INTRODUCING NEW CAPITALISM

 

The limits of the planet are a commonly faced reality of the modern age. We all hear and talk about global warming and we all pay high oil prices everyday; both are manifestations of the limits of the planet. Rising oil prices and other planetary constraints are also constraining growth and causing high unemployment in developed economies (detailed discussion in the following pages). Planetary limits have serious economic consequences for all human beings.

Planetary limits were not part of everyday economic reality during the time the current economic system evolved, therefore modern economies are not equipped to deal with the limits of the planet. Their failure to deal with planetary constraints is causing the global economic crisis to continue. Planetary limits have to be dealt with at the macroeconomic policy level through creation of incentives that influence economic choices of business and individuals at the microeconomic level.

The current capitalistic economic system has to be equipped to deal with planetary limits. New Capitalism is such an effort.

New Capitalism equips the economic system to deal with planetary constraints and thus enable economies to grow and prosper in spite of these constraints. It will tremendously expand the potential size of the global economy. Employment and income opportunities will become available for the growing global workforce. New Capitalism will help bring about lasting growth in sustainable economies, including the developed ones.

 

MAKING OF THE CURRENT CRISIS

In the 1930s Mahatma Gandhi said; “if the 300 million people of Indiachoose to industrialize the world cannot handle the consequence.” Now that the two billion people of Indiaand Chinahave chosen to industrialize, the world must handle the consequences.

 

Overcrowding and Over Capacity

Two billion people joined the global workforce after the collapse of communism and the onset of globalization. Massive industrialization and abundant workforce has tremendously increased the production capacities of the global economy. Competition for existing markets and jobs has therefore severely intensified. The world seems to have more labor and production capacity than it can profitably use for the mix of products that it currently produces and consumes.

Mix of products is a very good indicator of the potential size of an economy and its ability to employ people and capital. If the mix only includes food, clothing and other essentials the size of the economy will be much smaller than that of the economy in which luxury goods are also produced. When durable goods are introduced the potential size of the economy goes up further; and so on.

The current mix of products, including investment and service products, is not broad or diverse enough for employing the globally available labor and capital. The size of global economy that this mix of products can drive will be far smaller than the economy that can be potentially built by employing most of the globally available labor and capital. In other words, the fossil fuel driven global economy will not fully employ the growing pool of global labor.

The global economy will be able to provide employment and rising income to its growing pool of labor and also provide stable and adequate returns to capital, if the global mix of products is significantly expanded to include a wide variety of products and services that make economies sustainable and open new frontiers for commercial endeavors.

 

Resource Intensive Mix of Products 

The current mix of products and services produced is very resource intensive, particularly in fossil fuel. Since global resources are shrinking, the production mix of the world should include higher proportion of resource adding and resource preserving products and services.

An example of resource adding product would be a wind turbine: when a wind turbine or a solar power plant is established the planet’s effective resource pie increases, but when oil powered power plant is established the planet’s resource is consumed. Likewise, when an efficient and sustainably powered mass transit system is established the resource pie increases whereas when cars are built (and used) the resources are consumed. When effective recycling systems are established the resources increase whereas they are wasted when landfills are used. When oceans are cultivated for food and for carbon sinking[1] the resource pie increases, but when oceans are just fished the resource is consumed. Every product entails a net resource addition or consumption, either in absolute or relative terms.

When hunter-gatherers faced resource constraints they tried agriculture which at that time was a resource addition. The process has continued ever since and is an integral part of human progress.

Resource additions can be of a sustainable kind or an unsustainable kind. New mine is a resource addition of unsustainable kind. The current mix of products is not only resource intensive but the resource it uses is mostly of the unsustainable kind. If the resources used are of a sustainable kind it may help growth potentials. For example if the electricity used is from wind or sunshine resource intensiveness may be good for economic growth. However resource intensiveness here means resources intensiveness of the unsustainable kind.

The current mix of products fails to employ available labor and capital. The current mix of products will not create the additional resources needed to meet the needs and demands of billions of people who have joined the global workforce, and will therefore intensify competition for resources. It is taking the world on a disastrous course of economic strife and conflict.

To resume global economic growth, particularly in developed countries, the current global mix of products has to change to a sustainable mix of products; one that includes many resource-adding products and services of the sustainable kind.

