Throughout history, humans have thrived from moving from Generalised Reciprocity to Balanced Reciprocity. However, the invention of money led to a shift towards Negative Reciprocity. Unfortunately, today's neoliberal economic policies have accelerated Institutionalised Negative Reciprocity and will lead to the extinction of humanity.
To see the meaning of these forms of Reciprocity, view this YouTube description of Reciprocity.
This article discusses Loans and a bookkeeping modification to transform them into Balanced Reciprocity Loans. This change will increase the productivity of the financial system, typically resulting in twice as much investment from the same amount of Capital over a fixed period.
To read more on Balanced Reciprocity and social changes, read these summaries of the work of Polanyi, Ostrom, Pagel, Bregman and Adam Smith.
Negative Reciprocity Loans
Negative Reciprocity is when one party gives something to another, but the other person fails to reciprocate. In the context of loans, this happens when one party gives money to another, but the other party does not reciprocate and gives something back.
With a bank loan, the bank gives money to the borrower, and the borrower has to work to find ways to repay the Capital plus the interest. The government has licensed the bank to provide new government money to the borrower; the interest covers the Bank's costs of administering the loan, the interest the bank pays to depositors and the risk that the loan will not be repaid. This is Balanced Reciprocity as the Bank has taken a risk and incurred costs.
However, when the borrower pays the interest, they receive nothing in return even though the lender did nothing directly to earn the money. Instead, the lender gets interest and its money back, and the borrower receives another demand for interest on interest. They receive nothing except Negative Reciprocity.
It is institutionalised because the government enforces the demands of the bank. The government recognises the problem with laws on credit, but these laws would be unnecessary if the situation did not arise in the first place. Unfortunately, the rules on credit punish poor borrowers who lack access to money, compounding the effect of Negative Reciprocity and leading to wide disparities in wealth.
The result is widespread mistrust of the government and the institutions that take advantage of Negative Reciprocity.
Reducing the interest rate or blocking poor people from loans does not solve the problem, as interest is needed to show Balanced Reciprocity on the loan. Sharing the interest solves the problem, and if the interest is shared according to the risk and effort of the parties, it becomes Balanced Reciprocity. This, in turn, reduces conflict and non-compliance. It increases trust, and with increased trust comes lower finance costs. These costs are real and substantial, and today are often much more than the value of loans.
Under Balanced Reciprocity, the profits of bank shareholders would stay the same if the Bank reinvested half the interest.
Moving to shared interest can double investment productivity where the community has double the amount invested over time from a given amount of money.
Sharing Interest without Reducing it
Assume the loan is $100, and the interest is 5% for ten years. On the left is a set of loan repayments, with the bank taking 100% of the interest. On the right is the interest shared by reducing the loan amount by 50% of the interest paid and the repayment amount. With 100% going to the bank, the borrower produces ALL the interest and the interest on interest. With 50% sharing, the bank still gets the same amount of interest minus the interest on interest, and the borrower pays 50% less interest.
The loan has created the same amount of money but costs the borrower less because the other 50% does not go into the bank reserves as unearned income. The reserves usually go as dividends to the bank owners or higher interest rates to its depositors. The unearned income tends to remain stationary, and the risk increases because borrowers take longer to repay their loans.
With sharing, the repayments increase and boosts loan productivity because money is put to use, and the risk of a loan default drops, reducing compliance costs. Significantly it inspires trust because the borrowers see the bank's profits, and the lower risk removes the need for other expenses like mortgage insurance.
Paying back at the same rate or in a shorter time.
The advantage to borrowers increases the faster they pay off the loan. This is always the case with regular loans, but the sharing accentuates the advantage. Paying off the loan in half the time saves $22, or almost the same amount as the interest payment to the lender.
How much can a Community Save?
If the lender is part of the same community as the borrower, then the interest minus the cost of operating the system can go to the borrower resulting in more savings. If the transfer of Capital happens at the same time as regular payments, then the operating costs drop to zero. It means a community can keep investing the same money "forever" as the money circulates and is topped up as the asset it represents depreciates. Once an asset is purchased, there are only the operational costs of using the assets, including depreciation.
