Community Capital

The world is awash with wealth, but it is unevenly distributed. It sits in gigantic piles and is being used to destroy the planet to create more wealth that sits in bigger and bigger piles. There is a simple solution to spreading it more evenly, and it comes with a further benefit. It gives everyone a say in how much wealth we create and what we do with it.

Why we don't Share Wealth

In modern economies, wealth is Capital and Capital belongs to the owners of assets. Capital creates more Capital by enterprises making a profit. The profit goes to the business, and the extra Capital created also goes to the business. People think that the additional Capital is the same as profit. They are not. Capital is a value that goes on the Balance Sheet and can be sold again through Capital markets. What happens in business is that money is spent in the company, maintaining and increasing the value of the business. Those costs come off the profit as depreciation or, in many cases, as expenses. The change in Capital is not shown in the Balance Sheet but is real and is reflected in the share price.

The net result is that buyers pay for the profit — which is reasonable and desirable, but they also pay for the increase in the Capital but do not receive any of the Capital in return. That is not fair or reasonable. The buyer should receive some or all of the Capital for which they paid.

The free market proponents say that if there are competitive markets, the sellers have to reduce their prices to compete, so they don't make as much profit, and hence the buyers get their share of the Capital through lower prices. Lower prices are not an equal sharing of wealth. If that were the case, there would be less discrepancy in wealth across society and wealth discrepancy would reduce.

The free market proponents also say that the way to set the value of Capital is to sell Capital in free markets and let the market set the price.

Equity Capital is ownership of assets and all the profits from using the Capital. Instead of ownership of assets, we can have ownership and shares of the future production of assets and have Community ownership of the assets. This form of Community Capital is lower-cost and shares wealth more equitably across society.

Capital Markets

The argument for separate Capital markets is that we cannot know the value of Capital. Hence we need a market to set a price. Unfortunately, it is impossible for Capital markets — to set the correct price. One reason is that the buyers in markets are unequal and the value of money differs depending on how much the buyer has and the buyer's needs. However, the main reason in Capital Markets is that the value of a business depends on the future, and the future is unknown and unknowable.

While this is true for all markets, it is especially true for Capital Markets and leads to perverse outcomes. Capital Markets only have buyers with wealth, and the richest can always outbid the less wealthy. For example, dominant market participants with deep pockets buy new competitors to maintain their market dominance or set prices to drive new competitors out of business.

We need a different form of Capital to address these problems and out-compete Equity Capital by discovering an accurate price for Capital.

Community Capital

The price of goods at the time of a sale comprises the marginal cost plus the profit. Hence the value of Capital is the price minus the marginal cost. It is known and is a good indication of the price of future Capital. To share the Capital at the time of sale, we can give the new Capital to the buyer or provide the old Capital to the buyer and the new to the seller. Giving the new Capital to the seller means the seller transfers their Capital to the buyer and sells part of their share of the business.

Community Capital is a prepayment for goods and services where the owner of a prepayment gets a discount on the product's price and receives Community Capital as well as the product.

Community Capital transfers Capital at the time of sale in contrast to Equity Capital which transfers Capital through a separate market. It saves money because there is no need to pay rent on unused money, no need to pay the cost of transferring Capital, and no need to pay the cost of running a Capital Market. These costs will vary for every business, transaction, and market. Still, they will be approximately the same for subsets of buyers with similar characteristics and products.

Wealth will accumulate, but it moves more rapidly and is reinvested. As buyers will have funds to invest, they will favour investments to reduce administrative costs or the marginal cost of production, further increasing overall productivity.

It means businesses financed with Community Capital will need a lot less money from buyers to provide the same amount of product compared to a business financed with Equity Capital. It applies to all exchanges of goods and services, whether or not the entities are privately owned, cooperatively owned, or government-owned.

An enterprise can sell Community Capital as shares in the output, not a share in ownership. However, they can be connected to assets in the enterprise, like a physical factory or a piece of land.

Any business operating with Community Capital will likely require less than half the Capital to produce the same product, and it will tend to invest in ways to reduce marginal costs.

A Company to Rent Office Space

Traditionally investors jointly purchase a group of offices and rent them out. In Canberra, the yearly rent or lease is about 10% of the Capital cost of the buildings. An investor will likely get a 5% return on investment as dividends and be able to sell their shares with a potential Capital gain at some future time.

With Community Capital, investors sell a minimum of 5% of their shares each year and take any earnings each month. Earnings are set at 5% yearly, indexed for inflation. Investors can sell as many of their shares as they wish at the fixed price, provided a buyer exists. Investors can invest 10% in new ventures and compound their earnings. With this arrangement, reinvesting investors typically triple their Capital every 20 years with a 5% annual return.

The rules for Occupiers are that they must pay a minimum of 5% of the Capital value of the space they occupy. Fifty per cent of each payment purchases Capital in the building, and the other fifty per cent is a return on the total Capital. Capital accumulates until the value of the Capital they receive is 100% of the value of the space they occupy, and then their payments become investments. They can use their accumulated Capital to pay their rent if they wish. The net effect on occupiers is that accommodation costs drop by half, and they can use their accumulated Capital like an overdraft facility.

The company generates a surplus that may pay the body corporate and operating cost fees. New and replacement Capital comes from extra investment.

Both investors and occupiers are better off as the total system requires less money to exchange hands because Capital moves more rapidly.

A Company for Upsizing and Downsizing

In societies with nuclear families with a mobile population, the accommodation needs vary over a person's lifetime. Most people leave their family home and rent or share a flat or house. They then form a family and require a larger dwelling to house children. Later the children leave, and they need a smaller place, and finally, they are often on their own and require assistance.

Community Capital can reduce the cost of Capital by half resulting in significant savings in accommodation costs over a person's lifetime. The released Capital can go towards bettering a person's life while reducing the demands on the planet.

Government Business

Governments can use the same idea and operate a tax system that requires half as much Capital to provide the same amount of services. A tax system takes profits and recycles them. Sharing the earnings from Capital with buyers reduces profits but also reduces the need to recycle them. It reduces the need for taxation, and reduced taxation lowers the cost of administering and collecting tax.

However, it is in the areas of providing infrastructure that significant benefits arise. For example, electricity, tollways and metropolitan water are profitable businesses. Providing some of the Capital back to the community as Community Capital every time they pay water, electricity, or tolls increases citizens' wealth. The current system leaves large amounts of public infrastructure Capital idle. Community Capital makes it available for other investments.

Perhaps the best opportunity comes with health care. Instead of health insurance, we could have a build-up of health wealth by young working people that is available to them in their periods when their health costs are higher. These are childhood, old age, and periods of sickness. Health insurance is meant to do this, but it is expensive. Community Capital will halve costs while achieving the same outcome as Health Insurance.

Summary

Equity finance is an expensive way to distribute and use Capital. It favours investments in increased consumption. Community Capital is a low-cost way to distribute and invest Capital. It establishes fair prices without competitive markets because buyers help choose investments. It favours investments to reduce consumption while increasing value and puts less demand on the natural environment.

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Kevin Cox

Kevin works on giving individuals control over their online information - particularly their financial information with local communities.