portion of the population could invest time and efforts away from production of food to survive and turn their attention to something very different: industrial scale production of goods and services — the Industrial Revolution was launched.
The tools and structure of modern capitalism sprang from the roots of agriculture and took hold like wildfire creating our technological industrial world — For good and for bad.
Today it isn’t scarcity of calories that is the problem; it is the opposite for most of the world. And for populations still facing food insecurity, it is not a matter of production of calories but the distribution of them, largely a political and economic problem with conflict remaining the main driver of famine. For the “developed” world, food from industrial processes are so cheap, so plentiful, that we can waste 40% of production and still manage to have the majority of the population not just well fed but overweight to obese. Once the province of the elite nobility, the diseases of too much food — heart disease, diabetes, and gout are now available to all.
But this productivity has come at a very high price. Industrial agriculture is in fact a mining operation. We mine soil, water, minerals and energy resources to produce cheap food. Outside of a few niche-grazing operations, none of the modern agricultural practices, including organic production, produces more soil than it consumes. Agriculture is as extractive as any copper or gold mine. We have been living off our capital (natural) like drunken portfolio kids and the bill is coming due.
The current system is propped up on mined resources for inputs to replace natural productivity. The inputs are energy, water, minerals, industrially produced fertilizers, pesticides, fungicides, and herbicides. The casualties are a sustainable food system, human health, a clean environment and functioning ecosystems and an economically vigorous and resilient agricultural sector.
But agriculture can be the key to rebuilding natural capital and making some much needed improvements to capitalism, which worked quite well when it took is modern form in the 1600’s but has shown its age and design flaws. With increasing frequency, we lurch from financial panic to financial panic while increasing wealth disparity amidst a crumbing natural ecosystem. How could it be different? Let’s start with a basic question:
What Does A Farmer Produce?
That may seem like a silly question. We all know the answer. Farmers grow food, fuel and fiber. And from a very narrow economic viewpoint, that would be true. And that is the problem — the perspective is far too narrow.
Commodity production (the sale of a crop) is what the farmer gets paid for but only a portion of what they produce. What farmers actually produce is a much more interesting question and one where we have to widen our scope to get an accurate accounting.
In addition to crops, famers produce a host of others things that are for the most part off the economic books. On the negative side, farming can produce negative environmental, social and financial impacts.
- Polluted water and air from fertilizers, pesticides, herbicides and fungicides;
- Soil erosion reducing natural productivity and polluting water and air;
- Wasteful energy and water use;
- Greenhouse gases that can increase climate change impacts;
- Human health problems from pollution and less healthy foods;
- Reduced genetic diversity and resilience of food crops;
- Impacts to wildlife from pollution lack of habitat and genetic engineering.
As a group these are called negative externalities or costs the public has to absorb in the form of a hidden tax and price subsidy.
On the positive side, with better farming practices, farmers can:
- Grow soil;
- Make wise land use choices;
- Produce clean air and water;
- Sequester carbon rather than releasing it;
- Provide wildlife habitat,
- Produce healthier food;
- Increase the genetic base of our food supply and increase resilience;
- Use less water, energy and toxic chemicals.
These collectively are positive externalities and things the public gets for free but the farmer pays for, increasing his/her costs. A farmer, when they are producing food sustainably, is actually producing two crops: The first is what we buy in the store and the second is natural capital and ecosystem services that make life livable and affordable on this planet. But they only get paid for a part of what they produce.
With this broader accounting, we see the problem clearly. A narrow definition of assets, costs, and production efficiency, yields a system where the public pays a hidden tax to subsidize the “profitability” of current industrial agriculture while increasing costs on the farmer that may seek to produce healthy food sustainably. Any trip to the grocery store shows this imbalance — organic, hormone free milk, humanly raised meats, sustainably fished seafood and organic fruits and vegetables are more expensive than those produced with the externality subsidy.
The fact is that the grocery store price tag is a fiction. The costs that are counted show up on the price tag but the REAL COSTS are hidden from the buyer. Last year alone, carbon based fuels received a $5.3 Trillion subsidy worldwide according too the World Bank. This is just one of the subsidies hidden perversely in the low prices we see at the store and it is just one tax you and I are paying when the price tag on food is a fiction.
Here in the U.S., we can add the dead zones in the Gulf of Mexico caused by farm run-off, nitrates from fertilizers causing blue baby syndrome, the toxic algae blooms in Lake Eerie forcing a shutdown of water systems, the creation of antibiotic resistant bacteria — and on and on and on. Actually if these costs were accounted for, Whole Foods would be the low cost leader instead of the premium niche player.
Un-level Playing Field
The current system stacks the deck against sustainable production. Yet even with the hidden tax being levied on sustainable production, the public is demanding better food and a healthier environment, livable farm incomes and those that can afford it are paying the premium. This demand is creating a growing supply/demand gap for organically produced and sustainable food products. People would like to consume more of these healthful environmentally responsible and socially beneficial products, and retailer would like to sell more of them. But it is expensive for farmers to convert to sustainable practices and the products are still too expensive for the majority of consumers when compared to the subsidized alternatives.
