The cost of operating many capital markets, such as stock markets, exceeds the value of new investments. Most of the cost is in setting the price of Capital.
Capital markets set the price of Capital through the operation of a capital market with many buyers and sellers. The hope is that the “invisible hand” of the market will set a fair price for both buyers and sellers.
Unfortunately, capital markets do not “settle down” and arrive at a fair price. They behave randomly because they include positive feedback and because the product has zero production cost. The positive feedback arises because the measure of the product is the commodity traded. Others have described capital markets as similar to a market in heat by trading temperature.
For example, in housing markets, the positive feedback comes from a buyer with more Capital consistently able to outbid a rival bidder to purchase a given house that they both want. It means the likelihood of Capital going to the person who already owns the most is higher. Hence in the housing market, wealthier people will, over time, accumulate most housing capital and become landlords of the people they outbid.
If the purpose of a market is to set “the right price”, then capital markets with Capital as ownership cannot work. The empirical evidence that capital markets do not set “the right price” is overwhelming. We see it every day with stock markets following “random walk patterns”, the so-called business cycle, the rise of house and land prices, the setting of targetted inflation by central banks.
The other reason ownership capital markets cannot set a stable price for Capital is their inability to follow the laws of supply and demand. Trading a product with no cost to its creation means there can be no market in itself to set the price. The price has to be set outside the market. Capital as savings exists, and its production cost is irrelevant to its later use. Capital is also created as a loan where it is a promise to repay. Loans from banks or the government are book entries and cost nothing. Lending money is a risk, but it is not a cost of production as it is with markets in goods and services.
There is a price of Capital, but the capital market does not set its price. Capital markets as a means of setting prices are unnecessary. We don’t need them to generate wealth. Their function has become a means of redistributing wealth in a gigantic casino where the market operator always wins. Some games favour those players with the most money and influence over the setting of prices outside the market.
To overcome the problem, we need a different form of Capital. We need Capital that can only earn more Capital if it is invested and produces something of value. Also, when Capital returns to investors, the investors cannot still make money on the removed Capital. Rather than using a market to set the price of Capital, we need Capital Markets where the price is known.
Consumer Capital
Prepayments are the right to purchase goods and services in the future at a discount. The discount depends on the time held.
Consumer Capital only earns money when invested. When an investor earns a discount, the Consumer Capital transfers from the investor to the organisation. The organisation can move it to consumers, workers, the state, or the original holders of Consumer Capital.
Capital in this form does not give rich people an automatic advantage, and it prevents speculation. The Capital is the right to purchase at a discount. The price paid will depend on the future market price of the goods and services. The buyer of prepayments cannot corner the market as they can with futures and options. The cost of Capital is fixed at the time of creation, so everyone competes on equal terms. The criteria for buying Consumer Capital is who receives the most value rather than who pays the most for the goods and services.
Consumer Capital is economically efficient. Shifting from ownership of assets to ownership of Consumer Capital saves the money cost of the existing capitalist system. No extra money is needed to give a return, and there is no need for a separate capital market. Prepayments are an extension of the existing payments for goods and services. When Capital changes hands, there is no change in ownership of another asset like ownership of the business or ownership of a loan. Prepayments remove the cost of changing ownership.
When a customer buys a good or service, part of the cost is the cost of Capital. Prepayments systems can transfer the Capital to the buyer meaning all consumers gain wealth when they spend.
It means organisations seeking Capital can get more Capital for the same cost while investors can get higher returns. It is estimated to double the amount of Capital available for investment for those organisations that adopt the approach. It stabilises prices and distributes wealth across society, increasing economic activity.
With traditional Capital, investors and consumers are in conflict over prices. Investors want to increase prices while consumers wish to lower prices. With Consumer Capital, investors and consumers want to reduce the costs of operating the business. Higher costs with higher profits reduce the returns to investors as more prepayments transfer to consumers with each payment. The agreement leads to innovation, efficiencies and higher productivity.
Implementing Consumer Capital
Consumer Capital is an extension of the existing payments system. The extension handles pre and post payments as well. Post payments is a form of credit and remove the need for separate credit arrangements.
Consumer capital can coexist in organisations with shareholder capital.
Any organisation with loans or requires new Capital can implement Consumer Capital to raise more funds while leaving the existing ownership system in place. Over time consumers will hold increasing amounts of prepayment capital, and organisations will need to give board representation to consumer holders of prepayment capital. Consumers will choose the board representatives to represent them.
Because Consumer Capital costs less than shareholder capital, organisations using the approach have a price and investment advantage over shareholder only capital organisations. Consumer Capital will likely replace shareholder capital in most organisations.
Employee Board Involvement
Employees who contribute labour also contribute Capital to the organisation. People have the know-how and contribute it to the organisation. While they remain in the organisation, the know-how remains. Employees are typically paid for their know-how, and while they are with the organisation, it is part of the Capital. It does not receive a return on investment, but its existence entitles it to representation on the board.
Government and Regulators
In a similar way to employees, government and regulators contribute to the Capital of the business. They should have board representation or oversight of the board decisions and deliberations.
