Summary
The Reserve Bank needs direct control over the amount of new money released into the economy. Governments decide where to spend the money. Interest Rates are an indirect instrument with a delayed effect, while direct control permits immediate adjustment. Community Capital spent by the Government is a way to inject new money directly into the economy without causing inflation. It allows the Reserve Bank to respond quickly to changing economic conditions.
White Label Personal Clouds (WLPC)
WLPC is a research and development company that grew out of a successful identity company whose innovation allowed individuals to prove their identity rather than another party providing their identity. It created an efficient, secure verification of identity system. WLPC has worked for 12 years to give all members of the Community a similar agency over their financial data to improve the efficiency of the financial system. Community Capital that increases the efficiency of the financial system is the result of WLPC’s R&D.
Background to the Research
WLPC research uses ideas from complex adaptive systems. These systems contain independent entities connected by relationships. In nature, the purpose of living organisms is the species’ survival. Humans have gone beyond survival with systems with multiple purposes — like providing adequate housing for everyone for the minimum cost or, perversely, the goal of becoming the wealthiest person on the planet. These systems are non-deterministic and change as the environment within which they exist changes. Techniques used within areas like weather forecasting build system models and run the model many times to find the most likely outcome. WLPC takes the same approach as weather forecasting. As well as modelling, it builds systems that operate like the model to adjust itself toward the purposes set by the designers.
Community Capital and its use by the Reserve Bank
Humans have survived and prospered because they worked together and supported each other. They negotiated in small groups to look after assets and distribute the output within the group. Some were custodians of assets, and some were consumers of the asset output. The way they divided assets evolved using the principle of reciprocity to agree if the distribution was fair. It involved individuals agreeing to share with others, knowing that other parties will share with them.
The mental bookkeeping to handle all the possibilities is immense, so humans invented money to automate sharing. Money is a highly successful tool that simplifies sharing and has given rise to economics.
Unfortunately, Capital, a derivative of money, is not automatically shared. Owners of Capital use Capital to create profits that become Capital, but they do not share the new Capital with Consumers who supply the money to make Capital. It breaks the principle of reciprocity that encourages humans to cooperate and work together.
Society tries to correct the problem. Taxes on profits distribute from owners to consumers. Free market competition between sellers leads to lower prices for buyers and a sharing of profits. However, in modern society, these sharing measures have broken down, and taxes tend to take from the middle class and benefits to the poor are cut. Free markets turn into Capital markets where asset prices inflate, leading to higher prices for buyers. It is unsurprising as the wealthy have the funds to buy influence and set societal rules to best suit their interests of becoming Rentiers.
However, variations in wealth are desirable as it keeps the social system dynamic and evolving. Still, too much variation and wealth concentration cause stagnation. We know the system is broken when a few wealthy people control most of the wealth. Today we see the results with wealth stagnating in overpriced assets and speculative financial products with no intrinsic value while a large proportion of the population lives in poverty.
From Rentier Capitalism to Community Capital
Community Capital provides a socially acceptable method of spreading new wealth without impacting existing stores of wealth. We can turn Rentier Capital into active Capital and transform the economy incrementally. Chapter 8 of the Club of Rome “Earth for All” is titled “From Winner takes all Capitalism to Earth4all Economies” and describes the problem of Rentier Capitalism. Rentier Capitalism happens because owners of Capital do not share the profits with consumers. The Earth4All book gives possible ways to share after the problem has occurred. Community Capital prevents the problem from occurring in the first place.
If we prevent most Rentier Capitalism from happening, then the five changes described in “Earth4All” will evolve by putting constraints on the use of Community Capital. Community Capital outcomes are:
- Capital will localise, with most remaining in local communities.
- Wealth becomes widely distributed as consumers gain Capital when they consume.
- Economies work towards lower costs and efficient production because that rewards both investors and consumers.
- Efficient production reduces resource demands by producing more value (products) with fewer resources.
- Exponential technologies like electricity production will likely drop products in price by 15% with each doubling of sales, meaning fossil fuel consumption will rapidly decrease.
- Localisation of finance means most goods will be locally produced, especially food.
Governance of local Commons
A local community owns an asset, with members taking custody. Those with custody behave as if they own the assets. Custodians and consumers share the profits; as time passes, consumers take more responsibility until they become the primary custodians.
A way to make this idea scalable is to incrementally replace some Equity Capital with Community Capital. Community Capital is prepaying for goods and services produced by Community Assets. When consumers purchase goods and services, they share the Community Capital component in the price of goods and services. The return on investment of Community Capital can be a discount on the payment, or it could be more Community assets. Notably, the approach automates sharing of new Capital between Custodians and Consumers and profits come from reducing production costs.
Automating sharing leads to significant savings because the financial system becomes more efficient — meaning we need less Capital for the same quantity of investment. Capital moves between investors and consumers without any middlemen, and the Capital is reinvested, not spent on consumption. No middlemen remove the need to monetise assets saving the cost of renting money. Significantly, Custodians invest in reducing costs rather than making more money.
Existing markets operate without change but previously agreed profit targets set prices that consumers and investors adjust according to market conditions. Monopolies set fair prices because custodians seek ways to reduce costs. The approach removes the need for Capital Markets to set the price of Capital, resulting in significant savings and preventing asset inflation.
Modern technologies allow separate local communities for each product or service, creating variety that increases the rate of social, knowledge, and environmental evolution. The local communities share across groups by people moving from one group to another, bringing knowledge and Capital.
Community Capital coexists seamlessly with Equity Capital because they use the payments system to move value. Community Capital costs little to implement as it is a small addition to the payments system; it happens in small discrete steps and does not require separate expensive Capital Markets.