 

The underlying cause 

Global resource constraints and overcrowding of global workforce are forces that are working against the global economy, particularly in developed countries. However, the underlying factor that is making these forces work against the global economy is the unsustainable resource intensiveness of the current mix of products. If the mix of products was resource adding instead of resource consuming these forces would not work against global economies but in their favor.

Resource adding mix of products would add investment and consumption, which in turn would translate into higher employment opportunities for labor and available capital. It would alleviate resource constraints and global warming. The villain in the ongoing drama of global economic crisis is therefore the current mix of products.

To keep the global economy growing for everybody, it has to be lead towards a sustainable model that does not further stress the known limits of the planet and introduces a large number of new and sustainable products. The change itself will create huge investment demand and generate global economic growth for generations. Once the global product mix becomes sustainable the swelling global labor pool will create demand and business for the US and other developed countries.

 

UNSUSTAINABLE FINANCIAL SYSTEM

While the product mix may be the villain, the financial system is the force behind the villain. The current financial system has a major role in determining the global product mix. It does not allow sustainability into economies and product mixes. The following are some of the ways the current financial system incorporates un-sustainability in economies and their product mixes and kills new business opportunities and economic potentials.

 

Myopia

A huge shortcoming of the current financial system is myopia. Cash flows and profits become smaller in present value terms the farther they are in future. The compound interest method of cash flow discounting exponentially diminishes the value of the cash flow the farther they are in future. $100 becomes $5.73 in 30 years at 10% interest.

The current financial system has a vanishing point. Cash flow and other values become smaller the farther they are and tend to vanish beyond the vanishing point. For most applicable interest rates the vanishing point starts to appear around 30 years in the future. The current financial system does not see well in the future.

The myopia of the current financial system limits investments in all industries. If the vanishing point of the financial system was extended from 30 to 60 or 90 years, investments in general would go up very significantly. Investments in industries like wind and solar energy would go up dramatically. The financial system currently fails to recognize the benefits of using these relatively free and perpetual sources of energy, which over the long term[2] would translate into higher economic benefits than from continuing to use fossil fuel.

The current system fails to recognize the long term benefits of using sustainable sources of energy because discounting of cash flow obscures the costs and risks associated with fossil fuel occurring after the vanishing point. It hides the stable profitability of sustainable energy and the unstable and falling profitability of fossil fuel energy over the long term. It basically makes things happening after the vanishing point irrelevant for financial consideration.

If it were not for the myopia the dwindling reserves of finite fossil fuel and their supply uncertainties would have easily come into financial considerations and calculations. But due to this myopia they will not come into consideration till they cross over into the visible side of the vanishing point.

The fate of the global economy, which hinges on its ability to deal with challenges and constraints of planetary dimensions, cannot be entrusted to an economic system that does not see much beyond 30 years.

With such short sightedness the current financial system can no more serve to maximize real long term economic benefits. It will always favor short term gains (this side of the vanishing point) over long term benefits. In the age of globalization and planetary constraints and opportunities, long term vision is essential for a secure and prosperous future forAmerica and for the rest of the world.

The concept of Time Value of Money which is used to rationalize this myopia is an artifact of the interest based system. Time value of money belongs to the past when capital was scarce (details in the following sections).

Interest is robbing humans of sight and preventing us from seeing the financial un-sustainability of our current economic way of life. We have to get rid of this myopia to see far and be able to build an economy of lasting prosperity.

 

Squandering capital

The world is suffering from resource constraints. But one resource has increased tremendously and that is: capital. The world has more capacity to produce capital than it knows what to do with. There is abundance of capital.

The hurdle mechanism of the interest based financial system was not designed to handle abundance of capital. It was structured with the premise that capital will be always scarce i.e. demand for capital will always be more than its supply (at all risk levels). If capital can be produced there is no reason for capital to be always scarce. If there is prosperity and consequently savings there is no reason for financial capital to be always scarce.

Scarce savings or scarce capital premise is no longer true; there is abundance of both physical and financial capital (they are always equal). Given that there is abundance of capital there is no reason to incentivize saving with interest. Saving generally takes place because people have a need to save for the future, not because of interest.

Abundance of financial capital is somewhat evident in risk free return on capital (pure interest) which has practically become an illusion. Interest rate on US government securities has been practically zero for the lat four years. Treasury Inflation-Protected Securities (TIPS) were sold at negative yields in many auctions during the last three years.

