Rogerkb [at] theworldisfinite [dot] com

Economic Mechanisms for the Creation and Preservation of True Wealth: Part 2

As I explained in my previous post on this same topic the only source of true wealth is a healthy, functioning economic system with adequate supplies of productive resources (i.e. trained workers, raw materials, energy, etc). Purely private wealth is a delusion in an economic system with a high degree of labor specialization. The question I am trying to address in this essay is how to create explicit economic/social mechanisms which will foster the creation and maintenance of this true source of long term wealth in a world of limited resources. In part one of this essay I suggested that equalizing current incomes and basing retirement income on years of useful service (measured by income) would help to eliminate the compulsive search for individual security through constantly expanding economic output which drives so much destructive behavior in our current economic system.

However, even if we are not competitively attempting to accumulate more money than our neighbors, we still might collectively decide to live as richly as possible in the present and ignore the consequences to the future. If present consumption is imperiling our future economic wealth then we need to reduce consumption. The easiest way to do so is by limiting the variety of outputs produced. People tend to buy what is available to them. Out of sight is out of mind. If certain products are not produced and not advertised then no one will be anxious about not owning them.

The mechanism I propose for controlling production I call public finance capitalism. Capitalism in its most general sense is the financing of new production enterprises by existing production enterprises. Current production enterprises give economic output to new production enterprises under the assumption that the new enterprises so financed will produce output in the future that will match or exceed the value of the output that they are consuming in the present. The banker who makes loans in merely a kind of insurance person who says ‘I think that this new enterprise is likely to succeed so that I authorize existing productive enterprises to give them the output that they need to be successful’. This authorization takes the from bank deposits which the bank creates out of nothing and gives to the new business to use as it sees fit. When a check written against the deposits is presented to the bank by some existing business it pays the presenter with money out of its reserves. The reason that this process does not drive the bank’s deposits to zero is that loans made in the past have resulted in the creation of new wealth which flows back into the bank. In fact, in a growing economy financed by interest bearing loans, the money flowing back is greater than that flowing out in the form of new loans so that the bank’s reserves are continuously growing. Banks try to maintain a fixed ratio of deposits to reserves, so that as its reserves grow the amount of new loans is increased in the familiar and much beloved spiral of exponential growth.

We should keep firmly in mind that the real physical basis of capitalism is the provision of goods and services from existing production enterprises in exchange for future goods and services from new production enterprises. This exchange does not require the services of private financiers. In the economic system which I call public finance capitalism, new businesses would be financed by public banks whose reserves are provided by tax money. The loans made by the banks would be interest free. The purpose of these loans would not be to make money for investors. The purpose would be to provide goods and services which the community needs. Since the banks are public and the reserves would come from public tax money then democratic input as to types of businesses that the community wished to finance would be entirely appropriate.

The loans would be interest free. Bankers would receive salaries for their services, but they would not make profits based on the total volume of loans provided. The bankers’ purpose in life would no longer be to increase the total volume of economic production as rapidly as possible, but rather to enable the specific kinds of economic production deemed desirable by the community.

Clearly different levels of economic community exist (municipal, bioregion, county, province, state, nation etc.) and these differences may take on greater significance as reductions in the economic quality of available energy enforce more reliance on local production. A business serving primarily a small local community should be financed within that community, and not at the state, provincial, or national level. On the other hand businesses which will naturally be large and centralized due to economies of scale (e.g. semiconductor manufacturing) will be financed at the level of the larger community which they serve.

Although businesses are publicly financed they are still private enterprises. That is some person or group of persons will put together a proposal for a new business to be created, and if the community, through the banker as an intermediary, agrees to finance the new business, then this group of people become the proprietors of the new business and they can run it as they see fit. As long as the business is financially successful their right of proprietorship is absolute. No elected individual or legislative group can arbitrarily decide to remove or replace them.

The question of what constitutes financial success is a tricky one. Even in the current economic system we do not require that businesses show a profit every single year. If we did so, a chaos of continual bankruptcies would immediately ensue. I am not really financially knowledgeable enough to know what an appropriate measure of business success would be. Perhaps some ratio of income to debt averaged over a specified time period would be appropriate. Businesses which failed to meet this criteria would be liable to repossession by the bank in the public name. Of course it would not be necessary to exercise this right in every instance where it became possible to do so. A banker could use his or her judgment as to the probability of eventual success by a given business and could continue to extend credit in even in cases where he or she had a legal right to deny it.

