All countries introduce money into the community with banks, loans, and debt. The resulting economic system is called rentier capitalism. Rentier capitalism is an economic system where wealth accumulation is driven by ownership of assets (such as land, intellectual property, or financial instruments) rather than by productive labour or innovation. In this system, “rentiers” (asset owners) extract value through rents, interest, or monopolistic practices rather than contributing directly to economic production.
Key properties of a society based on rentier capitalism are:
- The concentration of wealth and power among asset owners.
- Economic inequality as wealth flows from workers and producers to rentiers.
- The stagnation of innovation and productivity is caused by resources directed toward rent-seeking activities rather than productive investment.
Rentier Capitalism has exploded over the past fifty years since the link between gold and the US dollar was broken. In Australia, we see it in the concentration of ownership and wealth accumulation of the top 1%, who now receive 80% of the new wealth in society. Rentier capitalism inevitably results in an economy with the following characteristics.
- Financialization: Growth of financial markets and speculative investment over productive enterprise.
- Privatization: Transfer of public assets into private hands, enabling rent extraction (e.g., utilities, healthcare).
- Monopoly Power: Dominance of large corporations with limited competition.
- Globalization: Shift of production to low-wage countries, leaving domestic economies reliant on rent-seeking industries.
- Intellectual Property: Extension of patent protections, royalties, and other legal mechanisms that generate rents.
Read a summary of rentier capitalism from ChatGPT4 and how it has concerned economists and policymakers for the last two centuries, what they have tried to do about it, and their limited success.
An Alternative
The following is an alternative that takes several ideas from the attempts to change policies to counteract rentier capitalism. The idea is to provide an alternative to the unnecessary capitalisation of interest when introducing new money into the economy.
The alternative does not replace the existing system but outcompetes it by taking away the advantages of wealthy people over those with less wealth. It does not take money from rich people. Instead, it gives everyone in society approximately the same amount of new money introduced into the economy instead of giving almost all new money to the very rich.
The approach
- Treats electronic money like cash, meaning it has the same value regardless of who uses it or for what purpose.
- It allows communities to decide collectively where to spend new money and compete with communities that allow money markets to determine where to invest new money.
The evolutionary competitive approach will succeed because it increases wealth from increased economic activity, which the debt-based system cannot match for the following reasons.
- Community wealth increases when there is an exchange of goods and services between people. Community wealth does not always increase when a profit is made. For example, when there is a capital gain, there is no increase in wealth.
- When the price of a goods and service increases for no change in the product or service delivered, there is no increase in wealth but a capital gain.
Capital gains are a danger sign in any economy, and reform occurs by:
- Introducing new money into society without allowing the banks to gain unearned capital.
- Introduce new money and allow groups of individuals to obtain new money on the same conditions given to wealthy individuals and companies.
- Share capital gains and profits between investors and the consumers who pay extra to give investors a capital gain or profits for no extra effort on their part.
Two-sided Markets
The most common form of capital gain comes from two-sided markets. A two-sided market appears when a middleman, instead of acting as a service provider connecting both parties, acts as though they operates a market with both sides and are entitled to a profit from the two markets.
Bank loans are an example. Banks provide a service to savers and borrowers. They should profit from the service but not gain unearned capital from it. Their job is to give the least cost connection so that the borrower gets the lowest cost and the lender receives the highest return. Instead, they pretend they own the money they lend and are entitled to a share of the borrower’s profit and a profit on the service they provide.
The two-sided market and treating money as a product with borrowers and as a means of exchange with the lender means they collect a profit twice for the same service. They called the extra profit a capital gain.
Money is a measure of value, not a product that magically earns more money. This is especially the case when banks create new money for the government. Why should banks collect capital gains from borrowers by capitalising interest? They shouldn’t.
