The Global Financial Crisis and now Covid19 has revealed the fragility of economic systems. To address these crises we need economic reform that is quick and easy to implement at scale. It can be easy because a financial system is an invention of humans and is software. We do not need to construct any new artefacts or invent any new technologies. We can do it by modifying the existing soft monetary system.
One way to do it is to introduce a change that reduces the cost of capital and spreads capital accumulation more broadly. A variation that achieves this is to use prepayments for goods and services to fund investments in assets that produce the goods and services. Prepayments are well known and well understood. Existing payment systems are efficient and low cost, and with modern technology, prepayments are efficient and cost little to operate. Loans and equity are expensive to work and to manage. Replacing loans or equity with prepayments is technically and operationally straightforward.
The cost of loans is the cost of interest. Interest also gives a return on investment. Holders of prepayments can receive a return on investment with discounts. Discounts eliminate the need to use interest as a return on investment. The saving of interest is a real cost-saving and, it means we can give investors higher returns in goods and services and users of the goods and services lower prices.
The cost of equity is the cost of capital gains and, as with interest, it takes more money to operate an equity system than it costs to operate prepayments.
To make prepayments work efficiently, investors receive fixed returns and buyers take the risk on the investment. Buyers obtain the capital released from investors when the investors receive a return of capital. The risk to the buyer is the risk of an increase in prices, but this is a risk a buyer already takes.
The capital accumulated by buyers is in the form of future prepayments, and the effect of the change is to halve the money cost of most capital intensive investments.
Implementation
One way to implement prepayments is to use human-sized organisations of 100 to 1000 human participants. Each product or service uses a different group of humans, but all groups have standard administrative systems making it easy for people to move between groups. The groups can take any legal entity such as private or public companies, trusts, cooperatives, mutuals, unions, governments, and not for profits. All humans in the group have a stake in the asset and a voice in how it operates.
The organisation takes collective responsibility and owns the capital asset with each user of the asset having custodianship and getting a direct benefit from part of the asset. For dwellings, the ownership could reside in a housing trust while the occupants of a dwelling take custody of, and have a direct stake in, the residence they occupy.
Turning existing loans into prepayments will stimulate the economy as it makes the interest money available for further spending. Making a monthly payment of 25% of gross income for occupying dwellings makes housing affordable and accommodates changes in income levels.
You can view and observe a prepayment system for solar panels at https://www.prepower.org
