A Bird's Eye View of Capitalism and how to address it

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No educated and objective person can argue that the planet and humanity is not in a lot of trouble. Paradoxically, even though there is a general consensus on what the problems are, there are no clear proposals that seem likely to be implemented in the real world. The problems are wide and deep – a vertiginous imbalance in wealth and income between the top 1% and the bottom 50% with the middle class being eviscerated in the process; climate change and species extinction; plastic in the ocean as well as the acidification of the oceans; unaffordable housing; loss of genuine participation by citizens in decision making, with their role being supplanted by corporations; an increasing invasion of personal privacy by the state; and so on. This article is an attempt to give a ‘bird’s eye view’ of the underlying structures and practices that are the causes of these ills. Many people make the mistake of attempting to deal with our social ills without understanding - and therefore, without addressing - these structures and practices.

 

A bird’s-eye view means that fine details cannot be elaborated on. Therefore, many of the assertions made here can only be substantiated and elaborated on in detail in the other articles in this website.

 

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Capitalism in a Nutshell

As explained in the homepage, the underlying problem in Capitalism is that people with great wealth make an income without contributing to the production of goods and services; and at the same time they get even wealthier, which in turn enables them to make an even larger amount of unearned money in the future. Such money made (but not earned) we call unearned income. Ultimately all unearned income derive from a small number of assets. These assets and their respective unearned incomes are:

 

Bank licence: interest on loans

Share owned corporation: share dividend

Land: land rental

Natural resources: income from sale of resources

 

The private ownership of these assets give their owners great financial and political power, much of which is not obvious at first sight. This power is used as leverage in the political sphere to subvert the principle of government of the people, by the people, for the people.

 

The very wealthy, i.e. those who hold a lot of the above assets, make unearned income but only need to spend a small portion of that income. They use the money left over to buy even more assets, enabling them to make an even larger amount of unearned income. (See the first cartoon image on the home page). This is called a positive feedback, and there is no natural end to this process until either society breaks down or the natural world breaks down. All unearned income is extracted either from those who earn their income from producing goods and services; or from the natural world in the form of what are called externalities. I shall show that the assets listed above should be commonly owned.

 

 

Why private banks should not exist

The naïve perception of banking runs something like this: people have money that they are not using. They place it in a bank as a deposit which in effect is a loan to the bank. The banks aggregate these loans/deposits and then reloan the same money to others who want to access it as a loan. Through the interaction of the supply of money by lenders and demand by borrowers, the level of interest rates arises. This picture is how the banking system would like people to imagine what happens in banking – but it is pure nonsense; the banking system is nothing like this. One can verify it very quickly by observing that depositors (lenders to the bank) can access their money as easily as borrowers. The same money cannot be accessed equally by depositors and borrowers. What actually happens is that banks just create new money in their ledgers (computer ledgers that is) and this ledger money is every bit as real as paper money, as they are convertible one to another. This process of creating new money out of nothing is called credit creation. It gives the banks two immense sources of power. The first power is easily identified – it is the enormous amount of interest they generate from their loans. The second has barely been noticed by critics of the capitalist banking system, and that is the ability by banks to dictate the terms and conditions of their loans. As will be shown later, this second power allows for the existence of the share owned corporations as well as the practice of private ownership of land and natural resources.

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Credit creation by commercial banks accounts for perhaps, on average, 95% of our money supply (the other 5% being notes and coins issued by the central banks) [1]. In the U.K. the figure is 97%. The banks charge interest on the money they create out of nothing. If one borrows a huge amount for a home loan and pays back twice what one has borrowed (on account of interest payments) before taking title to the property, then the bank has just made the equivalent of the original value of the property by doing absolutely nothing apart from a bit of paperwork. Without examining any monetary figures, one can imagine the interest on all the loans made by banks to be a whopping amount of unearned income.

 

If the whole of society (which I will refer to as the commons) comes to the realisation that credit creation, much like the printing of notes and coins, is a monopoly right of the commons, then private banks would quite rightfully and ethically be denied the right to credit creation - which effectively means that they will cease to exist. All the interest accruing to credit creation loans will  now be commons/public revenue – a world revolution is there in this simple thought. All the iniquities and skulduggery associated with banks as we know them vanish if we claim credit creation as a collective right.

