The purpose of an economy is to allocate resources efficiently and effectively to meet the needs and wants of society.
A sustainable economy is an economic system that meets the needs of the present without compromising the ability of future generations to meet their own needs. It is economically, socially, and environmentally sustainable.
Economies are driven by profits on Capital Investment, where capital refers to the financial and physical resources used to produce goods and services. Capital takes various forms.
- Financial capital includes money, stocks, bonds, and other financial instruments used to invest in new projects or expand existing ones.
- Physical capital includes equipment, machinery, buildings, and other physical assets used to produce goods and services.
- Human capital is the knowledge, skills, and abilities of workers used to produce goods and services.
- Natural capital is the natural resources such as land, water, minerals, and biodiversity used to produce goods and services.
Financial capital makes no direct demands on the physical world. Physical capital can be reused to continue to produce. Human capital as knowledge and skills are reused many times. Natural capital can be reused, but it is expensive and complicated.
A sustainable economy can be achieved by utilizing financial capital to develop strategies for reusing physical capital, investing in human capital and reducing reliance on natural capital.
Capital Creation
New Capital is created whenever a business makes a profit. People set up businesses to make a profit, and the profit drives business development. No profits, no business.
Financial, physical and human capital all require people to expend effort and time. If a person gets paid for the effort, it is called work. They use the money from work to pay others for things they help produce. If a person owns Capital, they can sell it or use its profits to pay others for things they need.
Thus there are two ways to gain income. The first is by doing work, and the second is by using Capital. In a stable, efficient, productive society, the income distribution from wealth should be more evenly distributed.
The closer a community achieves this, the wealthier and more stable it will be.
Australian Wealth and Income Distribution
One way to reduce the disparity in wealth and, with it, income is to use transfer taxes to redistribute income.
Another approach, considered fairer, cheaper, and more politically acceptable, is creating Community Capital Markets for public infrastructure and assets. This would involve everyone receiving the same amount of capital, or an amount in inverse proportion to their consumption, to invest in public infrastructure. This approach would be fairer because those who consume more have already received the benefits of higher consumption.
Problems with Capital Markets
Capital Markets are known to have the following issues:
- Unearned Income: Interest on interest, dividends on dividends, and Capital Gains are all unearned income that creates costs and reduces Capital movement.
- Volatility: Capital markets can be subject to high levels of volatility, which can discourage investment and slow economic growth.
- Market manipulation: Capital markets can be manipulated through insider trading or spreading false information, which can lead to artificial prices and reduce economic growth.
- Lack of transparency: Capital markets that are not transparent can create opportunities for rent-seeking by larger, more sophisticated investors and lead to reduced economic growth.
- Inadequate regulations: Capital markets that are poorly regulated can create opportunities for illegal activities such as insider trading and market manipulation, which can reduce economic growth.
- Credit market failure: Capital markets that are not functioning well can create opportunities for rent-seeking by allowing lenders to charge high-interest rates and fees to borrowers without proper oversight, limiting access to credit for small businesses and entrepreneurs and slowing economic growth.
- Lack of diversification: Capital markets that are not diverse and lack access for small investors lead to a concentration of wealth and reduced economic growth.
- Financial crisis: Capital markets can be a source of instability and can lead to a financial crisis, which can severely impact the economy.
Community Capital Markets
Community Capital Markets (CCM) address all the problems outlined above.
- Unearned Income: There is no unearned income in a CCM.
- Volatility: The return on Capital is fixed.
- Market manipulation: The fixed price of Capital makes it difficult to manipulate the market.
- Lack of transparency: The state of the market is known by all participants in real time. All trades are recorded and available to all participants but not the identity of the traders.
- Inadequate regulations: CCMs are part of the regulated goods and services markets.
- Credit market failure: CCMS replace credit markets.
- Lack of diversification: All buyers become investors creating maximum diversity.
- Financial crisis: CCMs are stable and will not trigger financial collapse. CCMs tend to localisation isolating financial issues.
Other Outcomes from Community Capital Markets
There are high costs in running Capital Markets separately from product markets. The cost of including Capital transfers in product markets is zero.
By implementing CCMs, the need for transfer taxes is reduced. Taxes could be further reduced by allowing everyone to invest in public infrastructure while providing everyone with a basic income. The approach would benefit everyone as it would reduce the cost of Capital and speed up Capital reinvestment.
Allowing consumers to invest in public infrastructure would reduce taxes even further while providing everyone with a basic income.
Community Capital Markets make private organizations more competitive. It’s expected that private markets will soon follow public infrastructure markets.
