Economics is a predictive science. It predicts that the planet will become unsuitable for human survival — if economic activity continues in its current form. The attempts to solve the problem piecemeal with greenhouse gas emissions targets, bio-diversity targets, reafforestation, banning of plastic use, is not working fast enough.
We need a fundamental shift in the way economics operates. Reforming Economics provides an approach and Outcomes of Economic Reform outlines how the approach changes parts of the economy. The capital released by the reforms is used to address global issues by coordinating local groups to give consumers a greater voice in investment decisions. The emphasis changes from thinking of money used to purchase an asset as the product to thinking of what the assets created as the product. We make the system change by giving investors a fixed return on their savings, by the consumers taking on the risk and rewards of investment decisions, and by replacing profits in the form of money with profits as cheaper goods and services.
We can achieve a fixed return for investors if we change the annuity formula based on money earning money and shown in the diagram above from
P = r * PV /(1- (1 + r) **- n)
to the annuity created with the paying in advance and with a discount calculated with the formula
P = PV * (1+r) / n
The graph shows that the formulae give different results. The prepayment investor gets fixed earnings per year no matter how many years the annuity lasts. The traditional loans investor receives variable earnings per year depending on the number of years. The prepayments give an intuitively correct result while the more complicated formula produces a counter-intuitive result.
The first formula has an exponential term that expresses the idea that money earns more money. Our current approach to investment is built around that idea. The idea leads to a complicated, opaque, unfair economic system; much like the formula.
Prepayments with a return on investment in more goods and services is a simpler formula and the investment system resulting from using it is simpler.
Simplicity brings predictive accuracy, lower costs, greater transparency and equity.
The lower costs mean we have money available to address the existential issues of climate change and other human effects on the environment. Greater transparency and equity means we are more likely to get humans to work together to solve these problems.
The change to the payments system so it becomes a means of investment will reshape the economic system. It will give us an economy that we are better able to understand, experiment with, and adapt to the world we are changing.
