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Who Owns Canada's Natural Resources? Originally They Were for the Common Use of All. This Democratic Policy Is Disappearing under Liberal Capitalism.
Natural Resources: The Struggle between Democracy and Liberalism
by John W. Warnock
December 15, 2010
For thousands of years human beings lived in small communities, commonly referred to by anthropologists as “band societies.” These were all egalitarian, democratic societies, based on the principles of reciprocity. Given this long history, one could argue that this is the normal social structure for human beings. The basic moral principles of these societies was altruism and solidarity. Land and natural resources were common to all.
In these democratic societies there were differences in personal property, but there was no concept of private property in the means of production, which is the standard today. Everyone had access to natural resources and was guaranteed adequate food, clothing and shelter. Customs, rules and moral codes were established on the basic democratic principle of utilitarianism. Political decisions were made by popular participation. Anthropologists have noted that in these societies, sharing among the group increases when there is a shortage of food or a threat of starvation.
In all these societies, land and natural resources belong to the people as a whole. The different communities often had territories where they operated, recognized by others, but even here there was no strict territorial notion of ownership. These band and tribal societies have been held up as the earliest examples of democracies. The fundamental value was the recognition of the equal worth of all human beings. (See Fried, 1967; Hindess and Hirst, 1973; Lewellen, 1992)
Unequal access to land and resources
Change started to come with the neolithic revolution, the development of modern agriculture. Through the use of improved staple crops, the introduction of draft animals, and the use of irrigation, those who farmed the land were able to produce an economic surplus. The storage and distribution of cereal grains, in particular, allowed the development of a social division of labour.
For the first time we see the creation of social classes, the fundamental division between the political, religious and economic elite, who had some form of special use rights over land and resources, and the majority who were the producers: serfs, slaves, peasants, peons, independent farmers who paid a tax, those under debt bondage, etc.. It was common that the producing class was forced to surrender 50% of the crop that their labour had produced. This was called “rent,” surrendered supposedly for the right to have use of the land. However, in reality this was a system of appropriation of the “surplus labour” from the agricultural producers, the surplus over and above what was necessary for the survival of the producing family.
In these new hierarchical societies, where the farming classes were grossly exploited and often faced starvation, the political state became necessary in order to enforce the social division of labour. With clear class divisions, laws and rules were established and implemented by the dominant classes. The military, the penal system, and the death penalty became central characteristics of these states where gross social inequality was the norm. Rebellions by the producing classes had to be contained. But while access to land and resources was unequal, the concept of individual ownership was virtually non existent. As territorial states were developed, land and natural resources became state property, to be allocated by the ruling political elite. (See Harris, 1977; Balandier, 1970; Krader, 1968)
After the fall of the Roman Empire, the decentralized political system led to the development of the feudal system of ownership and use of land and other resources. Local lords and tenant farmers had rights to land; the serfs paid a rent to their landlords, in the form of products, labour time and then later money. But there was no private ownership of land, and serfs had rights to the use of land.
The shift to private ownership of land and resources came during the early rise of capitalism, the period commonly referred to as mercantilism, roughly between 1500 and 1750. Mercantilism was characterized by the rise of the territorial state, the development of the modern state political system, and the expansion of European imperialism and colonialism around the world. The territorial state became the new owner of all resources, and the absolutist kings and queens granted land and other natural resources to privileged individuals.
Land rights and imperialism
For Canadians, what is most important is the changes that were occurring in England. The Norman invasion of 1066 began the process of establishing a more centralized political order. William the Conqueror laid claim to all of England by the right of conquest. As the absolute sovereign, he then allocated all the land of the country to a special group of aristocrats. These lords in turn granted land use to other subsidiary lords, then down to the tenants who actually did the farming. Peasants had the right to land use, for which product and services were rendered as rent. But there was still no concept of private ownership of land; lords could not buy and sell land and resources as if they were private property. The Crown still held absolute property rights.
