Property & Freedom

[Mark Barrett]

 http://www.prospectmagazine.co.uk/2009/12/a-place-of-ones-own/ (worth
clicking here to see picture)
*A place of one’s own*
*The idea of “equity” in property emerged in 16th-century England and spread
like a virus. It lies behind democracy and the credit crunch and will
determine China’s future*

Andro Linklater
16th December 2009

I live in an ancient farmhouse in Kent that boasts a cat slide roof, a
chimney stack leaning like the tower of Pisa, and a living room whose
ceiling is supported by an immense wooden beam low enough to stun anyone
taller than a jockey. In other words, it looks like a quintessential English
country cottage.

But quaint though the roof, chimney and beam now seem, these three elements
are evidence of a revolution in human affairs. Looking at them, I can
recreate the events of almost 500 years ago, like a detective surveying a
murder scene.

For sometime in the early 16th century, my predecessor in the house was
infected by a radical new idea, one that changed him so profoundly that he
altered the shape of the building to reflect the new way he thought about
himself and his neighbours. And like a mental epidemic, this idea then
spread from southeast England and gradually extended across the country. Two
generations later colonists carried it to North America. From there the
contagion spread to the Pacific, and around the globe from Nova Scotia to
New Zealand. It is now so deeply embedded in our psyches that it is hard to
recognise the pervasiveness of its influence.

The new idea was easily described—that land itself could be an individually
owned, tradeable commodity—but its origins were old and complex. Land
ownership rights began to be recognised under the common law as early as the
12th century; a market for land existed in the 14th century, and in some
exchanges cash payments were involved; and the practice of fencing off
individual parcels of ground, the enclosure movement, began in the 1480s.
During the course of the 16th century, however, one crucial element was
created that linked all these elements together in a single financial nexus.
An almost imperceptible change in mortgage law introduced the principle of
fairness, or equity, to deals that involved lending money against the
collateral value of a chunk of earth. Today, anyone who has a mortgage is
aware of the concept, if only through the small-print warning on the
agreement that begins: “Your property may be at risk…” But that phrase
encapsulates a near 500-year-old principle of momentous significance. It not
only underpins the modern mortgage market, it shapes societies around the
world—from the abandoned sub-prime mansions of Arizona at the heart of our
current economic crisis, to the aspirant property owners of Shanghai who may
yet bring us out of it.

***

The most obvious indication that change was underway came in an unexpected
form: the construction of chimneys. In 1577 the commentator William Harrison
picked out one thing that the old men in his Essex village thought to be
“marvellously altered in England within their sound remembrance… the
multitude of chimneys lately erected, whereas in their young days there were
not above two or three if so many, but each made his fire against a reredos
[the back wall of an open hearth] in the hall, where he dined and dressed
his meat.”

The chimneys signalled the arrival of fireplaces, which in turn showed that
small farmers were dividing up homes that once consisted of a single-roomed
hall used by family, friends and labourers for meeting, eating, cooking and
sleeping. Thus my predecessor constructed an inglenook fireplace for cooking
on one side of the hall, and an area for eating on the other. Outside, he
extended the roof almost to the ground to keep the heat from the fireplace
in. Then he ran a 30ft oak beam along the length of the hall to support the
floor of the new-fangled bedchamber above.
By the time he finished, the common space was enclosed, private and
specialised.

This transformation reflected what the 16th-century farmer had done to his
land. To profit from rising wool prices he enclosed parts of the grassy
hillside. He planted hedges to demarcate his portion, dug ditches to drain
the soil, manured it to improve the grass for grazing sheep. Enclosure was
an innovation, but even the most conservative farmer could see the
advantage. “The poor man who is monarch of but one enclosed acre,” the
17th-century observer Thomas Fuller wrote, “will receive more profit from it
than from his share of many acres in common with others.”

