In 1968 Edsger Dijkstra wrote a letter to the editor of Communications of the ACM (CACM) stating his opinion about using the goto statement in programs. Dijkstra said that using the goto statement made programs unreliable and error-prone, and the goto was unnecessary. Dijkstra asked for a different way to construct programs that would solve many issues with programming.
This article says something similar for Capital. It is time to change how we distribute Capital and look for Capital Market alternatives. Capital Markets are expensive, resulting in the mal-distribution of Capital, and there are better ways to distribute it.
Markets consist of buyers, sellers, a product, and a price. The market operation sets the price or measure of the product value. Capital is an invention, and to set the Capital price, humans have devised Capital Markets of money and monetised assets.
Issues with Capital Markets
In a Capital Market, money is a measure of value and the product. Setting the price of Capital becomes problematic, and in practice, Capital markets, like stock markets, follow a random walk. The price tomorrow is related to the price today, but when the prices change trajectory is random. Capital markets tend to be casino-like rather than predictable, and most people find them an unsuitable way to invest.
In practice, the buyers in a Capital market are those with money to spare and don’t need it, while sellers want money but don’t have any. In product markets, buyers want the product and sellers want to sell it. Capital markets do not have the invisible hand of negative feedback to set prices. Instead, the market sets prices randomly.
Capital Markets are expensive to operate and result in a Zipf distribution of wealth rather than the economically efficient Normal Distribution. A Zipf distribution is one with a few very wealthy investors and a long tail of people with no wealth or Capital. A Zipf distribution of Capital is inefficient because:
- Buyers have the least need for Capital; hence, they tend to get less value from more Capital.
- Buyers tend to accumulate Capital. This slows investment reducing economic activity and investment growth.
- Buyers of Capital are more interested in making money than producing goods and services and tend to invest in products with a high price rather than a high value.
- The measure of value in evaluating investment choices tends to use Discounted Cash Flow analysis, favouring short-term gains over long-term gains, leading to costly refinancing.
- There are few buyers of Capital because only some people have or can access Capital. Those with some but less Capital know they cannot compete on equal terms, so they stay out of Capital markets. This reduces market competition, meaning Capital markets often need expensive market makers to find the right price.
- The objective of buyers in Capital Markets is to make more money. It increases the money supply faster than the value of products produced, resulting in money and asset inflation.
A Capital Market Alternative
New Capital is created when a business makes a profit. A business makes a profit by adding up all the costs — including all the production, labour, Capital, and government costs, and subtracting them from all the income generated from sales. Most businesses do this monthly with a Profit and Loss Statement and a Balance Sheet Statement. The Balance Sheet includes all the profit or loss reflected in the Capital or shareholder value and includes the cost of dividends and interest. Shareholders are the business owners, and they accumulate Capital in the value of shares. Periodically they may sell shares on a separate market where the market is meant to determine the price.
However, shareholders will tend to hold onto shares if they continue to profit because the profit is on top of their return on investment, which they obtain from dividends or interest. Profit drives investment and business activity and is a necessary part of a market economy.
Community Capital addresses the distribution of Capital through the market for goods and services. It does it by requiring the new Capital created through profits to be shared between the shareholders who own shares and receive dividends and the buyers who pay extra money to make the profits.
Community Capital removes the need for a separate Capital Market as it uses the goods and services market to sell and buy Capital. On average, each sale of products generates new Capital as profit. Let us assume that the new Capital created is targetted as 10% of the sale price. With Community Capital, the buyer of a product purchases 5% of old Capital from existing investors, and there is a transfer of 5% of new Capital to existing shareholders. These transactions occur on the Balance Sheet, so they do not impact the Profit and Loss. If the shares can be used to purchase goods and services from the business and they earn an income by earning discounts, then it reduces the cost of Capital because instead of Capital earning money, it makes savings. This also reduces the cost of Capital.
The business — in real-time, knows whether the targetted profit is realistic and if it is not, then it can increase or decrease the price of products or look for ways of reducing production costs to keep the profit constant.
Because Capital has a fixed, known price, there is no need for a separate Capital market to set the price and investors can freely buy and sell Capital between themselves.
Community Capital is more efficient than Equity Capital as the distribution cost is near zero, and Capital is deployed rapidly and does not accumulate. Like all money, the faster it circulates, the more valuable it is to a community.
All stakeholders in a Community can obtain a share in the business either by buying products or by receiving shares instead of money for goods and services. This leads to Property Owning Democracies.
Deployment of Community Capital
Any existing business can introduce Community Capital overnight, as the change is an accounting addition to the Balance Sheet transactions when a buyer purchases goods and services. However, there is a change to the culture and power in the organisation, and unless done carefully and in a considered way, it could destroy the business. Equity Capital puts a premium on sales, financial and legal expertise to maximise profits by keeping prices high and making economies of scale. Community Capital is about making savings, reducing business costs, and scaling through cooperation within and across local communities.
In summary, Community Capital favours the soft skills of consensus and democracy, while Equity favours autocratic and hierarchical control.
Choice and Variety
Community Capital provides choice and variety, a prerequisite for evolution and progress. The choice comes from people choosing from whom to buy and sell Capital. For any given business, the price of Community Capital is fixed; people will decide with whom to buy and sell for other reasons. This will vary, but it will likely be because of familiarity and previous dealings.
The more customers, the more choice there will be and the more opportunities for innovation. Successful innovations will rapidly spread as there will be constant movement of people between the informal groups.
Community Capital exists alongside Equity Capital. A Company can choose to keep their stock market listing and have some finance with Consumer Capital.
Summary
Capital Markets will continue to exist and operate. The less expensive and more flexible Community Capital will find its place, particularly in allocating access to the Commons where natural monopolies exist.
