Capitalism is a way of doing business where people provide goods or services to others in exchange for money. It began as a way for people to share things they didn’t need and as a way of helping each other out or sharing. Sharing or gifting is an evolutionary change that distinguishes homo sapiens from other primates and increases survival rates.
But as time went on, the invention of Capital (money and resources used to create goods) made it possible for people to make more things than were needed and for some people to make money without providing anything of value. This leads to situations where some people have more resources than they need while others don’t have enough.
An example of Capital making money without providing value is interest paid on interest. We pay interest on money lent to us, but interest was not lent. Interest on interest does not have to happen, but standard loans operate that way. We can change the rules on repayments, so it does not occur.
The same thing happens with returns on shares. Repeat buyers pay investors for the Capital used to create the product; the next time someone pays for the same product, the investor gets paid again for the same Capital. We can change the rules, so double payments for using the same Capital do not happen.
Getting a return on the use of Capital is essential but getting repeated returns on the same Capital without sharing with those who supply the extra money is not OK.
Why does Capitalism produce so much?
Profits or return on investment is the driving force behind Capitalism. People will invest if they earn a return. Once a community stops investing and consumes more Capital than it creates, the society will stagnate and ultimately collapse or be absorbed by another.
However, wealthy investors live off the interest on interest and the dividends on dividends to consume without contributing. The rich accumulate assets that remain stagnate because they do not share the extra profits with the buyers who paid for them. Capital stagnating means new investment stops when too many people become too wealthy, and productivity improvements drop.
A strategy to halt the mal-distribution of too much wealth of a few alongside billions of poor people is to stop interest on interest and dividends on dividends while keeping investors investing.
To halt interest on interest, every repayment should reduce the Capital owed by 50% or more of the repayment. A $100 loan paid off in equal instalments with 10% interest over ten years is $16.27 a year. Using Community Capital, it would be $15 a year. Each year the loan reduces by $10, and $5 of interest is paid yearly. The $1.27 per year extra from the normal interest formula is the unearned income of interest on interest.
In 2023 the interest on interest for Australian Dwelling Mortgages is about $9,900,000,000. This money is unnecessarily tied up in mortgages, and its release would improve Australian productivity and economic health. It means the Reserve Bank has better control over the money supply and makes it easier to control and target zero inflation. Inflation is caused by the accumulation of unearned income in the economy, causing an increase in money without a corresponding increase in output.
Similarly, dividends on dividends are halted if, every month, shareholders sell 50% or more of the capital gains and dividends they receive to buyers of goods and services. The new buyer shareholders will want to reinvest or spend their investment returns, whereas the wealthy are happy to let assets accumulate as they do not need the income.
Another system change is to make profits by consuming fewer natural resources to satisfy needs. When consuming natural resources, nature gets no compensation for consumed Capital. However, if the use of nature is reduced with investment, then that is better than investing to increase the use of natural resources. This is more challenging than fixing the economics, but it can be done.
These strategies remove unearned income, increase the turnover of Capital, reduce the cost to transfer Capital and create local economies that grow by consuming fewer natural resources. To see one method, read Evolving a Sustainable Economy and Community Capital Markets.