 

This form of banking which I choose to call commons banking is not simply capitalist banking practices plus common ownership. The entire process of loan making will be put on an altogether different footing. I explain what commons banking entails here. Please have a look at this link. It is nothing like any kind of banking practised before, and the reader may need to familiarise herself with it to understand what follows below.

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A separate article which is also titled Why private banks should not exist explores the very nature of money, and shows that the the creation of money is a the sole right of the commons.

 

 

How share-owned corporations can be replaced with cooperatives

One of the practices I outline in the link on commons banking above is that, unlike private banks, loans are made without requiring collateral. Cooperatives have not made much inroad into becoming the corporate structure for larger corporations in our society; they are a miniscule part of our economy compared to the share owned corporations. The reason is that, in order to thrive, cooperatives need a commons bank that does not require collateral when advancing a loan. Why? When a capitalist bank asks for collateral in its loan application, it naturally makes the collateral provider want to, or need to, become owner of the corporation. The assets of the collateral provider is understandably on the line if things go belly up. So to get a loan, someone has to put up collateral, and that person becomes an owner in one way or another. When a company is privately owned in any way, it puts the workers in a situation of having to work for wages, while the owner claims the profit left over (as a kind of reward for risking his collateralised asset).

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Some people think workers-owned enterprises resolves this conundrum. Consider what generally happens here: the existing co-owners have invested some of their own capital; if someone new comes into the company to work as a co-worker and if that new person has no money to buy a share in the company, then he or she more or less falls into a wage earning situation, and/or does not have the same voice in policy decision-making. In other words, to be a full co-worker in a company, a person has to ‘invest’ money more or less in the same way that capitalists have to buy into their ‘investments’.

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There is only one way that workers can truly work in a company in a cooperative manner without having to buy into it, and it is as follows: The company, whether at its initial start-up or on an ongoing basis, has access to loans that do not require collateral. No one person has assets on the line if things do not go well. Therefore no person or groups of persons, has undue power in the company’s decision making on account of ‘ownership’ of the ability. All workers are remunerated not by wages but by a share in the profit (a subject I discuss in What does a profit-sharing cooperative look like?). Policy decision making is arrived at cooperatively (which may not be the same as ‘democratically’) because there are no owners – not even owner-workers – to deal with.

One should note carefully: the above process does not happen if one cannot access collateral-free loans. A bank that can offer collateral-free loans hardly exists in the capitalist economy, so that one can say: without a proper banking system, cooperatives will never thrive.

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If the commons deny private entities the right to credit creation and the commons become essentially the only bank in town, then we can also eliminate the share owned corporations simply by the conditions we place on loans. If a corporation approaches the commons for a large loan such as building a large factory or making roads, then the commons bank would require the entity to be a cooperative. Why would the commons loan money to an entity where the owners sit back and skim off the cream (profit) after paying their workers as little as possible? Why make such a loan when the cooperative is much more productive, efficient and transparent?

 

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The iniquities of the share owned corporations are legion: bribery of legislatures and watchdog organisations; defrauding the public; hiding the dangers and side effects of their products; conspiring to overthrow governments; conspiring to bankrupt nations in unrepayable foreign currency debt; killing off the public medical system to make it a profit-making industry; manipulating public perception through ownership of, and sponsorship through advertising, with the media; pushing sugar into our manufactured food while fighting against sugar taxes; and so on. Rather than tackle these issues one by one (and against the reach of these corporations into the political life), we just need to eliminate them by taking control of credit creation and creating a commons bank.

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Why land needs to be commonly owned – and how it can be commonly owned

Land is not a commodity that should be bought and sold on the free market. It cannot be manufactured as demand for it increases. It is a creation of Nature, and not of human agency. How does it come about that a person at some point puts down a bit of money (which is an artificial thing) and then for eternity, he and his descendants claim the sole right to use of the land and to a rental income from it? When the whole of society is in on this land grab and a whole new generation comes up, many of whom were not lucky to inherit land, the older generation which bought land when it was more affordable, lords it over them with absurdly high rental charges. And the banks – well, they make a bonanza with loans (with money manufactured out of nothing) of such huge amounts that many people can never pay them off.

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(Broadly speaking, as shown in the graph below, land prices increase in tandem with the total money supply, such money supply being credit creation money that banks have issued. In other words, one can conclude that land prices are increasing in lock step with the amount of money that banks have created.)