The current financial system is miserably failing to allocate capital to a large number of profitable uses, because it does not have a mechanism to deal with abundance of capital. Interest’s inability to go below zero is its major handicap in dealing with the abundance of capital. Interest rates are practically zero but investments are not taking place in businesses earning low or near zero percent returns for fear of interest rates going up. Interest rates can only go up if they are at zero.

Interest is consequently allowing capital to sit idle or go waste in speculative bubbles. Interest is also squandering potentials for creation of new capital through economic slowdown and unemployment.

The current system is not allowing growth in areas that have the capacity to absorb huge amounts of capital. As mentioned earlier sustainable energy industries are very capital intensive. To find ways to employ the huge amount of capital potentially available, in sustainable and other industries, interest has to be removed or permanently set at zero.

Interest is preventing us from preparing for and welcoming the future. It is a hurdle that is stopping prosperity at our doors.

 

Squandering Labor 

The tremendous increase in capital mentioned above is followed closely by the tremendous increase in global labor. Attaining high employment rate for labor is a major challenge of our time. Lasting employment of labor is a function of employment of capital, particularly in this century. Labor is employed when capital is produced and labor is again employed when capital is employed. This virtuous cycle will continue as long as we can find new and sustainable ways of employing capital for profit. Higher rate of employment of labor can be automatically achieved if we find many new and profitable ways of employing capital.

The current financial system is miserably failing to adequately employ the available capital. It is ignoring sectors that have great future potentials because they don’t provide high enough return on capital to cover interest. The fact that there is abundance of capital does not practically matter much for the system at this time (interest rates are already near zero). The fact that there is massive unemployment does not enter the equation of capital allocation.

The interest driven capital allocation process is still relying on fossil fuel driven industries to absorb all the available capital and labor. Given resource constraints, the current fossil fuel based production and consumption structure will never be able to provide adequate level of employment for the growing global workforce.

The current economic system was not designed with the objective of creating employment. Employment is just a byproduct of the process of making profits. Profits as a driver of economies has worked well for centuries and there is no reason to think that it can’t drive economies in future. The only reason profits are not regularly driving economies towards full employment is a cost that reduces profits: interest. The loss in the ability of profits to create employment corresponds to the amount interest reduces profits.

Economies would tend to achieve full employment by themselves if interest is eliminated. Interest is the main reason economies do not automatically achieve full employment as classical economics suggested.

Keynesian economics is a patch work to deal with such deficiency. It basically takes rate of return out of the equation of creating employment. It is a suboptimal solution. Better results can be achieved by just taking interest out of the equation of employment. Profitability should drive investment and employment to fully benefit from the efficiencies of a free market system. Entrusting central banks with the objectives of employment is another patch that works well for mild unemployment problems because central banks can lower interest. However for the massive unemployment problem of this crisis lowering interest rates is not working anymore.

Besides the painful consequences of massive unemployment of labor there are other serious economic consequences of unemployment for the whole economy, including its businesses. High rate of employment of labor is critical for maintaining a healthy level of demand and a healthy environment for business profits. Labor is a precious resource for creation of wealth and prosperity. A society that wastes labor remains poor.

Labor employment should be an objective of a well functioning economy because high rate of labor employment is essential for a healthy and growing economy. There is a positive feedback loop between employment and business profits; high employment increase profits and high profits create more employment. Profits are a very good and reliable driver of employment.

Economies should be so structured that they create full employment in the regular course of businesses making profits. New Capitalism is such a structure of capitalism.

 

Squandering natural resources

Minerals in the mine do not earn interest, thus companies that extract minerals want to extract and sell them quickly. The possibility of earning interest speeds conversion of mineral resources into cash. The sooner the minerals are converted into cash the earlier they can start earning interest. Faster exploitation of mineral resources translates into faster consumption through a series of intermediate steps that are also driven by interest. At every step along the way, interest drives the flow of goods towards the fastest conversion into cash, which eventually happens to be through consumption. The system is thus incentivizing rapid consumption of resources which should not be case given finiteness of resources.

The financial system is extremely powerful and effective in making humans consume resources rapidly. It not only incentivizes rapid consumption of mineral resources, it also prevents any shift away from mineral resources in the energy sector. Interest is the hurdle that sustainable energy industries fail to cross.

