Increasing Capital Productivity to Reduce Inequality
Human communities create Capital by investing money to reduce the cost and effort of producing something other humans want. Most wealth is created by continuously improving the products people already purchase. Improving products requires time and effort, but once we have worked out how to improve things, we can apply the ideas, time after time, for little or no extra cost and sell it for the same profit until someone else comes up with a better way. We call these improvements Capital, and the value of the Capital is the decrease in costs created by the improvements.
The ownership of improvements know-how or Capital is valuable. The more you use it, the more valuable it becomes because using know-how improves it. A rule of thumb is that most improvements get better by 15% for each doubling of sales.
Owners of Capital keep the ideas and profit from the concepts to themselves because if everyone can do it, then its value to the owner diminishes. If the owner can’t control the concepts, they dream up rules to preserve their advantage. Copyright and patents are two, but the most common is to make it difficult for competitors by restricting their access to Capital. Unfortunately, this reduces the productivity of Capital because restricting access to Capital is achieved by making it expensive and by storing it away in unused stores of value.
Access to Capital is restricted by only allowing people who already have Capital to get more and by charging for new Capital before it can generate profits. The financial system is designed to achieve both objectives by creating new Capital with loans. Only those with Capital are given loans and have ways of removing the cost of debt not available to those without existing Capital.
To overcome these problems, we can devise ways for everyone to access existing Capital without giving away know-how and without charging for it. We can circulate existing Capital faster, so it is available for investment.
One way is to create Capital by prepaying for products. Prepaying for products does not change ownership and does not give away know-how. Giving those who buy products a prepayment for products of the same value as the prepayments embedded in the price of the products does not cost the seller anything and gives them a future sale.
These changes will at least double the use of existing Capital, remove the cost of Capital Markets, and remove the cost of interest.
Significantly the changes do not decrease existing wealth nor change the existing financial system. It brings competition and a choice to the Capitalist system and makes it more productive.
We can achieve this goal by dividing our economic system into small self-contained communities of buyers and sellers, as described in Finding the Money to Survive.