Humans have survived and prospered because they work together and support each other. They negotiate in small groups to look after assets and distribute the output within the group. Some are owners of assets, and some are consumers of the output.
Unfortunately, in the current Capitalist system, the asset owners take all the surplus generated by the assets and do not share it with consumers. This breaks the principle of reciprocity that allows humans to cooperate and work together.
Society tries to correct the problem with taxes on profits to distribute from owners to consumers and with free markets where the competition between sellers leads to lower prices for buyers. However, in our modern society, these sharing measures have broken down, and taxes tend to take from the middle class and benefits to the poor are cut. Free markets turn into Capital markets where asset prices inflate, leading to higher prices for buyers. This is unsurprising as the wealthy have the funds to buy influence and set societal rules to suit their interests.
Variations in wealth are desirable as it keeps the social system dynamic and evolving however, too much variation and wealth concentration causes stagnation. We know the system is broken when a few rich people control most of the wealth. Today we see the results with wealth stagnating in overpriced assets and speculative financial products with no intrinsic value.
Addressing Rentier Capitalism
Chapter 8 of “Earth for All” is titled “From Winner takes all Capitalism to Earth4all Economies” and describes the problem of Rentier Capitalism. Rentier Capitalism happens because owners of Capital do not share the profits from the sale of the output from Capital. The chapter gives possible solutions after the problem has occurred. This article describes how to prevent the problem from occurring in the first place.
If we prevent most Rentier Capitalism from happening, then the five changes described in “Earth for All” will evolve if we put constraints on economic activity. The outcomes are:
- Capital will localise, with most remaining in local communities.
- Capital becomes widely distributed as consumers gain Capital when they consume.
- Economies work towards lower costs and efficient production because that rewards investors and consumers.
- Efficient production reduces resource demands by producing more value (products) with fewer resources.
- Exponential technologies like electricity production will likely drop products in price by 15% with each doubling of sales, meaning fossil fuel consumption will rapidly decrease.
- Localisation of finance means most goods will be locally produced, especially food.
Governance of Community Funding
One way to address the problem is to use ideas from societies that share the Commons using custodianship. A local community owns the asset, with members taking custody instead of ownership. Those with custody behave as though they owned the assets. Some people are designated custodians, and the profits from the assets are shared between custodians and consumers. As time passes, consumers become custodians. A modern way to make this idea scalable is to replace some Equity Capital with Community Capital. Modern technologies allow separate local communities for each product or service, creating more variety that increases social, knowledge, and environmental evolution. The challenge is to scale the sharing of new Capital across groups that share. We do this by sharing profits from each transaction with Community Capital.
Community Capital is the right to pay for goods and services produced by the Community Assets. When consumers purchase goods and services, they share the Community Capital component in the price of goods and services. The return on investment of Community Capital can be a discount on the payment, or it could be more assets. Critically the approach shares the ownership of new Capital between Custodians and Consumers.
Community Batteries as a Commons
Community Batteries can be financed with Equity or Community Capital. Equity investors in a company or a cooperative purchase the battery and keep all the profits. They decide if they will give any of the profits back to consumers.
With Community Capital, funders supply the funds and become Custodians of the assets. As Consumers use the electricity, they share in the profits and become Custodians.
Assume the Capital Cost of the Battery is $100,000, and the Battery generates $15,000 of profit each year.
With Equity, assume the $10,000 is distributed to the Funders, and $5,000 is invested. The Funders’ assets increase by $5,000 and receive $10,000 in income. The Consumers supplied the $15,000 in profits but receive none of the profits unless the Funders agreed to it. This breaks the principle of reciprocity and with it breaks the social contract.
With Community Funding, the Funders receive $10,000 and their Capital decreases to $95,000. The Consumers have $5,000 in new Capital invested plus $5,000 transferred from the Funders, or a total of $10,000 in Capital. However, a greater benefit comes if the Funders are also Consumers. In this case, all the $15,000 is invested, and of this, the Funders get $5,000 of the new Capital, and the Consumers get $10,000. This satisfies reciprocity and increases social capital.
Importantly Capital has both moved, and new Capital has been invested. Members convert their Capital to money by selling their share of Capital to new members or by getting a refund of Capital from the Cooperative. Both of these are zero-cost transactions.
What is Capital?
Capital is an asset that produces products that others will purchase. There are two parts to the cost of a product. The cost to produce a product, or the marginal cost, and a share of the cost of Capital. When the product is purchased, the Capital remains and can be sold again.
With Equity Capital, the Capital part of the price remains with the owner. With Community Capital, some or all the Capital moves to the purchaser, who becomes a Custodian. Custodians have the rights and responsibilities of an owner, but if they do not use the asset or pay for its use, they will gradually lose that right.
Equity Capital leads to rentier behaviour. Community Capital transfers responsibility and makes rentier behaviour more difficult to maintain.
Community Capital increases productivity because it prevents Capital from becoming stationary and hence unproductive. It replaces many Capital Markets with their associated costs and distortions of value.
Community Capital competes with equity and debt but is normally more productive, as it produces more investment from the same amount of Capital. Australia has had the lowest productivity for sixty years because Capital is tied up in overpriced assets like housing, the unnecessary cost of debt, and the costs of transferring Capital in equity and real estate markets.
Changing from Equity to Community Capital is low cost and will replace the need for markets to set prices. It reduces the cost of transferring Capital, prevents the stagnation of Capital, and speeds up the rate of investment of existing Capital. It addresses many social issues and will provide the funds needed to address existential issues as it allows all to participate in a unified way.