An efficient economy is one in which a given amount of money will produce the maximum value of goods to the buyer and the most value to the seller. A foundation on which to build an efficient economy is for sellers to share future profits with buyers on subsequent sales. With agent-based modelling, we can prove that sharing future profits creates a minimum cost (least money) and a maximum value market.
Buyers and sellers negotiate on the share. Buyers and Sellers are free to choose with whom they trade. When there is a choice from whom to buy or sell, the resolution is not on price but by who delivers the best product for both the buyer’s and seller’s purposes.
Without sharing, free markets depend on the relative power of buyers and sellers to establish the price, which results in either the highest price for the least value or the lowest price for the most value if there is even a small difference in the relative power of the parties.
Profit-sharing markets are stable, with minimum cost for the greatest value markets.
An example of the abuse of power is the Australian Home Loans Market. The recent compulsory rise in interest rates has resulted in Australian Banks making super profits at the expense of borrowers, with borrowers paying more for the same product — meaning there has been a significant decrease in home loan productivity as borrowers are paying a higher price for the same value.
Bank Loans differ from Private Loans, where a person saves money and then lends it. The government licenses banks to make loans with new public money, provided they follow specific deposit rules. They must always accept deposits from savers and have a given amount of cash available to give the savers back their money if they want it, and their loans should be greater than their deposits. The bank’s costs include unpaid loans, the costs of interest on deposits, establishing loans and making money available to their depositors and the cost of profits to give to their shareholders. These costs remain stable with increasing interest rates.
The borrower has to pay back the loans and the interest from profits. Their costs are the costs of doing business, and their profits should be greater than the cost of interest; otherwise, why take out a loan? The cost to the borrower will almost always be much greater than the cost to the bank. The profit to the bank is the difference between the interest and their costs. To produce the interest, the borrower has to make extra profit and repay the interest as though the bank lent them the money.
This is unfair as the Bank created public money, but its shareholders received all the profit, and the borrower did ALL the work to create the interest. It is unethical for a bank to keep all the interest in making public money, and it may even break some consumer protection laws.
The simple solution is for banks to share future profits by deducting a share of the interest paid on each payment from the amount owed. The same logic applies to savings loans, but the borrower’s share is less.
The Banks get the same profits but for a shorter time, and the same loan is repaid faster and for less cost, which is the definition of economic productivity. For a typical home loan, this reduces the cost of a loan by about one-third.
All community bank clients should ask for their repayments to be reduced. If they do, shareholder banks will have to follow, and Australia’s cost of living crisis will be solved. It overnight increases the productivity of the Australian economy and releases vast amounts of capital for productive purposes — particularly investments to address climate change and its ongoing costs.
The above reduces costs and will reduce inflation without resulting in deflation. The Reserve Bank can ensure zero inflation by requiring the Banks to share their profits with borrowers of Bank Loans.
The same approach to setting prices is possible with any product subject to government regulation, including electricity prices, communication costs, water prices, road tolls, and hospital charges.
The approach works because it brings a negative feedback control to stop excessive profits due to government rules and regulations.
