In his book "The Great Transformation" (1944), Polanyi argued that reciprocity, redistribution, and householding were among the central organising principles of pre-capitalist and non-market economies. He then argued that these principles were abandoned with the rise of market economies like service economies.
Reciprocity refers to a social norm or practice where individuals or groups exchange goods, services, or favours for receiving something of equivalent value in return.
Redistribution is a socio-economic process where resources, wealth, or goods are collected from one group or area and reallocated to others, often to achieve greater social equality or address imbalances.
Householding is the organisation and management of domestic activities within a household, including production, consumption, and resource allocation among its members.
Reciprocity can be reintroduced into market economies with a simple accounting change that will dramatically improve the efficiency of the financial system by eliminating unnecessary payments. Redistribution and householding are emergent properties of the resulting efficient financial system. An ecological economy of any size is an emergent property of an efficient economy.
Loans with Reciprocity
Loans with reciprocity illustrate the simplicity and effectiveness of reciprocity economics.
A loan is an agreement by a lender to give money to a borrower with the understanding that the borrower will give back more money than was borrowed. How much more is typically calculated as interest on the unpaid amount. Interest is new wealth that the borrower has created. In a service economy, the Bank takes all the new wealth. In a Reciprocal economy, the new wealth would be shared between the lender and the borrower as the borrower did the work to create the new wealth, and the lender took the risk of lending to the borrower and collecting the money.
However, there is a more fundamental reason why the profit from creating new money is shared: money is a public good, and the profit from creating it should be shared between the Bank and the borrower. The money does not belong to the Bank or the borrower. It belongs to the community, and its value comes from the trust in the currency. A system where one group, the Banks' owners, takes all the profits is unfair and does not reflect reciprocity.
Sharing the increase in wealth is of benefit to both the Bank and the borrower. The Banking system becomes more efficient as it creates more wealth for the same amount providing some of the interest is given to the borrower as Capital and is invested.
With reciprocity, money moves more rapidly, so more loans are created from the same amount of money, increasing the productivity of the loan system.
One way to share the profit is to reduce the loan repayment by a percentage. Making it 50% is a fair division giving both lender and borrower a return on the money.
Outcomes of sharing
If P is the loan amount outstanding, R is repayment, and I is the interest, then for a reciprocity loan,
P(new) = P(old) minus R minus half of I.
For a regular loan P(new) = P(old) minus R.
The following spreadsheet compares regular and reciprocity loans. The differences in Capital and interest depend on the length of time and how interest is shared. The community can vary these values and use them to redistribute the new wealth created by the loans. Half divides the new wealth almost evenly between lender and borrower.
A Loan with Reciprocity over the same time as a regular loan will pay the same interest, or if the repayment amount is about the same, the time to pay off the loan is reduced by about a third. The variation depends on the length of time between payments. The difference comes from the borrower creating more money with existing money because the bank does not destroy it, and it is available for investment.
The same objective of repaying the loan with interest is achieved with fewer payments, increasing the productivity of the loan.
Any Bank, including the Reserve Bank, can institute this loan repayment and increase the productivity of loans by about 30%. Varying reciprocity will vary the speed of money circulation without changing interest rates. If the Reserve Bank used the approach, it could insist that regulated Banks do the same. The Reserve Bank could finely tune the economy by adjusting the speed Banks repay each other's loans without changing interest rates.
In summary, a Service Economy Bank wastes resources because the system is geared to exponential consumption for less value.
Reciprocity throughout the community leads to more value for less consumption and may save the planet for humans. Lenders will still get wealthier with reciprocity, and most of the increased profitability goes to borrowers, so they get wealthier at the same rate as lenders.
Investments with Reciprocity
Investors give companies money and expect more money back. The extra money comes from profits on sales of goods and services. When customers purchase goods, they pay the company more than it costs to produce them. Today companies reciprocate in various ways, such as frequent flyer points or everyday rewards.
A better way is to share profits on each sale of goods and services as used for loans. Shareholders can share the profits with buyers by selling half the profits as shares in the company as part of the payment for goods and services. Reciprocity eliminates many unnecessary transactions and increases productivity by reinvesting money and using all the money for investments. Economic productivity is estimated to increase by 50% as the approach sets fair prices, even in a monopoly, and removes the need for many unnecessary processes, such as redistribution taxes and markets to set prices. Existing economic systems have enormous amounts of underutilised money that reciprocal economics will release.
Reciprocity and Control
All stable systems have control methods. Sharing profits provides stability for economic systems by giving consumers of services partial control over the size of the profit. A service economy has indirect control. A reciprocal economy gives direct control. It turns any economic system that adopts it into a stable, predictable system where non-economic goals determine the outcome.
An economy based on reciprocity of money exchange and investment can evolve into an ecological economy. An ecological economy minimises consumption and becomes environmentally sustainable.
Further Reading
Ernst Fehr and Simon Gachter — Fairness and Retaliation: The Economics of Reciprocity
MKM Architecture Rethinking Reciprocity