The government contracts banks to facilitate money exchange and create new money. They are entitled to profit from the services they provide. They are not entitled to capital gain from the funds they introduce into society for the government. They should create Democratic Money where everyone has equal access to new money as though it were cash. The other change is to allow consumers to work together as a company to operate Permanent Asset Markets (PAMs) to reduce the cost of distributing new money to all in the economy and to exchange ownership of existing assets.
Government funding everyday common goods and services through PAMs will distribute new wealth more evenly. A hypothetical suburban street described below illustrates how PAMs will improve financial access and affordability for homeowners by removing unearned capital gains taken by banks.
A PAM is built by a community forming a company that owns and manages housing assets, enabling residents to participate in a shared equity model, eliminating the need for traditional mortgages and reducing costs significantly. Collaboration with banks and the government will further reduce borrowing costs through adjustments to loan practices.
Current Method of Adding New Money into an Economy
New money is introduced into most communities through individual loans to separate households. Loans give people with some wealth new money for no net cost; the wealthier a person, the more wealth we give them. Wealthy people then use the money to make a profit, taking money via non-profit sharing businesses from people with less money.
New money introduced by banks capitalises their interest and creates more new money for themselves as an unearned capital gain on new money. The unearned capital gain is paid by the borrowers paying interest twice — once as a capital gain and once as a fee for the service.
Unsurprisingly, wealthy people accumulate wealth ever-increasingly, especially those who control banks. Today, 80% of the new wealth in Australia goes to the top 1%. Sixty years ago, after the Second World War, the increase in wealth was evenly distributed amongst the whole population because of government Keynesian policies. Unfortunately, the ideas of rentier capitalism were re-introduced with the banking reforms of the 1980s.
We can change government policy and introduce new wealth evenly across the population without taking existing wealth from the wealthy. We turn electronic money into electronic cash, called Democratic Money, and introduce new money through Permanent Asset Markets (PAMs). While these can be created with private money from individuals, it will not scale unless governments create money by funding the assets that produce common goods and services with PAMs. For example, public roads, bus and rail services, schools, water supplies, hospitals, universities, and electricity transmission and distribution.
A Comparison of Rentier Capitalism and Democratic Money with Permanent Asset Markets
This comparison compares the existing rentier capitalism with loans without capitalisation of interest and individual lenders, with a community of lenders, with democratic money, and finally by introducing money without loans. The community comprises three households and one landlord who forms PAMs Pty Ltd.
The company’s constitution follows Elinor Ostrum’s principles and allows investors, governments and banks to invest or give loans. All residents purchase their houses, sell them, or invest in other members’ houses using company shares.
The following scenarios are modelled.
- The current situation is that of separate households with restrictions on borrowers.
- Traditional bank loan financing with restrictions removed by the community combining their assets.
- Bank loan financing with no capitalisation of interest resulting in a cost reduction.
- Government new money financing through banks where assets remain within PAMS and local investors, including super funds. This reduces costs, such as when the government becomes another investor but forgoes the destruction of new money invested in community assets.
- When the community own their dwellings, the ongoing cost of housing in PAMs is expected to be close to the depreciation rate of houses, plus the bank costs and profits from providing the service of exchanging money.
An Example
On a suburban street, there are three homes. One is owned by a landlord and rented by a young couple wanting to purchase the rented house. The landlord is looking to sell to get a higher return. Another is a retired pensioner couple who have paid off their home and live on a pension but want to get a mortgage to make some repairs. The third is a family with a large mortgage and high repayments worried about mortgage rates and their ongoing income. The households are called A, B, and C.
A wants to buy their rented unit, valued at $700,000, for which they pay $760 weekly. They have a combined after-tax income of $150,000 with a deposit of $20,000 saved after one year, but they need a 20% deposit to get a loan. B needs $100,000 for maintenance on their house valued at $1,000,000, and they have a non-taxed income of $60,000. C has a mortgage of $500,000 at 6% variable interest over 25 years and a single income of $120,000.