Institutionalised Negative Reciprocity Loans
A Community of borrowers and investors can establish Balanced Reciprocity arrangements with local currencies and mutual credit. However, for the community to interact financially with the local currencies and mutual credit schemes have to mesh with government money. This can only be achieved with the participation of Banks, Superannuation Companies, and Governments. These organisations are built on money. They benefit from Negative Reciprocity. For governments, it is a form of taxation legitimised as a standard business practice. For Banks, Superannuation Companies, and many other financial organisations, it becomes an easy way to literally "make money" without effort.
This system is hard to change because everyone who becomes a lender receives unearned income. The lenders and governments say they need this unearned income. For the government, it replaces taxes. For businesses, it is profit without doing any work. However, Balanced Reciprocity reduces the need for taxation, creates a less litigious, violent society, and benefits governments through increased trust and less enforcement.
The following example of Institutional Balanced Reciprocity shows the benefits of sharing interest paid on housing loans.
Balanced Reciprocity Loans for Affordable Housing
To calculate the benefits assume the average variable home-loan rate is 6.07% (the average Australian rate at the time of writing), the mean price of a Build to Rent apartment is $400,000, the loan repayment time is 30 years, the average income per household is $70,000 and affordable means 25% of income. Assume the occupier has no deposit. The occupants cover the operating costs and utility costs.
Paying interest on a loan is the same as renting money. Interest is needed to incentivise people to save to invest in creating more money. However, it is clear that investors taking all the interest and not sharing it with those who worked to earn the money to create the interest is unfair — and it is a lot of money.
Sharing and taking 100% of the interest with regular loans saves the borrower a little over $100,000 on a $400,000 loan. The extra money comes from interest on interest and shows the effect of Negative Reciprocity and inequity with Regular Loans.
Sharing is mutually beneficial when investors and occupiers are part of the same organization. For instance, if investors split the profits and distribute half among occupiers, both parties can benefit. For example, investors receive a longer income stream than a superannuation pension for the same amount of money. Ultimately, this system is advantageous for both investors and occupiers.
The amounts owing and paid can be adjusted for inflation, making the system even more stable and equitable.
This graph shows the level of sharing at which houses are affordable, and given enough time, any dwelling is affordable because there is no compounding of Capital. In this example, sharing around 60% of the interest makes the average home affordable.
If both investors and occupiers benefit, where does the additional money originate? Actually, there is no extra money, but the existing money circulates more quickly. This results in increased productivity and is the same as having more money available for investment.
Governance and Organising Social Groups for Housing
Money exchange is a social activity that is a result of human imagination. It is a constantly evolving concept that adapts to the changing needs of people, and there is no single optimal way to organise. The system of exchanging money will continue to transform in accordance with the situation and requirements of groups of individuals.
However, with housing, the group is determined by the houses, not the individuals. Individuals must have the freedom to leave without any repercussions. Any changes to the group's composition, such as adding or removing houses, should be agreed upon by all members. If a new person is to join, existing members must agree to it but without any discrimination as defined by the wider community.
Day-to-day operations are handled by two or more members or a service provider owned by many groups and financed with Balanced Reciprocity Funds. Governance decisions are decided by the group members, including all investors, occupiers, and service providers.
The most suitable legal structure for a group in Australia is a Pty Ltd Company, with a board selected through sortition.
Barriers to Adoption
The barrier to adopting Institutional Balanced Reciprocity is the normalisation of Institutional Negative Reciprocity. The accumulation of wealth and the exploitation of natural systems has bought immense benefits to humankind. This has come about because Negative Reciprocity can benefit those who adopt it and profit from it.
The biggest challenge in adoption is effectively demonstrating the benefits to everyone involved and being able to identify unearned income and manage it appropriately.
Outcomes for Housing
Institutionalised Balanced Reciprocity Loans will transform the Australian Housing Market from a market in money to a market in houses. There will be a dwelling available to all. House prices are expected to remain high but stabilise and cease increasing beyond inflation. The funds released will initially be used to rewire dwellings and make them liveable and energy efficient.