However, the landlords strove always to increase their control over the land. Parliament originated as an instrument by which the landlords used their political power to gain the right to private ownership of land and resources from the absolute monarch. By the 17th century men with property had used their complete control of parliament to establish a new legal system which granted them private property rights. Whereas the feudal system had been based on relationships between persons, by the 17th century this had been replaced by the capitalist concept of the exchange of things. (Hindess and Hirst, 1975; MacPherson, 1962; Vogt, 1999)
The other major development in Europe over the mercantile period was modern imperialism and colonialism. England and the other major European nation-states embarked on extensive military assaults around the world. This involved not only the subjugation of the majority of the people of the world but also the imposition of absolutist colonial regimes. In all the conquered areas of the world, which included almost all of the non-white and non-Christian peoples, the colonial powers ended all systems of common ownership of land and resources. As one political economist noted, these acts of piracy “signalised the rosy dawn of the era of capitalist production.” Not only did the imperial states seize all land and resources, individuals and their families arrived from Europe bent on grabbing “free land” from the indigenous populations. (See Weaver, 2003)
Those of us who live in western Canada know this from our own history. On May 2, 1670 the British Crown created the Hudson Bay Company and gave the company “the sole trade and commerce of all these seas, straits, bays, rivers, lakes, creeks and sounds ... that lie within the entrance of the straits, commonly called Hudson Straits and the possession of all such lands and territories not already possessed by other subjects or the subject of any other Christian prince or state.” The mercantile corporation was declared to be the “true and absolute lords and proprietors of the entire territory.” It mattered not who lived on this land.
Liberalism and the right to steal land and resources
The European monarchs had no problem justifying their conquest and domination of other peoples around the world. These people were described as barbarians, were not Christians, and were by definition inferior. The Europeans were bringing Christianity and civilization. It took a while for the Church in Rome to determine that the non-white people around the world were actually human beings. The Church then decided to end the practice of indiscriminately killing these people and instead chose to turn them into slaves and serfs to work in agriculture, forestry and mining.
But some English capitalists felt the need for a moral justification for seizing other people’s land and resources and ending their freedom. The most influential defence of the new capitalist imperialism was set forth by John Locke (1637-1704), generally considered to be the founder of liberalism and liberal political economy. He set down the ideological justification for individual rights, the right to own private property and the justification for imperialism and colonialism in The Second Treatise of Government (1690) and Some Considerations of the Consequences of the Lowering of Interest and Raising the Value of Money (1691).
Locke argued that England had the right to seize land abroad as their settlers and business enterprises would be productively using the land and resources. The land not under cultivation by the indigenous population was considered “waste land” and could be seized at will. But Locke went farther in advancing the liberal view of private property. Since the indigenous populations of North America cultivated their lands in a collective or democratic manner, Locke argued that they had no claim to it. Under the principles of liberalism, those who farmed could only establish a legal claim if the land or resources were used on an individual basis; it had to be enclosed and fenced off by individuals. Since this was not the case in North America, new local governments, enterprises and settlers were free to take any land that was being used by the indigenous populations.
Equally important to establishing the liberal capitalist view of private property, Locke argued that those individuals and enterprises which seized land and natural resources did not require the consent of others or the community in general. North America was “wilderness” or “vacant space” and any use of the land by colonizers would be a beneficial improvement. He also stressed that it was not necessary for those who seized this land and resources to pay any compensation to the general public. Furthermore, the indigenous populations could only claim the right to use the land and resources if they were selling their product on the world market.
Finally, Locke argued, government was needed to establish rules to defend the rights of the owners of private property. This is the first task of governments. It is only logical that those who participate in politics, those who can be classed as “citizens,” who can vote and hold a seat in parliament, is limited to men who own property. (Arneil, 1996; Macpherson, 1992)
The democratic reaction
The traditional liberal view of ownership and control of natural resources by a small group of men did not gone unchallenged. Over time we have seen the struggle to revive the democratic tradition. In the political area, men without property mobilized in a broad fashion to achieve equal rights with those who had property and the right to form trade unions. Those who were slaves struggled to achieve freedom. Non-whites fought to obtain the same rights as whites. Colonized peoples took up arms to achieve independence from the European empires and establish their own governments. Women continue to struggle to be recognized as persons with equal rights with men.
As democracy spread across the world the majority who did not own private property in the means of production took political action, formed political parties, eventually formed governments, and pushed for economic and social rights and greater equality. Part of this broad democratic struggle has included the demand that natural resources belong to the people as a whole. Elected governments, with sovereign power, can redefine ownership and how resources are developed and used. It is clear that in the period since the rise of capitalism and liberalism, the central political struggle around the world has been between the supporters of the liberal order of privileges for the few and those who support the democratic value of equal rights for all.
Arneil, Barbara. 1996. John Locke and America: The Defence of English Colonialism. Oxford: Oxford Clarendon Press.
Balandier, Georges. 1970. Political Anthropology: London: Allen Lane the Penguin Press.