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The shocking issue of homelessness and unaffordable housing is fairly well covered and in-your-face for everyone so it needs no exploration here. There are no plausible and effective fixes for this ongoing crisis. What needs to be admitted is a solution that society is either too fearful or unimaginative to address: the termination of private ownership of land.

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This suggestion brings about a lot of reflexive fear in many people so one has to have proposal for a new form of relationship to land that can allay this fear. Ultimately all land should be owned by the commons. Private parties can sign a lease agreement whose duration is the longer of either 33 years or the tenant’s lifetime. If the tenant lives more than 33 years, she is guaranteed the right to live there for her whole life. If the tenant dies before the 33 years is up, the 33 year clause allows her children to reach adulthood before they have to vacate the house if the commons wants to take possession of the land back.

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Tenants generally own the improvements on the land which will include dwellings, but also things like landscaping and fencing. If they want to sell the improvements and move on, almost for sure the buyer will be taking over the lease and paying the seller for the improvements. If the commons take back possession of the property at the end of a lease, it has to remunerate the owner of the improvements – the value of which is ascertained by third parties.

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Everyone can get security of tenancy in such an arrangement. No-one takes out a lease and sits on the land waiting for capital gains to happen, so land becomes very affordable (to lease). People may choose to take out a lease, put a dwelling on it and sub-lease it out. However, the commons would probably prioritise it to those who actually plan to live there.

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The question is: how does the commons find the money to buy out private owners? Recall that private banks create up to 97% of our money supply. If we terminate their right to further credit creation and their existing loans are slowly paid back and retired, then the money supply would shrink and that would cause a depression. This requires the commons bank to step in with new loans. Now, instead of loaning money to private parties to buy land, the commons bank simply loans the money only to a single commons land trust to buy land. The loans are set at zero percent interest, and the land rental pays off the loan over time and then becomes a permanent source of commons/public revenue. The land is held in common ownership in perpetuity.

 

Why natural resources need to be commonly owned

We have a major global environmental crisis because many of our key natural resources are privately owned or privately trashed. First and foremost are the fossil fuels – gas, coal and oil. Somewhat like land, it is absurd that natural resources can be privately owned. No-one can manufacture them. Natural resources should always remain in commons ownership. The commons decide if, when and how any natural resource should be tapped into. The process of say extracting and refining a mineral can be contracted out to various private parties (which should be cooperatives) but the commons must always dictate the conditions. Only in this way can we as a global community contain the free for all approach of Capitalism that is doing so much damage to the planet.

 

Again, the commons, if it has taken control of the banking situation, can use the commons bank to buy out existing mineral rights etcetera. We can also (quite ethically and justifiably) starve such owners of mineral rights of future loans.

 

Not many people understand that if we sharply curtail the future extraction of fossil fuels by say political legislation, then the share prices of the oil companies would crash with the consequence of a crash in the entire stock market (cross ownership) and the banking system. While it sounds great to terminate fossil fuel use sharply and transition to renewable energy, one must anticipate such a crash and have in place a commons bank to loan the money to keep the economy going (by say buying out certain share owned companies and transforming them into cooperatives, or just letting the former expire and start to create cooperatives to do the same work.)

 

On the global scene, it should be noted that the raison d'être of the US military (and the CIA and NATO etcetera) is to ensure access to natural resources for western corporations and effectively to steal it from the people of the countries concerned whilst bribing some corrupt local rulers. One has only to study the modern history of the Middle East to see how this has played out with the issue of oil.

 

 

The major problems created by unearned income

All sources of unearned income becomes a cost which is incorporated into the cost of production of goods and services. A business person who takes out a loan and pays interest on the loan has to cover those interest payment costs in the price of her product or services. They become more expensive on account of the interest charges. The same goes for rent and the share dividend for share-owned companies. (Yes, the owners of the company are a cost to production – not the workers; Capitalism has it upside down.)

 

People who work on wages have to cover their own interest charges within their wage demands – either that or do without a certain amount of food and heating and so on. All unearned income is therefore incorporated into general prices as a cost. There may be a number of sources of inflation that is peculiar to a capitalist economy. One is the ever increasing money supply that is caused by the banking system. The other is the ever increasing amount of unearned income that accompanies the increasing prices of shares and land, and increasing size of mortgages. As we become a more productive society with better technology and social infrastructure, prices should actually be falling. Asset price increases and the accompanying increases in unearned income make for modern day inflation.