Since Fossil fuel delivers almost four times the energy per unit of capital ($) than that delivered by wind or sunshine; fossil fuel driven power plants are able to pay interest consistently and remain viable. Wind and sunshine power plants are very capital intensive; capital costs kill them in the offing. It is extremely unlikely that there will be a thriving sustainable energy sector as long as interest is around.

The current financial system will favor fossil fuels over wind or sunshine for energy production as long as fossil fuel continues to be a staple or until oil is below a certain threshold e.g. $300 a barrel (rough estimate based on the cost of solar power which is three times coal power). These thresholds will be met for a dangerously long time because governments intervene, through subsidies and other means, to make fossil fuel available at affordable prices to people and businesses that depend on it. Oil producing countries also keep the price of oil at a level that maximizes their revenues. It is ironic that efforts are being made by governments, oil producing countries (OPEC) and the financial system to deplete finite resources.

Interest based system is causing depletion of earth’s resources with maximum speed; it needs to be replaced by a system that allows sustainable industries to flourish.

 

Ignoring Environmental costs and benefits

Environment friendly businesses and industries, particularly clean energy, are not taking root because their rates of return are low. Their rates of return are low also because a significant part of the benefits of clean industries accrue to the environment, to the planet, and to mankind. In other words, a significant part of the benefits of clean industries while beneficial to humankind, do not get translated into financial benefits.  Conversely, the resource loss and environmental and other harm caused to mankind by use of fossil fuel is not translated into financial costs.

In short, the current financial system works against clean energy and other sustainable sectors because of its double failures, i.e. (i) failure to translate environmental and other benefits of clean energy into financial benefits, and (ii) failure to translate environmental and other costs of dirty industries into financial costs. The impacts of both are additive which together make a big difference.

Since the current financial system lacks a mechanism to account for environmental costs, new criteria that account for environmental costs need to be added in the economic system. In other words the financial system besides using financial rate of return should also value sustainability, economic security and macroeconomic prosperity as a measure of return on investment. The proposed Asset tax system of New Capitalism helps to embed those costs and benefits in the cost structure of business and other assets.

 

Capital Destroying Bubbles

The current financial system because of its myopia and complete oblivion of the planetary constraints does not allow investments in new and sustainable industries. The resulting lack of sound and viable investment opportunities in developed countries resulted in diversion of capital to speculative activities; which was evident in the large scale speculative asset bubbles preceding the current crisis.

The existence of interest does not allow capital to flow into low yielding industries. Investors would not go into low yielding industries even when interest rates are favorable because rates are more likely to go up than down, particularly as they get closer to zero. Temporary low interest rates do not help sustainable or environment related industries because of the fear of interest rates going up.

Temporary low interest rates will usually help an economy do more of the things it was doing before; e.g. more investment in real estate, working capital, commodities, and other assets.  It is not surprising that speculative activities pick up during low interest rates. The financial system will let capital be wasted in speculative bubbles and credit bubbles rather than allowing investments in industries that provide low and sustainable rates of return to materialize. In the presence of interest, money is far more likely to be invested in bubble forming assets than in low return industries. Asset bubbles can promise to pay interest, sustainable industries cannot.

Under the current economic conditions, most efforts to spur demand through monetary easing will fuel speculative demand, which will create conditions for further crisis and destruction of capital. As the financial system succeeds in destroying capital through speculative bubbles it further reduces the ability of the economy to invest in new industries that are sustainable. The chances of the current system allowing sustainable industries to flourish are low even when everything else favors those industries.

Interest is the biggest force against sustainability. The current financial system, therefore, needs to be reformed to adapt to the challenges of this century.

REFORMING THE FINANCIAL SYSTEM

The course of action proposed in this book to remedy the conditions causing this crisis is to gradually change the direction of evolution of the global mix of products from increasing resource intensiveness to decreasing resource intensiveness. Once that change takes place the resource constraints instead of restricting investments would become a force for increasing investments in resource adding businesses. The global economy will be free to grow and prosper. It will also be able to employ most of the available labor and capital.

When money is able to produce risk free returns in the form of interest, all investments involving effort or risk have to earn much higher than interest. Clean energy and other planet friendly industries, which have low returns, will not be able to consistently earn more than interest. These industries will always be either financially unfeasible or be at risk of becoming unfeasible in the presence of interest. To make resource adding investments feasible the hurdle of interest has to be removed or permanently lowered for them.

