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September 22, 2005


In Commons we trust: how an old idea could be depoloyed to protect our shared inheritance

Let’s assume that, as a society, we’re morally bound to preserve vital shared inheritances for future generations. How might we go about doing this?

One way to think about this question is to consider what you and your spouse would do if you were wealthy parents. Most likely, you’d call a lawyer, and she’d establish a trust, or perhaps separate trusts for each child. You’d endow the trust(s) with specified assets, either now or upon your death. And you’d appoint a trustee — perhaps a bank — to manage the assets on behalf of your beneficiaries.

Well, why can’t we do that as a society? Why can’t we use the same tools for passing on shared inheritances that we use for passing on private inheritances?

In fact, we can.

When we think of economic institutions, the one that first comes to mind is the corporation. Its well-known algorithm is maximize return to capital. But there’s another time-tested institution that has different algorithms. That institution is the trust.

A trust holds and manages property for one or more designated beneficiaries. The essence of a trust is a fiduciary relationship. A trustee never acts in her own self-interest; she’s legally bound to act solely on behalf of beneficiaries.

Trust principles apply not only to private trusts set up by parents and grandparents; they extend to pension funds, charitable foundations and university endowments. They also apply to entities like the Nature Conservancy that own land or conservation easements in perpetuity.

Trusteeship isn’t the same thing as stewardship. A steward is someone who cares for an asset, but whose obligations are voluntary and vague. A trustee, by contrast, has strict legal obligations. Trusteeship is thus a more formal and rigorous responsibility than stewardship.

The rules of trust management have evolved over centuries of common law. They include:

  • Managers must act with undivided loyalty to beneficiaries.
  • If beneficiaries span many generations, managers can’t favor one generation over another.
  • In many cases, managers must preserve the corpus of the gift. It’s okay to spend income, but not okay to diminish principal.
  • Managers must assure transparency by making financial information available to beneficiaries.

These rules are enforceable by the courts. The basic mechanism is that an aggrieved beneficiary can bring suit against a trustee, who must prove she acted prudently to carry out the trust’s mission. In the case of charitable trusts, a state attorney general may bring suit.

If we were to design an institution to protect pieces of the commons, we couldn’t do much better than a trust. The goal of commons management, after all, is to preserve assets and deliver benefits to multiple beneficiaries. That’s what trusts do, and managing trusts isn’t rocket science.

Trusts have advantages not only over profit-maximizing corporations, but also over government agencies. Consider, for example, the Federal Reserve Board, created in 1913 to manage the nation’s money supply. The Fed is a hybrid entity. Technically, it’s a corporation whose stock is owned by member banks, but unlike normal corporations, its governors are appointed by the President to 14-year terms. In effect the Fed is an autonomous trustee of our currency.

The genius of the Fed is that its governors can make tough economic decisions without risking defeat at the polls. In particular, they can raise interest rates, which means higher borrowing costs for businesses and higher mortgage and credit card payments for millions of voters. No politician wants to do this, and thanks to the Fed, none have to.

One can imagine similar entities for managing carbon and other pollutants. Their governors would serve long terms and have a fiduciary responsibility to future generations. They could make tough decisions — such as reducing carbon emissions, which necessarily raises gasoline prices — without committing political suicide. Such entities might appeal to elected politicians precisely because they permit a shifting of responsibility and blame.

It might be argued that, by shielding such entities from direct political influence, we’d make them undemocratic. The same could be said, however, for our courts. The fact is there are certain decisions, both economic and judicial, that should be shielded from politics and markets. It’s also necessary to express the needs of future generations, ecosystems and non-human species, something neither politics nor markets do well. Trusts, however, can do this. In that sense they’d expand, rather than constrict, the boundaries of democracy.