What made my predecessor’s activities truly revolutionary was the legal
innovation that allowed him for the first time to claim “equity” in his
newly profitable land. Under the medieval notion of a mortgage, or “dead
pledge,” a landholder borrowing money effectively promised to let his title
to the land die, should he not redeem the loan in full at an exact place and
time specified by the lender. This practice was so unfairly tipped in the
lender’s favour that, as a matter of equity, chancery law in the
15th-century developed the novel concept that the borrower possessed a
residual
ownership to the land that even a mortgage could not extinguish. In effect,
the courts allowed a landowner to redeem the loan at any date (even years
after the period specified) and to regain his property. To be sure of
recovering his debt promptly, therefore, a lender now had to issue a writ of
foreclosure forcing sale of the land. Once the debt was redeemed, however,
the borrower kept any money left over. This was his “equity.” As the
principle of “the equity of redemption” became accepted in 16th-century
England, ownership acquired a monetary value separate from the land itself.
Equity morphed into capital, and the modern world began.

***

By the late 17th century John Locke had decided that property was the
contractual basis of a democratic society, but the idea of land as commodity
that underpinned his argument didn’t take hold in western Europe until a
century later. As late as 1800, two thirds of the world’s agricultural land
was held communally. Across the North American prairies, South American
pampas, Asian steppes, Australian outback and African savannah, shared
possession dominated. The remaining third of the arable earth—eastern
Europe, Russia and China—was worked by peasants, slaves and serfs. Yet by
the end of the 20th century, the practice of treating land as private
property was fundamental to a modern, democratic community. Some regions
resisted the idea, but none remained untouched by it. Wherever private
property was introduced it drove out aboriginal ownership, and the communal
values went with it.

As early as 1789, Henry Knox, secretary of war in the newly independent US,
expressed his regret “that all the Indian tribes once existing in those
States, now the best cultivated and most populous, have become extinct.”
That tragedy would be repeated elsewhere—sometimes, as in Canada and New
Zealand, in less extreme fashion; occasionally, as in Patagonia, more
savagely. But its cause was always the same. Knox insisted that Native
Americans had to develop “a love for exclusive property”; a century later,
Massachusetts senator Henry Dawes said that the Cherokees had
to learn “selfishness, which is at the bottom of civilisation.” Both were
expressing an individualist outlook inseparable from the concept of private
property. But the idea that the earth could be owned was incompatible with
the aboriginal belief that people belonged to the place they lived in, that
they were, as the Maori put it, tangata whenua (people of the land). In
these cultures, animals and crops could be owned, occupancy might be bought
and sold, but the Earth, the source of life itself, belonged to no one.

Behind this conflict lay a larger phenomenon: the influence that possession
of the land has upon the way that people think. Thomas Jefferson recognised
this, declaring in his 1782 Notes on the State of Virginia that republican
government depended upon as many people as possible owning land, because
“cultivators of the earth are the most virtuous and independent citizens.”
In keeping with that goal, the United States Public Lands Survey divided up
the wilderness from the Appalachians to the Pacific Ocean into 40-acre plots
for sale at $2 an acre. Successive administrations encouraged the westward
movement of pioneers, a policy culminating in Abraham Lincoln’s Homestead
Act of 1862, which enabled a settler to claim 160 acres of wilderness as
property by building a cabin and ploughing a few acres. By the end of the
20th century, about 70 per cent of US families owned their homes.

Communist leaders were aware of the influence that landownership could
exercise on social values, too. Lenin knew that poorer Russian peasants
wanted to emulate the richer by employing labour to help them work the land.
So not only was private ownership abolished after the 1917 revolution, but
Lenin also attacked any farmers who behaved as if it still existed.
“Ruthless war must be waged on the kulaks! Death to them!” he ranted in
1918. To create the conditions for a socialist consciousness, he and Stalin
killed or starved to death some 20m peasants in the 1920s and 1930s. Aiming
at the same goal in China 30 years later, Mao accounted for 30m more.

In the last half of the 20th century, the cold war brought private and
communist property into competition. Though it was partially hidden by
rhetoric and nuclear brinkmanship, the cold war was really a battle to
create either socialist or capitalist societies in Africa, Asia and Latin
America by redistribution of land. The most notable communist success came
in Cuba, where Castro nationalised all private property. But capitalists
could point to Japan and Taiwan, where American agricultural economist Wolf
Ladejinsky expropriated farmland from feudal landlords and transferred it as
property to peasants. That radical creation of a landowning class is often
cited as the foundation of the subsequent industrial boom in the far east.
Not only did the programme spread wealth and self-reliance among the new
owners, but their children became the entrepreneurs of the Asian tiger
economies.