The economic makeup of the world now includes constraints and scarcities that are not captured by market prices, e.g. the environment and finite mineral resources. This failure of prices is one of the primary reasons for the resource intensiveness of global mix of products. Some mechanism therefore has to be put in place to compensate for the failure of product prices to reflect global constraints and scarcities.

Now that planet friendly and resource adding industries need help in obtaining affordable capital, and prices need help in reflecting long term planetary scarcities; we may want to first eliminate the current pricing mechanism of capital, and then introduce new mechanism for pricing of capital according to the resource intensiveness of its use i.e. the resource intensiveness of the asset it acquires.

Replacement of interest with asset tax will achieve both the objectives of providing free or cheap capital to planet friendly industries and of incorporating planetary scarcities, the kind of scarcities that are not captured by market prices, in economic and business decisions. Thus planetary and national resources will be preserved and resource intensiveness of mix of products will be significantly reduced.

The economic geology of the world today is very different from that of the world inhabited by David Hume [3]and Adam Smith[4]; a system designed in their days certainly needs to be updated. The reason most proposals for addressing climate change e.g. carbon tax, cap and trade, etc. fall on their faces is that they are relying on an economic system that is crying for an update.

 

PROPOSED SOLUTION

The proposed system, dubbed “New Capitalism,” is based on the following pillars, i.e.

  1. Eliminating interest from the economic      system;
  2. Discontinuing Income tax;
  3. Instituting Asset tax.

 

Eliminating interest

Interest is an effective mechanism to allocate scarce capital

The return on capital is a good measure of the economic utility or value produced by capital. This criterion for allocating capital has served economies well and has been instrumental in the economic advancements of the recent centuries. Allocating capital to uses that promised to at least deliver a rate of return better than the interest rate worked particularly well after the advent of fossil fuel based industrialization, because limitless opportunities to earn returns became available in one or other form of industrialization. Using hurdles (interest rates) to control allocation of capital made sense then.

During the last four centuries the immense return potentials from the industrial use of fossil fuels materialized, particularly for developed countries. As long as the earth was limitless and its resources unending the deciding element for accessing, developing, exploiting and using those resources was capital; capital had to be rationed through the market based hurdle mechanism because there was immense demand for capital. The hurdle mechanism of interest worked very well as an allocator of capital.

However we don’t live on a limitless planet any more, and there is plenty of capital and even more capacity to produce capital. The allocation mechanism for capital cannot be a simple hurdle mechanism any longer. It has to have a mechanism to ensure adequate employment of capital under conditions of abundance of capital. For example, if interest rates could go below zero (negative) they could continue to drive capital towards employment under conditions of abundance.

 

Interest is an ineffective mechanism to allocate abundant capital

Massive industrialization of developing countries has tremendously increased global industrial capacities to produce and supply capital. Consequently, there is abundance of capital; which is also reflected in huge savings inAsiaand elsewhere. Increased supply of capital has reduced the rate of return on capital, thanks to the law of diminishing marginal returns. Lower returns are reflected in interest rates that have been at historical lows for most of this century.

Since interest rates are near zero they are far likely to go up than down; the fear of interest rates rising is preventing businesses from making investments which would otherwise be feasible at these rates. When interest rates are low the expectation of higher interest rates in future keeps industries with inherently low returns from making use of capital. Lower rates generally don’t bring in new industries as borrowers.

Since interest rates can’t go below zero the expectations of its rising increases as it approaches zero. This asymmetry of expectations seems to start at 5%. Interest rates have hovered at 5% for centuries, therefore 5% can be thought as the buoyancy level of interest rates. When interest rates go below its buoyancy level the expectation of its rising tends to be higher than falling. Due to this asymmetry of expectations interest rates start to lose effectiveness as they go below their buoyancy level of 5%.

The interest based system is not very effective in allocating capital through lowering rates i.e. during times of abundant capital. Interest is ineffective in dealing with abundance of capital; it can only handle scarcity of capital.

