In a Circular Economy, money moves locally to buy, sell, and invest in goods and services. It is an efficient economy where efficient means it produces the most products for the least amount of Capital. The price of products is arrived at by agreement and remains constant.
An alternative economy is a competitive market economy where sellers compete to get the highest price for the same product while buyers compete to get the lowest price. The market sets the price.
Both economies coexist and interact seamlessly, as a circular economy is a mutation of existing market economies. This article illustrates the concept using the deployment of Community Batteries as an example.
Ownership of Community Batteries
A Community Battery is owned jointly by a Community of members using Community Capital. All have an investment in it, and most use the services the Battery provides. Those who pay for the services receive shares in the Battery each time they pay. Members can sell their shares to other members. The shares have a fixed price and a fixed return, so there is no need for a Capital Market to set the price.
The Battery will make the same profit or loss regardless of how the profits from ownership are distributed.
Community Batteries owned by Shareholders
When Shareholders own the Batteries and sell the service to the Community, how and when the profits are distributed to shareholders changes the distribution of profits but, more importantly, reduces the profit.
The article Community Batteries in a Circular Economy describes the financial advantages of Community Capital. The following table shows the difference in profit using Regular Capital and Community Capital. A critical point about Community Capital is that the profit remains the same regardless of distribution, whereas, with Regular Capital, the profit will vary according to the distribution. The implications of this are then discussed.
Comparison of Capital Distribution
A Community of ten people invest in a Community Battery with solar panels to charge the Battery. The Capital cost is $100,000, and the Battery operation produces $5,000 profit each year. The profit is reinvested in ways to Rewire the Community, and the profit on Rewiring assets is 20%. Consumers still pay the same price, receiving their profits as more Capital. The initial parameters are:
- The initial Total Investment is $100,000.
- The distribution of Investment is Zipf with a .6 parameter.
- Profit from the Battery is $5,000 per year.
- The profit Rate from the Battery is 5% per year.
- The profit Rate from new investments is 20% per year.
The modelling is ten years of operation where consumers pay the same price for electricity resulting in Figure 2 outcomes. The modelling spreadsheet can be found here.
Discussion of Community Capital Modelling
The standout outcomes of the modelling are
- Community Capital produces higher profits.
- Community Capital changes wealth distribution from Zipf towards a normal distribution.
- Community Capital's total profit is the same, no matter the distribution.
- The cost of production determines the value of Capital.
The article Improving the Australian Financial System points out worse than expected economic outcomes of Australian and other countries' economies over the past decades. It shows the gross inequalities of wealth distribution can be overcome using efficient Community Capital.
Community Capital produces higher profits than Regular Capital. The higher profits result from the rapid Capital movement. Existing businesses can quickly change from Regular Capital to Community Capital and increase available Capital. Also, existing loans can be converted to Community Capital, saving the cost of interest and increasing the amount of Capital for investment by the outstanding balance of the loan.
Community Capital reduces Wealth Disparity.
Some wealth disparity encourages humans to strive to get more. Variations in wealth encourage us to do more and to think of ways of gaining wealth. The system breaks down when people acquire wealth by taking and not reciprocating. When it becomes institutionalised, as it has with Capital Markets, wealth disparity becomes toxic. Community Capital overcomes the accepted idea that when a profit is made, the person supplying the money that made the profit possible keeps all the profit. Today not giving any profit back is admired and built into the law.
Companies set prices at what the buyer will pay, and directors must prioritise shareholders and legally minimise giving back profits as taxes. Community Capital overcomes the problem by requiring buyers to purchase shares from investors when they purchase products. Investors do not share current profits but share future profits. Buyers can always sell their shares if they want cash instead of Capital that earns future profits.
If the economic system does not encourage buyer purchase of Capital, wealth distribution will remain an unstable Zipf distribution. Moving wealth distribution towards a stable Normal Distribution brings stability and greater wealth from cost reductions instead of greater wealth from price increases.
Community Capital results in Stable High Profits.
If the total amount of old Capital purchased is half the new Capital created, then the total profits made by a Community are stable and maximum. It means a Community can use techniques other than discounted cost-benefit analysis to choose what products and how to produce them. Criteria other than profit maximisation are used to select products and how to make them.
Each Community decides its criteria. If Communities of Communities exchange products using Community Capital, the same criteria will become widespread from the bottom up, transparent and agreed upon.
The Long-Term Profitability of a Circular Economy
Figure 1 shows that Capital circulates within a closed Community because of the two-way flow of Capital between buyers and sellers. Capital represents assets; hence, preserving assets is the best way to maintain profitability. A Community where assets circulate is where the preservation of assets, especially natural assets, becomes a priority and goal.
Community Capital puts a value on preserving the natural world and may provide humanity with the mechanism to keep our planet liveable.
The Value of Assets.
In a free market economy with Capital markets, the value of Capital in share markets and exchange markets follows a random walk because the expectations of future profits determine the value.
With Community Capital, the value of the profits is known, and buyers and sellers set the value of the Capital by consensus. They have full transparency of the actual costs and current profits. The value of Capital can change slowly as the wealth represented by Capital can go up and down and not affect the price of products or the profit created. Capital value or wealth automatically cushions and absorbs external shocks within the local circles of Capital transfer.
Community Capital creates a resilient and adaptable economy and will permit it to adjust in a measured way to the coming changes caused by the degradation of the natural environment. It will provide a system to adjust human behaviour and practises to restore much of the environment.
Summary
A financial system where investors fail to share Capital with buyers who create it will be exploitive and inefficient. It creates opportunities for unearned income to extract value from nature without replacing it. A financial system where assets circulate creates an economy where nature is valued and preserved, and Community Capital is one way to create a circular economy.
