Incorporating Capital Markets into a Free Market
If a tomato market operated the same way as a Capital Market, trading between sellers would generate new tomatoes. This article shows how to trade Capital without creating more Capital.
Today most Capital is traded in Capital Markets that operate like Free Markets in goods and services. Giving money the ability to generate more money over time turns Capital into a commodity with value and tradable in a Free Market. Free Markets work well in goods and services but not in Capital Markets. Capital Markets are expensive to operate, distort the distribution of wealth, reduce economic progress, and allocate Capital to harmful activities like burning fossil fuels.
The Invisible Hand of the Free Market is an emergent property of Free Markets, provided there is community oversight and regulation. The Invisible Hand establishes a stable consensus price. Capital Markets differ from commodity markets in a way that changes the effect of the Invisible Hand. Instead of setting a low, stable price, the Invisible Hand of the Capital Market causes prices to rise and then collapse.
Central Banks regulate Capital Markets. They have recognised the way the Invisible Hand operates and have bowed to the inevitable. They set inflation, or an increase in the price of money, targets. Unfortunately, Capital Markets influence goods and services markets resulting in price instability of goods and services.
A Free Market in Capital must cause inflation because we create Capital as extra money instead of more goods and services for the same amount of money. Markets in money generate more money by trading money. It is like having a market in tomatoes where the more we trade them, the more we have without growing any more.
We can solve the problem by not creating more money when we trade it. We can do that by buyers providing Capital and receiving a return on Capital with more goods and services for the same amount of money.
A buyer creates Capital when they pay more for the goods or service than it cost the seller to obtain. The difference is a profit that increases Capital. Capital is wealth, and it is money or an asset we can sell for cash. Profit is the reason we trade, and Free Markets provide a way to set an optimal price. If there are many sellers and many buyers who are all free to change, the price settles on a stable value in an orderly market. In an orderly market, buyers and sellers divide the profit. Buyers get lower prices, and sellers get more money.
When sellers need Capital to invest in new products and services, they go to investors who have money because they have the same objective of obtaining higher prices and profits. Alternatively, sellers could receive their investments from buyers and give buyers returns with lower-priced goods and services. Buyers can do this by prepaying for goods and services and receiving a return on investment as discounts when they pay for goods and services.
However, many investors are not buyers, but the payments system can automatically schedule investor repayments with discounts. When a buyer purchases goods and services, the money collected goes to those investors who want their money back.
With prepayments that earn discounts, we do not need a separate Capital Market. The market in goods and services continues to operate as it does today and performs two functions. It is a goods and services market, and it is a Capital Market. The operation of the market does not increase the amount of money available for other purposes. It increases the Capital as more goods and services. When purchasing goods and services, the cost is the cost of the goods and services plus part of the Capital to create the goods and services. As buyers buy goods and services, they also get a proportion of the Capital released from prepayments.
When a trader sells tomatoes to another trader, they receive money. No new tomatoes appear. A return on the trade is the discount on the payment.
In summary, buyers supplying Capital as prepayments replace Capital Markets without distorting the market in goods and services they serve. Removing the need for separate markets by incorporating Capital Markets into the goods and services markets saves the cost of the Capital Markets. The savings go to investors in higher returns and buyers at lower prices.
A side benefit of a prepayment Capital Market is that governments are likely to receive higher taxes as it is difficult to hide the increased profits and sales. In contrast, there is a large industry devoted to tax minimisation in Capital Markets.