This inability of interest to be effective during abundance of capital results in huge sums of unallocated capital which in turn drives interest rates even lower, particularly short term, and increases speculative activities. Speculative activities increase asset prices and cause asset bubbles. In the presence of interest, money is far more likely to be invested in bubble forming assets than in low return industries. Asset bubbles can promise to pay interest, sustainable industries cannot. Currently the major reason for capital being wasted in asset bubbles is: interest.

Trillions of dollars that were wasted in asset bubbles could have been productively employed in sustainable energy and other 21st century industries if the interest based system did not stand in the way of sustainable industries. Interest rates and their threat of rising is the only reason massive amounts of new investments are not being made in sustainable and related industries.

 

Interest as an impediment to sustainability and growth

Even though the input costs of sustainable energy, wind, sunshine, etc., is almost zero compared to the rising price of fossil fuel, sustainable energy still cannot compete with fossil fuel energy because of interest, the cost of capital. Given the abundance of capital and the resulting toxicity in the financial system, cost of capital should not prevent establishment of industries that are critical for the future well being of an economy or a society. But it is, because the only way interest rates can function as an allocation mechanism is by being a cost or a hurdle. It has no mechanism to actuate capital.

If interest is removed from the financial equation, the economics of sustainable energy would make sense even today because of zero input costs, stable returns over long durations, and absence of fuel price and supply risks. Sustainable energy would also prevent capital from being wasted.

Temporarily low interest rates will not help the establishment of new environment friendly industries. Government subsidies and taxes will not be enough to move the economic base away from fossil fuel in the presence of interest. It will be a huge economic waste to have interest weigh in towards fossil fuel and have subsidies and taxes push the economy away from fossil fuel.

 

Myopia

If discounted cash flow using compound interest method were not used, cash flow 30, 40, or even 50 years away would have significant value today, which in turn, would make energy sources like wind and sunshine commercially feasible. The current financial system, because of interest, cannot extend its time horizon far enough into the future to see value that can be created over longer terms by sustainable sources of energy and by many other industries.

 

Epic loss of opportunities

As time passes fossil fuel would only increase in value. The financial return that comes from using finite fossil fuel will always be there to capture when it is most needed. The return that comes from using wind or sunshine cannot be saved for future. In other words the sooner humans shift to sustainable energy the better off mankind would be in economic output over the long term. There is a strong case for diverting capital away from fossil fuel and into sustainable energy.

Not only is the wind or sunshine not harnessed lost forever, the income that would come from doing so is also lost. The wages and profits that would have been earned are lost, which is particularly painful given the currently high unemployment rate. Interest by restricting investments in sustainable industries prevents production of real economic benefits and financial returns. As income is lost, potential saving or capital is also lost. Interest is causing opportunity losses in many ways: not harnessing wind or sunshine, not allowing labor to be employed, not allowing income to be earned, and not allowing new capital to be employed or created. Interest is thus causing opportunity loss of epic proportions.

 

Misguided economic growth

If interest remains the sole criterion in allocating capital, investment in fossil fuel power will keep on increasing till oil reserves are virtually depleted or something equivalent happens. Investment in sustainable energy will not pick up till a point of inflection in the availability of fossil fuel is reached. Huge amount of economic value will be lost in economic slowdown prior to the point of inflection, and significant amount of physical capital will be lost again when most of the fossil fuel based assets become useless. Interest based capital allocation system will waste capital and destroy capital over the long duration of transition to sustainability.

 

Measly and Toxic returns

The opportunities lost due to economic slowdown prior to the point of inflection in availability of fossil fuel and the losses due to falling real demand will eventually shrink economies. Losses and shrinking of the real economy may materialize through a number of wealth destroying events including credit crises, debt write downs (Greece75%), economic slowdowns, speculative bubbles, inflation, higher taxes etc. For a sizeable long term and diversified investor, it will be impossible to escape these losses.

Investors holding debt instruments will suffer higher losses. The measly financial returns currently earned through interest are not only small but also toxic. These returns will get eroded and erode the principle along with it. Debt capital cannot continue to remain intact for long if economies remain in distress.

Given the monumental waste of capital in recent bubbles, maximizing overall return from capital involves preventing waste of capital. Employment of capital in sustainable energy will translate into higher long term returns through elimination of toxic investments, increase in investment volumes, and stable returns over longer durations. Employing capital even at zero or negative rate of return is better than destroying it.

