Economic activity is the exchange of goods and services using money as the medium of exchange, the store of value, and the unit of account.
Say an exchange transfers goods from party A to party B of value X. Money of the value Y is exchanged where Y = X + profit P.
In a market-based economy, party A keeps the profit P, and the market sets the profit and the price. In practice, the profit paid often depends on the wealth of the individual. Higher-wealth individuals typically pay less profit because they buy more, spend more, and have more choices.
In Sharing Economies economies, the profit P is shared between A and B the next time A and B exchange goods. The profit P is set by consensus before the transaction occurs, and in the sharing economy, the profit share could vary explicitly depending on the wealth of the buyer.
The Effect of Sharing Profits
We can understand the overall effects of sharing profits with a small model of a closed economy.
There are three parties A, B, and C. A sells to B, B sells to C, and C sells to A. The resulting graph follows if all the money on each round is exchanged simultaneously and the buyer and seller share profits.
The profit is the same in each case, but the amount differs in each round. The reason is that when the profit is left with the seller, it stays with the seller and does not move. It accumulates, whereas if it goes to the buyer, the buyer uses it to purchase goods in the next round. Less money is needed in the system for trading to occur.
The extra money needed goes from $35 to $15, or about a 57% increase in the productivity of the financial system.
The extra money either exits the closed system or stagnates with a seller bank balance or asset increase. The increase in the speed of money movement is a productivity improvement as the same goods and services are bought and sold for less.
The higher the buyer’s share of profits, the greater the system’s overall monetary efficiency. The seller has to make a profit; otherwise, they will go out of business, and there has to be a certain amount of money as a liquid asset to cover the payment variations and the time of payment reconciliation. When the buyer receives a larger share of the profits saves the time and cost of another transaction and reduces the cost of operating the system.
Everything else being equal, an increase in interest will cause economic activity to slow down, and a reduction in interest will cause the economy to speed up. Unfortunately, this does not work well because everything else is not equal. Even worse, it means the economy will always grow even when there is no need, as loss-making enterprises tend to stop altogether quite suddenly instead of fading away as their prices become uncompetitive.
Sharing profits means the increase in money is split between the buyer and seller. The share of money left with sellers or buyers changes the investment dynamics. Sellers tend to use it to create more sales. Buyers tend to use it to reduce costs.
In the current system, sellers keep all profits and invest in increasing sales. Conversely, buyers utilize their funds and invest in cost-reducing measures, including recycling and consuming fewer irreplaceable resources.
Growth for the sake of growth is no longer the only option. Communities can consciously invest enough to keep the system operating while allowing unnecessary or inefficient industries to disappear to help preserve natural resources.
Debt and Money Creation
The article Increasing the Productivity of Money Creation shows how sharing the interest between banks and borrowers reduces the amount needed to repay bank loans. For most loans, it reduces the amount by the amount of interest repaid. This happens because Bank loans charge interest on interest, and compounding unnecessarily increases the amount paid when the loan is for many years.
The article Unethical Banking but Is it Illegal argues that Bank loans are unethical and may be illegal. The loans can be made ethical and legal by the borrower and the Bank coming to a clear statement on only paying interest on the amount borrowed and explicitly deciding how to share the profit (interest) generated by the loans.
This change can happen overnight and immediately increase borrowers' wealth — not by taking money from lenders but by sharing new money by consensus between the bank and the borrowers.