In 1979, Iran became the first important country to withdraw from the
east-west property struggle. After the Islamic revolution the new government
nationalised its dry, semi-
desert land but, unlike the Soviet Union and China, allowed those who worked
the soil to own the produce. This was the classic pattern of peasant
farming: to have property in what was produced, even to own occupancy of the
soil, but not to own the land itself. Throughout history it is a pattern of
landholding associated with conservative values.

Nonetheless, throughout most of the latter half of the 20th century Marxists
and capitalists remained convinced that the right pattern of ownership could
provide the basis for their ideal societies. It was a line of reasoning that
led Michael Heseltine to describe the Conservatives’ “right to buy” policy
in 1980—which transferred an estimated 2m homes from public to private
ownership-—as “one of the most important social revolutions of the century.”
And by the end of the 20th century, the collapse of communism in the Soviet
Union seemed to prove the superiority of individual ownership. The World
Trade Organisation carried the sanctity of the right of private
ownership—even in areas such as knowledge, music and images—into the deepest
forests and remotest deserts where custom still obliged people to share
useful information. The very universality of private property made it
difficult to imagine a superior alternative—until economies exploded under
the impulse of irrational exuberance.

***

On 1st October 2008, a sheriff arrived at the door of 90-year-old widow
Addie Polk of Akron, Ohio. He was there to serve a foreclosure writ on her
home. Addie and her late husband, a worker in a tyre factory, had bought
their white clapboard house in the 1970s. But a succession of brokers later
persuaded her that she could pay for healthcare by taking out mortgages on
the property. The last of these loans, for $45,620, was repayable in 2034,
when she would be 116 years old. But Addie Polk had found herself unable to
keep up the payments and, despairing at the arrival of the sheriff, tried to
kill herself with a handgun. (She survived, only to die later of unrelated
causes.)

She was not alone in her desperation. Hundreds of thousands of US homeowners
(and millions across the world) faced the same threat of losing the roof
over their heads. But Polk fell victim not just to mortgage sharks, but to
her government’s policies. By lifting financial regulations on home loans,
the administrations of Bill Clinton and George W Bush wanted to make
homeownership available to people on low incomes. The seemingly endless rise
in the value of their homes was meant to eventually pay off their mortgages.

But few people appreciated that the global boom was built upon a fundamental
disparity: between the way land was owned in the west on the one hand, and
in China on the other. Rising property values in the capitalist societies
powered expansion in their consumer economies. US GDP alone ballooned from
$960bn in 1970 to $8.7 trillion in 2005, a staggering $6 trillion added in
the last decade alone. Yet in China, the lack of individual property rights
drove as many as 100m peasants to work in urban factories, producing
consumer goods for western markets. Since their savings could not be
invested in property at home, they had to be placed abroad.

Out of this disparity grew the edifice of global finance—around $2 trillion
in Chinese savings invested in US treasury bonds, which in turn kept
interest rates low, mortgage lending high, and economies growing. In 2007,
the growth in derivative securities (both in foreign exchange and mortgages)
topped out above $600 trillion. The very size of this financial colossus
almost obscured the fact that it depended on property. Only when the
subprime mortgage market began to disintegrate in summer 2007 did the basis
of the boom become apparent. In 1929, the collapse of Wall Street triggered
the crash. In 2008, it was the collapse of property markets, and it is there
that the most serious consequences are felt.

In 2004, just about when Addie Polk’s last mortgage was being issued, Yang
Wu, an excitable, stubborn restaurant owner living in central China’s
megacity, Chonqing, began to build a redbrick house in the Hexing Road. It
replaced the family’s dilapidated wooden home, and according to its owner
was as smart as any in Shanghai or Beijing. Three years later, a
semi-official development company, Chongqing Shengbo Real Estate, with plans
for a shopping mall, slapped a compulsory purchase order on Yang Wu’s house
and demanded he move out. His neighbours accepted compensation and left, but
in March 2007 Yang Wu refused to go, even when diggers gouged out a
30ft-deep trench around his house.