 

All unearned income also lead to a shortfall in demand of goods and services. If a person has to pay say $400 a week in rent, that is $400 that he does not have to buy goods and services. He simply has to do without. The people (people like himself) who could have provided the goods and services that he might have bought, also have to do without those potential sales. All the people in a similar situation paying rent is creating a huge shortfall in demand for goods and services. Some might have to be made redundant, some may have to quit their business.

 

Unemployment comes about on account of this shortfall in demand. Now this situation would not eventuate if all landlords use their rental income to buy goods and services. Then they would create the demand for such goods and services. But a very wealthy landlord might spend only say 5% of his rental income on buying goods and services; the rest he might use for buying up even more land and sending the price of land up even further.

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One must not imagine unemployment is simply a statistical number of people who don’t have a job according to some criteria established by the government. Everyone who works for a living is forced to charge less for their services or labour because either there is the threat of unemployment hanging over their head, or they are experiencing a lack of demand.

This in a nutshell is the cause of unemployment. The mainstream explanation for the cause of unemployment is woeful and gutless.

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Unemployment also causes a shortfall in tax revenue. While the rest of society suffers from a lack of public spending, this too is something that wealthy capitalists relish because it provides an opportunity for profit-making. How? Because the impoverished public does not have money for say a proper hospital system, the health industry can press its case for privatisation. All kinds of public services and utilities are privatised. Mining leases are given out in order to earn government revenue. Public land is sold off. Publicly funded media face budget cuts. The funding of education is privatised. Major road construction is handed over to private corporations who can then charge toll indefinitely. These are some of the depravities of capitalism which impoverishes society and then capitalises on that impoverishment.

 

Financial crisis

People will have few problems recalling the devastation of the global financial crisis of 2007. This is a short explanation for the fundamental source of all financial crisis. The various kinds of unearned income mentioned at the beginning of this article (interest payments etcetera) can be classed as the primary unearned incomes. A secondary class of unearned incomes exists in the form of capital gains (increase in prices) in various assets – land, shares, and commodities. A financial crisis is created by banks loaning out a lot of money (i.e. increasing the money supply with credit creation) in the hope of making the primary unearned income of interest payments. The borrowers on the other hand are hoping to make capital gains on land, shares and commodities - which are the secondary forms of unearned income. If private banks do not exist, and share owned companies do not exist, and land is commonly owned, none of this will take place. The sheer idiocy of speculative cycles can be put to rest.

 

There is a tertiary form of unearned income which is to be found in options and derivatives. These financial tools make it easier to generate a crash but that subject won’t be explored here. Options allow a speculator (including banks) to make money from a crash in asset prices, so the banks not only generate a speculative boom; they can make money on the bust.

 

 

A new tax system

There is much to be criticised about our existing taxation system but we shall restrict our discussion on this topic on a single issue: the avoidance and evasion of taxes by corporations. Our company taxation system is based on taxing their profits, which is to say, taxing on their income less their costs. Unlike individuals who more or less only get taxed on income, companies can load all kinds of dubious things onto the cost side of the equation – things like depreciation, losses in the stock market and derivative market, currency fluctuations, estimated loss of value in assets, and so on. One of the most insidious practice is that of transfer pricing. This happens when a transnational company sets up a subsidiary in a country. The subsidiary makes a profit and some fictitious cost like royalty payment is made to another subsidiary of the parent company, this subsidiary being based in a low tax rate country like Singapore. If these costs are made high enough, the local company gets away with paying little or no tax.

 

Such practices are a major headache for governments trying to get companies to pay their tax dues. The answer to all these corporate tax issues is extremely simple: tax companies on income and not on profit. So as soon as any company receives any income in the form of a bank transfer of funds, then a set percentage of that income automatically goes to consolidated public revenue. Everyone – corporate or individual – pays the same tax, so that there is no tax advantage for anybody in ‘incorporating’. This tax replaces company taxes, personal income taxes and GST (also known as VAT in some countries), and because it applies to every transfer, and allows for no deductions, can be set at a very low rate – perhaps 3-7%.

 

Every transfer of money gets taxed. This includes transfers for purchases of shares, options and derivatives. It also includes currency exchanges involving the local currency. Such a tax will kill off the entire financial speculation industry, and as we have asserted, this does not hurt, but actually benefit, the real economy in which goods and services are being produced.

 

This tax is cheap and efficient, easy to implement (just tell the banks to insert the tax software into their computers) and can be explained in one page (unlike the 10,000 pages of the Australian Tax act). At the FEC we call such a tax a transaction tax, and we are implementing it as a grassroots tax on trade between members of the Cooperative.

