The financial system is complicated, but the reason it is complicated is simple. The complication comes because there are two parts to a payment. The first part is payment for the product received, and the second is payment for the Capital used in the product. Unfortunately, the financial system does not supply the buyer with the Capital used because the seller is deemed to own the Capital. This breaks the principle of reciprocity on which human society is built. The financial system goes to great lengths to complicate the system to hide this fact.
Community Capital restores reciprocity and, in doing so, it simplifies finance because a Community Capital payment gives the buyer the product plus the Capital embedded in the product. Community Capital created this way is a product that can be bought and sold, is well-defined, easy to implement, has near-zero operating costs, and is accurate.
How it works
Community Capital is a prepayment for a company's products, much like rewards points that attract a discount on the next purchase. The prepayments are a share of future production, not a share of ownership. The Community of buyers, sellers, workers, investors, and the government collectively owns the organisation's assets. Some community members may be given ownership custody of some of the assets, and the ownership of assets can be transferred between communities.
The above diagram shows the three separate money transfers in the business. Investors can buy Capital, buyers pay for goods and some Capital, and investors periodically sell some of their Capital while receiving dividends.
Existing businesses can move to Community Capital by converting their existing shares to Community Capital and making the accounting changes above. Nothing else in the operation of the business changes.
Once bought into the business, Capital stays with the Community.
The Savings from Simplicity
Community Capital can coexist with Equity Capital. Each business can decide for itself if it wants to use Community Capital. Doing so typically halves the cost of Capital, and the savings are given to the members as lower prices and higher dividends as decided democratically by the members. Member voting can be one vote per member or member voting weighted by shareholding or consensus.
Equity Capital has extra costs from
- The operation and cost of running Capital Markets.
- The delay in moving Capital for reinvestment.
- The cost of renting money or interest.
- The cost of calculating and distributing Capital, including taxation.
- The cost of acquiring customers and retaining customers.
For Capital intensive businesses, these costs are much more than the costs of producing goods and services.
When a business starts, most members are investors. When a business is operational, most members are buyers. This means the controlling board of directors should include buyers' representatives and be democratic.
Community Capital requires the least Capital and is the most efficient form of finance. As it is the most efficient, the criteria for decisions are the desired outcomes. For example, the requirements could be the business must be greenhouse gas neutral or better, and the prices charged for products should reflect the buyer's ability to pay.
For many products, the buyers are localised, and the governance is local. This means overall control is bottom-up. Local communities have representatives to work together at a district level, then state level and finally countrywide.
Businesses buy from other businesses and hence become shareholders in their suppliers. This creates a connected, interdependent society that is resilient to external shocks and stable.
Simplifying the distribution of Capital will build a society able to cope with and possibly reverse the effects of environmental degradation. Changing existing businesses from Equity Capital to Community Capital will incrementally provide the funds to bring about the changes.