Two Barriers To Sustainable Agriculture
High Cost of Farmland
The farmer trying to do the right thing faces some high hurdles. Farmland is expensive in part because farming has to compete with alternate uses such as development. We are loosing agricultural land at the rate of about an acre per minuet to sprawl. Here too is hidden tax working against sustainable production as developers are among the most heavily subsidized businessmen, enjoying tax breaks, free infrastructure and robust capital supply where the farmer is not so fortunate.
Most farmland is purchased with a mortgage and the farmer must try like mad to produce as much income as possible to pay for the land debt, expensive equipment and the inputs of the industrial agriculture treadmill. Despite all the technology and direct farm subsidy, net farm income continues to decline. And this will only intensify. 57% of farmers are over 55 years of age and most new farmers will not be inheriting the land they could hope to farm.
As a result corporations own more and more farmland. In and of itself corporate ownership is not the problem. Some models of ownership, a REIT structure for example, could allow for large funds to purchase land and bring on specialists to farm sustainability without the high cost of debt forcing short term thinking. But too often, the corporate model of ownership is tied to industrial style production with farmers being renters with even less investment in long-term health of the land and environment. There are innovative financial solutions to this problem, but they need to become mainstream.
Crop Rotation Problem
Jumping the first hurdle of purchasing farmland, the farmer who wants to produce sustainably faces a second even larger one. The most effective way to increase natural productivity and reduce negative externalities is crop rotation. What that means is the farmer cannot produce the most lucrative crop year after year. After a high value crop, the farmer must rotate to things that build soil’s natural productivity and those crops are less in demand or have no market value and are plowed into the soil. Good for soil and society, bad for income. Farming sustainably also requires a new knowledge base and flexibility that current markets do not support and requires effort and expense to obtain.
A sustainable farmer would also not put marginal lands in production, would retain riparian setbacks, would leave room for wildlife, including beneficial insects, pollinators and a balanced ecosystem with predators to control species that damage crops. This puts further pressure on the farmer, as it is not a system to maximize short-term profits. One can see why the factory model is the dominant system today.
On one track, you can automate, make bigger and bigger farms using more and more fertilizer, pesticides, and industrial technology to produce a handful of high value crops year and year out. The financial system rewards this approach of mining the land with easier credit and access to technology and above all a huge subsidy that absorbs the costs this approach externalizes to the public.
The core of the problem comes down to what a farmer produces and what they get paid for. On one side of the ledger today you have assets and income related to a parcel of land that includes:
- Commodity Crop Production
- Developmental Potential (suburban housing, and strip malls, etc.)
- Mineral Rights
- Water Rights
- Easements (payments to maintain agricultural land)
These monetized values drive decision-making in the system. Here, financial capital is given preference over all other forms of capital. Natural, human and social capital are left out in the cold, financially worthless or as we have ironically termed them “priceless”.
A farmer is not paid for clean water, air, producing wildlife, job production or a healthy resilient food supply. But these products are as valuable as the commodity crop itself.
The IVE Solution
To put sustainable (or better) agricultural practices on even footing with industrial agriculture, we need to monetize natural assets and provide price information (a price tag that reflects real costs) that brings our environmental and social values into the economic mainstream. Including these stranded assets represents a huge potential windfall for farmers and agricultural investors as natural, human, and social capital are estimated to be larger than the current industrial economy, yet remain isolated without the financial tools and markets to convert them to financial capital.
An Inclusive Farm Economic System
- Commodity Crop Production
- Ecosystem Services
- Clean Air
- Stable Cimate
- Water Retention
- Groud Water Recharge
- Home for Wildlife
- Genetic Diversity of Food Crops
- Reduced System Risk
- Developmental Potential
- Mineral Rights
- Water Rights
- Natural Capital Appreciation
- Human Capital Appreciation
- Social Capital Appreciation
Converting Intrinsic Assets to Financial Capital — The IVE Soil Product
The natural assets of sustainable agricultural land and the “ecosystem goods and services” they produce are VERY similar to an industrial factory. Both produce goods and services of value from a productive underlying asset.
The capital base for a factory includes; buildings, machinery and other infrastructure, so called “built capital”. Agricultural land has natural assets — soil, water, as well as the geology and the biology of the entire farm ecosystem.
In addition to commodity production, these natural assets produce natural capital and ecosystems services just as a company’s asset produce goods and services in the industrial economy. Except in the farm case, the natural assets and productivity have up to now been excluded from the financial economy and thus remain “free” or better stated, remain un-priced and thus the industrial economy cannot value them.
Without a capital market mechanism to include natural assets in the financial economy, we rely on conservation payments, taxes and regulations to try to rebalance the market failure of externalities. The result is an inefficiently transfer from one agent in the economy to another. These transfers pay for a fraction of the true costs and are not based on the value of the underlying asset. While the hidden tax of absorbing negative externalities is largely hidden, taxes and regulations are very visible and are resisted. The current command and control system of wealth transfer does not engage the power of the market to rebalance the system.
The Intrinsic Value Exchange, IVE, was designed to handle this problem by creating financial tools and an exchange infrastructure to price these valuable natural assets and convert them into financial capital. This connects the mechanics of financial markets with the realities of the natural world. Instead of taking from someone, the IVE system produced wealth from the underlying asset. This provides a direct financial incentive and avenue for capital formation for sustainable (or better) production.