Sharing Bank Profits
Banking is a highly regulated industry, and the Government guarantees small Bank Deposits. The Government can change the regulations along the following lines to bring stability and certainty to the financial system.
Banks should make a profit, but it should be shared between investors and the customers who paid interest on loans. Bank Shares should be converted into Community Capital. As Banks pay out profits, an equal amount of Bank Capital is returned to shareholders. The Bank Capital is transferred to customers who paid interest. The customers receive the Capital as Community Capital.
The system can be trialled by encouraging existing Community Banks to convert to Community Capital.
Community Ownership of Community Batteries
Equity or Community Capital can finance Community Batteries. Equity investors in a company or a cooperative purchase the battery and keep all the profits. They decide if they will give any of the profits back to consumers. With Community Capital, funders supply the funds and become Custodians of the assets. As Consumers use the electricity, they share in the profits and become investors.
Assume the Capital Cost of the Battery is $100,000, and the Battery generates $15,000 of profit each year. With Equity, assume the $10,000 is distributed to the Funders, and $5,000 is invested. The Funders have $105,000 in assets and $10,000 in income. The Consumers supplied the $15,000 in profits but received none of the profits unless the Funders agreed to it.
With Community Funding, the Funders receive $10,000 and their Capital decreases to $95,000. The Consumers have $5,000 in new Capital invested plus $5,000 transferred from the Funders, or a total of $10,000 in Capital. However, a greater benefit comes if the Funders are also Consumers. $15,000 is invested, the Funders get $5,000 of the new Capital, and the Consumers receive $10,000 in new Capital. The agreement satisfies reciprocity and increases social and physical capital.
Significantly Capital moved, and new Capital created. Members convert their Capital to money by selling their share of Capital to new members or by getting a refund of Capital from the Community. Both of these are zero-cost transactions.
The savings and the reinvestments mean that Community Batteries funded with Community Capital are economically viable at $800 per kWh with a life of 3,000 recharges. The same Community Batteries funded with Equity will lose money.
Permanent Housing Markets for Affordable Housing
If any of the following apply, occupiers of houses should consider starting or joining a Permanent Housing Market.
- Thinking of moving house in the next ten years?
- Paying more than you can afford on your mortgage?
- Renting but would like to buy?
- Homeless and can’t afford a suitable place to live?
- Looking for a stable income stream for the rest of your life?
- Looking to invest in property but don’t want the hassle of being a landlord?
- Worried about maintaining your house?
- Looking to downsize?
- Want to reduce your electricity bills?
The occupiers and investors jointly own the Market. The occupiers use the dwellings, and the investors initially own the dwellings. The occupiers are custodians of the dwelling in which they live.
Investors get an adjustable 7% indexed income stream (annuity) for 30 years. Investors can freely trade their annuity with other members. Occupiers pay a minimum of 25% of their income until they have purchased the home, then the amount drops to a maintenance fee which is a percentage of the home value and depends on the services offered.
To prevent speculation and manipulation once a property is in the Market, the owners of the Market, namely all investors and all other occupiers, must agree to the property exiting the Market.
Permanent Housing Market compared to ad-hoc Market.
Permanent Markets remove the interest cost and give investors a higher inflation-adjusted income stream. Each time an occupier pays an occupation fee, 50% of their fee becomes equity in the property. The other 50% gives investors a return on investment. The community keeps all the Capital and invests it in the Permanent Market to provide a better return than superannuation allocated pensions.
The removal of interest and the need to transfer ownership means the Capital stays in the permanent Market, reduces occupation costs, and increases investment returns. Making 50% of the payments available for investment in improving housing productivity is a way to help finance the Rewiring of Australia. Rewiring Australia invests in housing to make houses energy efficient and use renewable, cheaper energy. Fifty per cent of all payments is a lot of investment. It will rapidly improve the productivity of buildings and reduce living costs freeing up more Capital for productivity improvements in other parts of the economy.
What is Capital?
Capital is an asset that produces products for others to purchase. Product cost includes the cost to make it, or the marginal cost, and a share of the cost of Capital. When a product from an asset is purchased, the Capital remains and can be resold.
With Equity Capital, the Capital part of the price remains with the owner. With Community Capital, some or all the Capital moves to the purchaser, who becomes a custodian. Custodians have the rights and responsibilities of an owner, but if they do not use the asset or pay for its use, they will gradually lose that right.
Equity Capital leads to rentier behaviour. Community Capital transfers responsibility and makes rentier behaviour more difficult to maintain.
Community Capital increases productivity because it prevents Capital from becoming stationary and hence unproductive. It replaces many Capital Markets with their associated costs and distortions of value.
Community Capital competes with equity and debt but usually is more productive, as it produces more investment from the same amount of Capital. Australia has had the lowest productivity for sixty years because Capital is tied up in overpriced assets like housing, the cost of debt, and the costs of transferring Capital in equity and real estate markets.
Recommendation
It is recommended that the Reserve Bank set up a project to trial Community Capital at scale with one or more Banks or State and Territory governments and observe the outcomes to see if the approach meets the Reserve Bank’s objectives.
Summary
Changing some Capital from Equity to Community Capital is low cost and will replace the need for Capital markets to set prices. It reduces the cost of transferring Capital, prevents the stagnation of Capital, and speeds up the rate of investment of existing Capital. It addresses many social issues and will provide the funds needed to address existential threats as it allows all to participate in a unified way. The Reserve Bank can use Community Capital to fine-tune the economy and help it adjust to external and internal events.