 

Time value of money

There is really no justification for interest any more. Interest was necessary in the gold system because hoarding of gold could bring the economy to a halt. However, that is not the case in a fiat money system because money can be produced at will.

There is no real scarcity of capital and there is no scarcity of facilities and labor to produce more capital. Gone are the days and the economic conditions when capital was entitled to a risk free return. Gone are the economic conditions when “a dollar today was worth more than a dollar tomorrow.”

“Time value of money” has now become a fiction. The borrowing cost for theUS, Japanese, Chinese and other governments has been practically zero percent for a long time. Given that the chances of inflation in distressed economies are relatively high, it seems that they are borrowing at negative interest rates. If the return on TIPS (Treasury Inflation-Protected Securities) mentioned above is any indication the time value of money appears to be negative at this time.

 

Interest free prosperity

Elimination of interest provides a scenario under which a thriving US economy and lasting prosperity can be visualized. Elimination of interest will:

  • help sustainable industries take root and help most other industries survive,
  • bring more sustainable resources in economic use; expand the global mix of products; and expand the range of feasible economic activities
  • help industries of the future such as Space Exploration, Ocean Cultivation and water desalination become commercially feasible
  • reduce dependence on foreign oil because cheap, clean energy will become available
  • significantly bring down costs (capital, energy, etc.) and significantly improve the competitiveness of developed countries with respect to low wage countries,
  • restore economic growth and increase income and employment.

Eliminating interest does not, however, mean eliminating compensation for risks that capital undertakes. The risks that capital undertakes have to be fully and properly compensated. Currently credit and other risks are not very well modeled or understood. Risk, particularly credit, is priced very roughly along with interest. Under New Capitalism, risk will be better modeled, assessed, and finely priced for each of its components, including time.

 

Discontinuing Income Tax

The reason for suggesting discontinuation of income tax is simple: it is not needed in New Capitalism. Income tax performs the function of generating revenue for the government; asset tax would perform that function with higher efficiency and fairness. Wealth is a better measure of an entity’s ability to pay tax and its fair share than its income in a particular year. Asset tax will be far easier to assess, collect, and administer.

The great philosopher and thinker Plato said: “When there is an income tax, the just man will pay more and the unjust less on the same amount of income.” Income tax tests a person’s honesty to a great degree, asset tax does not. Income being a derived value has a high element of history, opinions, and methodology.

The value of an asset is assessable with higher consistency and certainty and the valuation involves the immediate present. In Asset tax there will be no need to have apparently outrageous and confiscatory tax rates like 50, 60 or 70%. Even the highest rates in Asset tax will be in low single digits. Asset tax is friendlier to the practice of honesty and integrity. Income tax is friendly to loop holes; under the current income tax system there are many examples of millionaires and even billionaires paying less tax than individuals with low or middle income.

Income tax hinders social and economic mobility in the society and tends to perpetuate class structure:

  • Income tax protects the rich from competition from the talented and ambitious new entrepreneurs, because income tax progressively slows down the progress of the new comers.
  • Income tax tends to slow down the progress of the poor towards prosperity and allows the rich to stay rich. Rich getting richer and poor poorer.
  • Income tax tends to perpetuate the class structure of a society. Income tax increases inertia in society.

Under asset tax system it will be far easier to become rich and wealthy; however, it may not be as easy to stay wealthy because of absence of interest and presence of asset tax. Asset tax by taxing wealth will tend to equalize the wealth levels in a society. There will be greater upward social and economic mobility for most people in the asset tax system. Asset Tax will not help perpetuate the class structure of a society, or facilitate concentration of wealth, the way income tax and interest does. Income tax and interest are vestiges of the past and of class oriented societies.

 

Instituting asset tax

Sustainability

Asset tax is an annual tax on all assets including cash. Since one of the main reasons for instituting asset tax is to promote sustainability, generally assets that are sustainable will have lower asset tax rates and those that are unsustainable or resource intensive will be taxed at higher rates.

An Asset tax structure allows for efficient incorporation of environmental, macro-economic and other societal priorities in the allocation of capital. For instance, a low Asset tax rate can be applied to environment friendly or job creating assets and, conversely, a high Asset tax to polluting or speculative ones. Asset tax will be the major tool for incorporating sustainability in the national product mix, including investments.

