In today's world, electricity and money are shared resources, yet our current exchange system treats them as commodities to be bought and sold to the highest bidder. As individuals, we own our solar panels and have money in our bank accounts. If we have excess electricity, we may permit someone else to use it and sell it to the highest bidder. Similarly, we may lend our money to others, choosing the person who offers the best return with the least risk. Theoretically, a market system determines the most economically efficient price. Unfortunately, in practice, it favours those with the most resources and extracts profits away from local communities to an external financial sector that takes profits that locals earn.
Australia's electricity and money markets are subject to strict regulations and cannot establish a market price. Instead, the price is set by an imagined international money market that includes Australian financial markets. The investors get a guaranteed return on the future value of the assets no matter how much money has been extracted from electricity consumers or savers of money. It is a shocking failure of our financial and democratic systems, resulting in higher electricity prices and a Reserve Bank that perversely fights inflation by making money more expensive.
Instead of relying on a market to set prices, Polanyi, Ostrom, Pagel and Bregman (a link to short summaries of their ideas) and others suggest using reciprocity and redistribution. Reciprocity means treating others as you would like to be treated. Redistribution involves providing for those with the greatest need. This results in a Commons, where goods and services are distributed in a way that supports democracy and financial systems of custodianship rather than ownership.
Where did we go wrong?
As a society, we have overlooked the importance of sharing profits. Instead, we view Capital as a commodity whose price is determined by trading in Capital Markets. Despite knowing that these markets follow a random walk and cannot predict the value of money or assets like shares and currencies, we pretend that they provide the most efficient price for Capital. It is important to note that these markets are heavily regulated and primarily benefit those with Capital.
The alternative to Capital Markets is for communities to agree on profits and how to share them between investors and consumers.
Fortunately, implementing a reciprocity-based monetary system involving redistribution is technically simple and can be deployed in small socially connected groups at half the cost of existing Capital Markets.
Sharing Interest between Banks and Borrowers
When Banks provide loans, they earn a profit known as interest. However, this profit is solely for the Banks and not shared with the Borrowers. Although the Borrowers can negotiate repayment terms and interest rates, the Banks retain all the profits and charge interest on interest. There is no room for negotiation on profit-sharing.
It's important to note that the money itself doesn't generate profit - the borrower uses it to create a profit. When obtaining a traditional loan, the government authorises the Bank to create money and is held accountable for the loaned funds. If the money isn't created, the Bank must find an alternative source of funds to replace it.
The Bank takes a risk, but so does the borrower. In a sharing economy, both would share the risk and agree on how much risk they will take when the loan is created.
When providing a conventional loan, the Bank receives all the profits (in the form of interest), and the risk taken by the borrower is ignored. The Bank does not bear any risk on the interest generated by the loan and takes all the profits from the loan even though the Borrower created the profits. The Bank did not work for it. This goes against the principle of reciprocity and makes a profit that the party receiving it did not earn.
The problem is clearly illustrated in the spreadsheet. The middle section shows that the Bank keeps all the profits but does not take the earnings on interest. The orange section shows a regular Bank loan where the Bank takes all the profit, including the interest on interest. If a borrower takes a $100 loan for five years at a 15% interest rate, they will pay an additional $74.16, almost double the interest amount. The situation is worse than it seems since the surplus money usually ends up sitting idle in bank accounts instead of being utilised or invested by others.
The blue bars show the amount transferred to the lender, and the red bars show the profit to the borrower. The sum of the red bars and blue bars is the cost of interest on the $100 and is the same for all profit divisions between lenders and borrowers. It is also the minimum interest paid on a loan. The first blue bar is the profit going to the Bank on a regular loan. Changing to a profit-sharing approach will increase the productivity of the monetary system as it almost halves the cost of a loan.
Today's economy is a recipe for inflation and the devaluation of money. Up to 50% of all profits are unearned, as the same principle applies to business profits. In a healthy and productive economy, there should be little unearned money, and profits should be shared by agreement between the parties sharing profits, risks and losses. Local Communities can rid themselves of most unearned income and use criteria other than price to decide on the allocation of profits.
Sharing Profits with Community Batteries
A fair distribution of earnings from community batteries, as they are a natural commons, presents an opportunity to strengthen Australian democracy.
The spreadsheets above show that sharing profits on a given product sets the lowest price, but we still need to set the profit margin and agree on how to divide the profits. This is where democratic principles and governance assist communities in making decisions.
Sharing profits described here is a practice that complies with the current regulations for businesses, including banks. It is based on contractual agreements between the parties involved in each loan and business transaction. By adopting sharing, these entities can cut costs and gain a competitive edge over those who do not.