***

The image of Yang Wu’s home precariously perched on a pillar of earth (see
p59) attracted media coverage across the world and widespread sympathy. But
his demonstration had a broader resonance. Although China’s land is
nationalised, as a city dweller he owned a 40-year leasehold on his home,
the norm in urban China. Indeed, the real purpose of his protest was
probably to secure greater compensation, but the timing offered an
unexpected glimpse into what may be China’s future.

Just weeks earlier, the National People’s Congress had voted to extend
similar property rights to the country’s 750m peasants. The new proposals
were prompted by the need to keep China’s huge population employed, and the
economy growing at above 9 per cent a year. Even before the crash it was
obvious that foreign demand for Chinese goods was not sufficient to keep the
factories working. Giving the rural population property rights would create
capital value in the land they farmed, and in turn stimulate the country’s
own consumer economy. “China must increase domestic demand and not just
depend on foreign trade,” Wen Tiejun of the People’s University in Beijing
argued at the time. “If you can invest in rural areas and increase the cash
income of people, you can increase domestic demand.” As Zhu Keliang of the
Rural Development Institute in Seattle pointed out in April 2009: “Imagine
what an increase in income for 750m people, when given secure land rights,
would mean for the global economy.”

Yet despite the endorsement of President Hu Jintao, the property rights
policy has triggered deep ideological opposition within the Communist party.
A China of 750m stroppy Yang Wus would overturn the basis on which Mao
Zedong built the 1949 revolution. And so, for the time being, the plan
remains sidelined. Instead, China has relied on an aggressive course of
capital investment and the extension of personal credit to reflate its
economy. But with demand in the west stagnant for the foreseeable future,
the case for reform will remain. In practice, it may already have succeeded.

The example of Israel suggests that China is on a course from which there is
no retreat. Israel nationalised nearly all its territory at its foundation
in 1948, following the socialist instincts of David Ben-Gurion, its first
prime minister, and an injunction in Leviticus (“The land shall not be sold
for ever: for the land is mine; for you are strangers and sojourners with
me”). Since then, the land has been owned on 49-year leases, and
theoretically reverts to the state at their expiry. Once the first leases
began to run out in the late 1990s, however, the practice proved very
different. So entrenched had the sense of individual ownership become during
the interval that the state has had no option but to renew leases for
another 49 years. As Joshua Weisman, professor of property law at
Jerusalem’s Hebrew University, points out, leasehold over 98 years becomes
almost indistinguishable from outright ownership.

Given human nature, a similar pattern may be expected among China’s urban
dwellers in the next decade, when leases issued since Deng Xiaoping’s
reforms in the 1970s come up for renewal. Once that pattern of leasehold
merging into freehold spreads to the countryside, it will in the long term
not only create an unprecedented amount of capital, but a new social
consciousness and the need for political structures sympathetic to
property-owning interests.

Similar pressures will operate in the west. It is probably too late to
reverse the decision to put the needs of the financial sector before those
of a property-owning society, but it represents an error of historic
proportions. Indeed, meeting the bill for the staggering infusion of credit
to our financial institutions will see much of the wiser social engineering
of the past 30 years reversed in the next decade. In England, the number of
people who own their own homes has fallen, according to statistics published
in September by the department of communities and local government. This put
homeownership at 68.3 per cent in 2008, down from 70.9 per cent in 2003. On
present trends, homeownership rates in Britain could drop significantly
within ten years.

Yet if we learn anything from our history, it is that our social order
follows the way we govern our property. Whatever the demands of the City, a
future David Cameron government would be wise to find ways to support
property owners against their mortgage-lenders, and favour both ahead of the
financiers who lent to them in the first place. Just as the government of
China is waking up to the social power of property, it would be tragic if
the British government forgot how the long-term social gains of protecting
ownership far outweigh the short-term financial cost. For good and ill,
Britain’s society and its economy have formed themselves around the concept
of private, exclusive property. The new slogan must be this: “It’s the
property, stupid.” The rest will follow.
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