Fried, Morton H. 1967. The Evolution of Political Society. New York: Random House.
Harris, Marvin. 1978. Cannibals and Kings: The Origins of Cultures. New York: Random House.
Hindness, Barry and Paul Q. Hirst. 1975. Pre-Capitalist Modes of Production. London: Routledge & Kegan Paul.
Krader, Lawrence. 1968. The Formation of the State. Englewood Cliffs, N.J.: Prentice Hall.
Lewellen, Ted C. 1992. Political Anthropology: An Introduction. London: Bergin & Garvey.
Macpherson, C. B. 1962. The Political Theory of Possessive Individualism: Hobbes to Locke. New York: Oxford University Press.
Vogt, Roy. 1999. Who’s Property: The Deepening Conflict Between Private Property and Democracy in Canada. Toronto: University of Toronto Press.
Weaver, John C. 2003. The Great Land Rush and the Making of the Modern World, 1650 - 1900. Montreal: McGill-Queens University Press.
Note: This essay appeared as an appendix to the CCPA-SK paper, The Potash Industry: Who Benefits?
What Is Economic Rent? How do we collect economic rents from non-renewable resources?
by John W. Warnock
The concept of economic rent used in the petroleum and mining industries today is that set forth by David Ricardo in 1817. If all mines have the same degree of ore concentration, and the same costs of production and transportation, then the value of the extracted resource would depend only on the quantity of labour needed to bring the resource to market. Following from his argument on rent in agricultural land, Ricardo’s thesis is that the resource extracted from the poorest mine, sold in the market, and returning the normal rate of profit will yield no rent. Rent only comes from those mines which have the higher grade of ore or mineral fuel. Rent is a surplus income over and above normal profit.
An example of this would be uranium. Saskatchewan has 31 percent of world uranium production, by far the highest grade ore deposits, and modern efficient mining operations. Under free market conditions, it should bring in a high level of economic rent. Markets have been somewhat limited because of uranium’s key role in nuclear weapons; other governments maintain extensive subsidies to less efficient operations for the purpose of national security controls. The domestic nuclear industry is also limited. Nuclear power plants are very expensive to build, and because of the hazardous nature of the entire nuclear fuel cycle, there is strong opposition around the world to further development. Nevertheless, the profit margin of the Saskatchewan mines should be high. This may be the case, but we do not really know. A high level of Ricardian rent extraction in Saskatchewan is definitely not reflected in the provincial royalties and taxes the corporations pay. (Anderson, 1987; Whillans, 1997; Pembina Institute, 2001; Prudhomme, 1998)
Capturing economic rent
It is very difficult to determine the economic rent for the extraction of mineral resources in Canada’s political economy. Natural resources are in theory owned by the public as a whole and managed by our elected provincial governments. It is presumed that the public as the owners of the resources should get a return when they are privatized. The mining and fossil fuel industries are dominated by large trans-national corporations which are granted licenses to extract and use natural resources. There are many different resource royalty systems which vary between provinces, and they vary between projects in the same industry. However, there are a few basic approaches to rent extraction that are in use today. (See Gunton and Richards, 1987)
First, a government can try to capture some of the economic rent through a flat rate which is usually a quantity-based royalty. This was the system used originally in the coal mining industry. A flat rate per tonne was charged. This approach does not take into consideration ore grades or the costs of production. The reasoning behind this approach is the belief that when a private company takes a natural resource from the public for its own use and profit they owe the people some basic return. The purchase of the raw material should be considered a cost of production. However, under the flat rate system inflation reduces the value of the royalty. This system is not widely used today, although it is still common for construction materials. Other similar royalties include a property tax, usually a percentage of the value of the land for mineral or oil extraction, or a lease fee, an annual fee on land leased for mineral purposes. These are used in Saskatchewan.
Second, an ad valorem royalty is widely used, usually a percentage of the sales price or gross revenues that the operator receives. This approach should be easy to calculate. However, it is very difficult to determine when “sales” are in fact intra-company transfers by trans-national corporations. These “sales” are not market transactions but administered prices. This situation is the norm in Saskatchewan.