If a decision is made to repossess business capital then new proprietors for the business can be sought. Or if the decision is made that the business is unlikely to succeed no matter who is chosen to run it then the business can be dissolved and the remaining capital can be sold for whatever it is worth to at least partially compensate for the bad loans.

Bad loans, of course must be paid for. If the proprietors of the failed business are shown to have been negligent then some of the cost can be recovered by attaching their future wages. However, starting a new business is risky business, and if everyone involved believed in good faith that the risk was reasonable and worked hard to make the business a success, it would be unreasonable to reduce such individuals to life long poverty for having taken such a reasonable risk. Thus, just as at present, some kind of bankruptcy procedure would be necessary in certain cases.

If the losses from bad loans cannot be completely recovered in any other manner, then the bank’s reserves must be maintained by increasing taxes. Bankers who make a lot of bad loans will not keep their jobs for long.

Remember that this proposal for public finance capitalism is to be combined with my proposal for limiting and substantially equalizing salaries. No matter how successful a business enterprise is the proprietors can earn no more money each year than this maximum salary which will be the same salary earned by all full time employees in any successful business (A business which is on the verge of failure could reduce salaries in an effort to survive). If excess income is earned above what is needed to cover operating expenses and employee salaries then the extra money is used to pay off any outstanding debt. If a business is debt free then the income in excess of operating expenses and salaries is taxed away and goes into the reserves of the appropriate public bank.

In this economic system there are no owners of capital, only proprietors of capital. That is if a business is successful and pays off all its loans its proprietors cannot sell the business for a large sum money and live in ease off the proceeds. The capital is owned by the community which financed it. If the proprietors of a business decide that they are ready to retire or want to change careers the business passes into the public domain and new proprietor’s for the capital are sought out. Once the new proprietors are chosen, they have an absolute right of proprietorship as long as the business is financially successful. Below a certain level of capitalization traditional family businesses can be allowed so that (for example) the proprietorship of a farm can be passed on the farmer’s children without the need for public approval. However, if the children prove to be incompetent farmers and end up running up large debts then eventually the farm can be repossessed and given to new proprietors.

But wait a minute! you say. If a successful entrepreneur cannot earn more than his or her least productive full time employee then why would anyone choose to take on the headaches and responsibilities of being an entrepreneur? I have two answers to this question. First certain people are born to be entrepreneurs and their passion for practical accomplishment will inevitably find an outlet. Just as in the current economic system we see multimillionaire CEOs who could have retired decades ago still running giant corporations and working long hours because they value the symbolic trappings of leadership and success more than they do leisure, so in a system of public finance capitalism the movers and shakers will find and excuse to move and shake no matter what the financial rewards. Secondly, I propose to build in an explicit economic mechanism for rewarding successful entrepreneurs.

As I explained in part one of this essay, retirement income in the fantasy world I am creating would come from a system of universal social security, and the size of that income would be determined by the total lifetime income of the individual and the age of retirement. Successful entrepreneurs would not be granted excess income in the present, but would receive credit for having earned extra income in the social security system. A super successful entrepreneur who started multiple profitable businesses might eventually reach a point where the retirement income to which they were currently entitled would equal the maximum allowed income, and they would then be free to do whatever they wished with the rest of their lives. The reward of productivity should be freedom, not excess economic consumption.

But isn’t this idea counterproductive? you ask. Don’t we want great entrepreneurs to go on being entrepreneurial for as long as possible rather than retiring early? In a world in which we are constantly striving to increase economic production the answer to this question is ‘yes’. In a world in which we are striving to achieve adequate levels of production with minimum consumption of resources the answer is ‘no’. Or at least we would like these successful entrepreneurs to direct their creative energies outside of the purely market driven goal of making short term profits. To me the idea of exceptionally talented individuals being free at a relatively young age to direct their creative energies to whatever activities they most care about or perceive as being the most valuable in the long term, rather than simply concentrating on enhancing their status by accumulating more short term wealth, is a happy thought rather than a horrifying one. We must find a way to honor people who make exceptional contributions to society’s well being, but this honor must take some other form than an ever increasing right to consume economic output.

July 3, 2007