 

 

Making democracy immune against the virus of Capitalism

One hardly needs to explain how corrupted our legislative bodies are, and how amenable politicians and the major political parties are to corporate demands. People think that representative democracy is as good as it gets in the practice of democracy. There is a simple way of strengthening democracy such that the political decision making process is much more responsive to the needs and wishes of real people (as opposed to the artificial persons called corporations). It is the practice of direct democracy.

 

Direct democracy basically works like this: if a person or group of persons wish to see a piece of legislation enacted, or to overturn a decision of the legislatures, etcetera, they draw up a petition. If say 5-10% of the population sign their support of the petition, it goes to a binding referendum which cannot be overruled by the legislatures or judiciary. The referendum is passed if say two-thirds of those who vote are in favour of it. This enables citizens to bypass politicians and get whatever they really want. It effectively nullifies the corporate grip on the political process.

 

 

The Threefold Economy vis-à-vis Capitalism and Communism

The above ideas may be summed up as the making of a Threefold Economy. To many people it may look like communism which in turn brings about a reflexive fear. Both Capitalism and Communism are hierarchical structures. The Threefold Economy as described is the very opposite of that. Even to the extent of loan making (the principle of social guarantor), we encourage participation and inclusion.

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When people imagine what communism is, they actually picture the Soviet Union version of it which is more correctly called Bolshevism, so Ishall use that term Bolshevism.

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The essence of Capitalism is the private ownership of what economists call the three factors of production – which are Land, Labour and Capital. ‘Land’ covers both land as we know it as a geographic entity, but also the natural resources within it. ‘Labour’ in Capitalism is the share owned corporation which owns and manages labour. ‘Capital’ covers the banking and finance industry.

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The corresponding essence of Bolshevism is the state/communal management of production, distribution and consumption. So in the Soviet Union the state tried to organise the entire process of production in every industry and also arranged what people bought (consumed) by the issuing of ration tickets etcetera.

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Neither system works although it takes Bolshevism a shorter time frame to break down completely. Capitalism is close to its own point of collapse on account of its ‘cannibalistic’ qualities.

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The freedom of individuals (‘free market’) that Capitalism touts is assured if we allow ‘free choice’ in production, distribution and consumption. But we must not allow this element into the sphere which belongs to the commons, namely in the factors of production. There a free market acts like a corrosive acid. The Threefold Economy advocated here holds the healthy balance between individual free choice and communal cohesion. It is neither Capitalism nor Bolshevism, nor a kind of compromise like the Scandinavian economies.

 

 

An overall picture of the Threefold Economy

It will be hard to summarise the positive changes that will come with the Threefold Economy as described. Here is a short, sharp but by no means complete list of things.

1. A full employment economy.

2. A huge amount of (commons) tax revenue. One might have noticed that we have spelt out three huge sources of public/commons revenue. They are: interest on loans, land rental and the transaction tax. The hamstrung national budgets we have today will no longer be. Amongst other things, this will result in:

3. A proper healthy welfare system so that people are not wanting for finances to look after the young, the old and the sick and disabled.

4. A clean and transparent political system. With the demise of private banks and share owned corporations also go the corrosive and corrupting influences of these institutions on the political life. Direct democracy adds the finishing touch to make our democratic process responsive to our collective wants

5. Money for transitioning to an economy that is sustainable and uses only renewable energy – and no corporations to battle against in implementing such an agenda.

6. Totally affordable housing.

7. No stupid speculation in the economy and no periodical financial crisis. Loans from a commons bank are purely for the purchase of goods and services (including housing) and are never for the purpose of buying shares, land, options and so on.

8. Removal of harmful products and practices that are pushed by corporations.

9. Free education.

10. A society whose members are not stressed out with debt repayments, lack of work, medical costs, lack of money for food and utilities bills, and rental payments.

11. No tax returns.

12. A banking system which considers the elimination of of great importance when approving loans, e.g. requiring farmers to practise sustainable and chemical-free farming.

 

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Footnotes

[1] Different countries have different ratios of money created by their central bank (notes and coins) and by their commercial banks (credit creation money). The New Economics Foundation in the UK claims the U.K. money supply is 97% commercial bank money in the UK.   No other major country is quite this high. My own research tells me the world average is about 95-96%.