Third, a net profits royalty is used. This also takes the form of an ad valorem rate, usually a percentage of the profits, which can increase as the rate of profit increases. This is the approach favoured by the private corporations and has been widely adopted in Saskatchewan in more recent years. This tends to result in low royalty payments, sometimes approaching zero. Michael Cartwright, a U.S. specialist in this field, has commented that “there are virtually no buyers for this type of royalty [in the United States] because of the creative accounting that the mining operator can use to depress the royalty payment account.” When the Blakeney government enacted a net income royalty on potash, the private corporations refused to provide data on their operations. This provoked the NDP government into nationalizing part of the industry. (Cartwright, 1999; Gunton and Richards, 1987)
Fourth, a government can introduce a marketing board with monopoly power to purchase all the output from the corporations and market the product. This approach gives the government additional power when dealing with large trans-national corporations. It can increase the ability of the government to assess the real costs of resource extraction. Ross Thatcher’s Liberal government set up the Potash Conservation Board in 1969, a marketing board with monopoly power to sell potash. The government was trying to capture a royalty in a situation of over investment and excess capacity, but it was also trying to create a cartel which could set prices and production quotas. In 1973 Peter Lougheed’s Conservative government in Alberta created the Petroleum Marketing Commission, a Crown corporation which had broad control over the production and marketing of oil. It held ownership of all oil in the province until it was sold to the consumer. It was quite successful in capturing economic rent. (Warnock, 1974; Richards and Pratt, 1979)
Finally, there is the use of the state through joint ventures with private corporations and the use of state-owned corporations. Through a number of joint ventures between the Saskatchewan Mining and Development Corporation (SMDC) and private corporations, the government of Saskatchewan was directly involved in the extraction of uranium and was able to determine the real costs of uranium production. Through the Potash Corporation of Saskatchewan (PCS) and the Saskatchewan Oil and Gas Corporation (Sask Oil) they appropriated all the rent from some resource extraction and paid it into the provincial treasury.
PEMEX as a case study
A very good exampe of the benefits of state ownership can be seen in Mexico. Petroleos Mexicanos (PEMEX), a state owned enterprise, has had monopoly control over the extraction, refining, processing and distribution of oil since 1938. The government of Lazaro Cardenas, facing a capital strike by the foreign-owned oil companies, responded by nationalizing all of them. PEMEX has been criticized by mainstream economists as inefficient, hiring too many workers, hiring too many high paid executives, and being under the control of patronage. These criticism are certainly true. But it is the largest employer in Mexico, pays the highest wages and salaries, and over the years has provided around 40 percent of all federal government revenues. Students going to state owned universities in Mexico pay no tuition. This is provided by grants from the federal government, economic rent from the extraction and sale of oil. The vast majority of the people in Mexico are determined to keep state ownership of this industry. State ownership of the oil industry is entrenched in the constitution. The economic rents stay in Mexico, and they do benefit ordinary people. However, this approach to capturing economic rent is out of fashion in the new era of globalization, free trade and the private enterprise economy. State ownership certainly benefits the population as a whole, but not private investors. (See Teichman, 1988)
The case for public ownership
The case for public ownership of natural resource extraction industries was advanced by Eric Kierans in his report on the mining industry to the government of Manitoba in 1973. He argued that it is extremely difficult to devise a system of capturing economic rents when the mining industry is dominated by large trans-national corporations. Even when there is some revenue in the form of royalties, it is usually not enough to “finance the costs of the highways, schools, hospitals and other services that are required to make a new community livable.” With the wide range of subsidies found in mineral extraction, “the social costs will exceed the returns and the resource development, far from yielding a net income to the province, becomes a burden on the whole community.”
Kierans argued that “it is vital to the growth and development of a province or nation that it retain these super-returns [the Ricardian economic rent] as a means of ensuring its growth and lessening its dependence on others.” The former president of the Montreal Stock Exchange went farther:
"To be satisfied with the new jobs created and to forego the surpluses and profits inherent in the development of its own endowment is hardly the mark of a strong and mature government. It accepts the role of “hewers of wood and drawers of water” for its people when they are capable of much more. That role provides wages and salaries and little else. The profits, which direct and finance the future, belong to those who have been invited in, and this capital formation . . .does nothing for [government] priorities in the fields of agriculture, health, education or whatever. A developing nation, a province or a colony may be rich in its beginnings but when that wealth is depleted through the poverty of its policies, nothing remains of the original endowment but the instability, dissatisfaction and political unrest arising from poorly conceived policies. "(Kierans, 1973)
Note: This is an extract from John W. Warnock, Saskatchewan: The Roots of Discontent and Protest. (Montreal: Black Rose Books, 2004. Chapter 11: "The Struggle over Resource Royalties."