Knowing that the cost of finance is minimised allows a community to deploy Capital to fit within the existing social, business, and regulatory infrastructure.
Deploying Community Batteries
Multiple houses are linked to the electrical grid through a solitary 240V step-down transformer. The residences positioned after the transformer consume the electricity produced or conserved within their homes. Batteries and solar panels attached behind the transformer become part of a shared resource, with the inhabitants of the homes overseeing the assets.
To fit within existing regulations, occupiers who wish to become part of a local community to own a community battery will form a Pty Ltd Company or Cooperative with shares. The entity will own batteries and solar panels in the participating households. The occupiers become the custodians of the assets they choose to include in the entity. The occupiers are issued shares in the entity in return for the assets. Investors purchase shares in the entity, and if necessary, the entity takes out loans with Community Banks.
The entity installs its own metering for its purposes and initially leaves all existing billing and operational arrangements in place.
The Local Distributor Company will be invited to operate any Community Batteries for its purposes and pass on income from arbitrage to the community entity.
The approach requires no change to the existing electricity commercial or operational arrangements. The community entity will earn income from arbitrage, and its main function is to share the revenue with investors and consumers.
Community Ownership of Community Batteries
The following outlines Community ownership compared to external ownership. The existing commercial arrangements for sale and ownership of the grid are left in place, and Community Batteries are one of many investments in technologies to “Rewire a Community”.
Community household occupiers are the members of the community served by the Batteries. The owners pay for electricity, invest their savings, and take out loans for other infrastructure. They decide where to direct the profits from the investments. In this comparison, a Community invests all its returns into renewable and savings technologies.
With external ownership, the profits from investments are required to go to the shareholders of the external entity, including Government agencies. Any benefits to the community tend to appear as support for other government organisations, charities, good causes, sponsorship of sporting teams, and support for community events. The shareholders and executives of the external entities make all these decisions.
The following comparison shows what happens when all the profits from electricity infrastructure owned by local communities are invested in more local infrastructure.
Assume a community-owned infrastructure valued at $1,000,000 yields an annual profit of $100,000. The community decides to invest $100,000 annually towards building new infrastructure in addition to all the returns from the current infrastructure. The profits are distributed equally as new shares to those who regard a dwelling in the community as their permanent residence. The profits from loans from a Community Bank are reinvested in the Community.
When a community does not own its infrastructure, it misses out on the investment from profits. These all go to external investors — including governments.
Importantly, all the red increase is distributed equally across the community. The yellow is distributed equally across the community if the funds are a Community Bank loan.
In this article, the suggested distribution is according to a head count but could be inversely proportional to existing wealth or the ability to pay for electricity. That decision is made locally by the Community of asset user custodians.
Deploying Interest (Profit) Sharing
The main takeaway from this article is that sharing eliminates unearned income from loans and lowers the cost of financing. The Bank supplied the money for the loan, but the borrower supplied the money for the interest. Clearly, it is unethical that the money earned by the interest goes to the Bank because the Bank did not supply it. The best way to stop it is not to calculate it in the first place. Suppose the Bank agrees to share the interest with the borrower. In that case, the interest on interest is not calculated because the bank has received the interest and is not in the borrower’s interest-bearing account.
There could potentially be grounds for a class action lawsuit against banks that have calculated interest on money they did not supply.
There are no legal, accounting, or regulatory obstacles to profit sharing. A Bank and borrower can agree that there will be an explicit decision to share the interest. Sharing the interest is NOT the same as lowering the interest rate.
Implementing interest sharing is a simple change to the accounting when money goes into or out of the loan account. All Banks could do it by changing their loan agreement to make sharing explicit and changing their accounting systems.
Summary
Governments have outsourced the creation of new money to Banks. Banks create money through loans and make a profit by charging interest, and the owners of the Bank keep all the profits as money is treated as a commodity to be bought and sold. The Bank also keeps the interest from the interest even though the borrower took all the risk.
The alternative is to treat money as a shared resource where the profits are shared between the Bank and the borrower. Sharing the profits shares the risk and removes profits on profits. Removing profits on profits and sharing profits reduces the cost of creating money and improves the productivity of the financial system resulting in a more productive real economy.
Treating money as a shared resource reduces the cost of products and services created with money. Those products and services, like electricity, can become shared resources by sharing the profits from their sale. Sharing profits will reduce the cost of those products and services.
However, the main benefit of sharing comes from the increased willingness of communities to work together to survive.