A cannot raise the deposit for the property, B cannot afford a reverse mortgage over five years, and C is having difficulty meeting their monthly repayments. Individually, the three households have to take what the banks offer, and the banks are remarkably consistent in their offerings with only minor variations. Hence, the households stay as they are.
However, suppose the households and landlord join together and form a company that combines the assets and issues shares to each household, where the shares are the value of their holdings. The income for the company is an agreed fixed percentage of each household's income. In that case, they can each achieve their individual goals.
The landlord sells the house to the company and, in return, gets an inflation-adjusted annuity of 10% for twenty years or twice the return he or she would get from an allocated pension.
The combined asset value of the company is $2,400,000. And the combined money to be spent on regular mortgages would be about $95,000 if they could be obtained. However, if they formed a company, then the landlord becomes an investor, and the company pays 10% of the value of the investment, inflation-adjusted, for 20 years. The total cost of loans plus investor amounts would be $86,227, so the company would have a small surplus in its first year and a loss because of the 2.5% depreciation allowance on the $2,400,000 in assets. The company would not pay tax, and the four shareholders could operate it voluntarily.
The loans of $600,000 would be serviced by the occupant's payments of 25% of their income. Most would pay a higher proportion than 25% because the company share account operates like a liquid savings account with a return on savings of 5% indexed.
The company plans to expand to 30 houses and employ one member full-time with other members part-time. This will create a company with a capital value of $24,000,000 and a turnover of $3,000,000. It will work with other permanent housing markets to establish a group organisation to communicate with governments on other permanent asset markets.
It will negotiate with a bank to remove interest capitalisation in return for a higher interest rate.
Removing interest capitalisation will reduce the cost to occupiers by about 30% while allowing the banks to increase their interest rates to partially compensate them for not capitalising interest.
The final savings is to work with the government and the Reserve Bank to reduce the cost of bank loans by only requiring the borrowers to pay the bank interest and not to repay the loan capital. This is the equivalent of loans “destroying” money when the loans are repaid because the new money is tied up in the permanent asset market where new occupiers buy the houses from previous occupiers.
Once there are no external loans, the cost of occupying PAM houses will be about the same as the depreciation rate of houses or $25,000 per year for a $1,000,000 home.
Change in the GDP
The GDP measure for the three houses is shown in the table below. Currently, with the first house, the contribution is the payment of rent; the second, there is no contribution as there is no loan; and the third, it is the repayment of the loan. With PAMs, it is the payment to live in the home plus the transfer of ownership, which almost doubles the GDP.
Increases in GDP come from the movement of money — not from profits. Profits are transfers. The movement of funds transfers value. Operating a financial system so money moves more rapidly by increasing the number of participants and giving them more funds to transfer increases the economy's productivity. Accumulating wealth and not transferring it reduces economic activity and productivity.
Communities become wealthier not by accumulating wealth but by transferring value to each other. It requires a rethink in the way we think of an economy. Profit is not the aim, but transferring value with less money makes for a more prosperous society.
Democratic money enables greater participation, and PAMs increase the rate at which money moves.
The Scalable Steps to Achieve a Productive Fair Economy
The ideas of Democratic Money and Permanent Asset Markets will not happen without government agreement and action. The following outlines the steps necessary. The government has to set the rules and regulations to allow the following and to assist community groups — including government enterprises, to implement the ideas.
- Stop banks from capitalising interest on loans of new money. This will immediately drop the house cost by about 30% without affecting property values.
- Evolve economies by replacing loans to increase the money supply by funding consumer-owned enterprises with Permanent Asset Markets (PAMs). This can happen slowly but in a way that will spread virally.
- Start governments using PAMs for community assets like water, electricity distribution, roads, hospitals, research and development, schools, TAFE, and universities. Consumers buy shares in the community assets as they purchase services from the assets. Anyone in a community is permitted to invest in community assets. This can start slowly, but it can also spread virally.
- Governments encourage the development and operation of PAMs for privately owned businesses. Privately owned businesses will adopt the approach voluntarily but it will accelerate with government encouragement.