 

Allocation of capital

Asset tax on cash will be a disincentive against hoarding money.  Asset tax on cash creates a pressure to lend or to invest in order to preserve or to increase wealth respectively. The lender’s inducement to lend will include sharing all or part of asset tax liability with the borrower. Borrowing will continue to have a price (asset tax and credit premium) and therefore an inducement for early repayment and economic employment of resources.  Usage of capital should generally have some price to ensure its efficient utilization, that price will go to the government in the form of asset tax, saving the economy from income tax.

Asset tax, like interest, will serve as the minimum return requirement for allocation of capital to the respective asset. Under the current economic system an investment asset is not held unless it provides, or promises, a return better than interest. The same would be true with respect to Asset tax, i.e. investors would not hold an asset that does not earn more than the applicable asset tax rate. Asset tax rate structure will ensure that capital and other resources are only employed if they produce, or promise, a specified minimum return.

Financial rate of return will continue to be critical in economic decision making; but after accounting for asset tax. Since asset tax will go to the government, investors would try to maximize their return after paying Asset tax. Asset tax will allow profit motive and free market forces to work, while at the same time incorporating global and local economic constraints in most investment and other economic decisions through the asset tax structure.

 

Macroeconomic management

Asset tax will be a very effective tool for monetary and macro economic management of the economy. This is so primarily because Asset tax is a two pronged tool. Increasing Asset tax on cash will tend to increase investments while increasing asset tax on physical assets will tend to decrease investments in those assets. For instance, a sure way to increase investments would be raising asset tax on cash while at the same time lowering asset tax on a group of physical assets. It will be potent because it simultaneously applies a push and a pull both working in the same direction.

Since Asset tax on cash targets the whole economy and asset tax on physical assets only targets particular segments of the economy, a combination of asset tax rate changes can be prescribed for achieving any desired economic outcome. Asset Tax rate changes will have few unintended consequences because they can be targeted narrowly as well as broadly.

 

Return fragmentation

Due to low wage and strategically driven competition from developing countries and also due to environmental and other constraints, return potentials are different for different segments of economies. In other words, there is return fragmentation[5] particularly in developed economies. Migration of industries to developing countries is also a result of return fragmentation. Low return industries are migrating.

Some of the low return segments, including sustainable energy, basic industries, and agriculture, are critical for economic security and prosperity of nations. Currently subsidies are used to keep some critical industries alive at home. Interest which acts as a single and uniform qualifying rate of return for all economic activities is frequently a hurdle too high for many critical industries in many countries. A windmill should not be expected to cross the same hurdle to exist as should an oil powered plant. Interest therefore needs to be replaced by a set of hurdles (Asset tax) with different rates for different industries and activities. Subsidies are no longer the answer because sustainability encompasses most of the economy.

Return fragmentation has become common after globalization; it cannot be ignored. Economic security, national security, sectoral balance and other forces require countries to deal with return fragmentation. The return differences between sustainable energy industries and fossil fuel driven industries is not new but has become important because of the need for sustainability. Return fragmentation has to be addressed to bring about economic sustainability and to achieve other national, social and economic objectives.

Therefore, Asset tax which has different tax rates for different assets or industries will be very useful in offsetting the effects of return fragmentation. It will level the playing field for different industries.

 

No zero bound

If interest rates had the capacity to go below zero then the chance of interest rates going up would generally be the same as going down no matter where interest rates were. That would balance the downside risk with upside potential. Investments would take place at low or even zero interest rates for fear of negative interest rates. Therefore, the cycle of production, consumption, saving, and investment would run smoothly if interest rates could go below zero.

Sometimes a country may have to make investments at negative return to protect its wealth and prosperity. Making investments at negative returns is better than letting the economy go into major recession and lose huge amounts of wealth, employment and economic stability. Governments force negative returns even under the interest based system, through inflation for instance, when they try massive fiscal and monetary stimulus.

Besides providing returns to the investor an investment provides returns for employees, customers, suppliers, government, environment, society and many other participants. We are now in an era when total return view has become far more relevant than it was ever before. Negative financial return on investment therefore has to be a possibility, if the total return is positive.

Economies have to periodically go through recessions and economic crises because of the failure of interest rates to go below zero. Under asset tax system, no matter how much people saved the saving would find avenues for productive investment, even if the return was zero or even negative.

Asset tax is a tax on cash as well as on all other assets. Asset tax on cash pushes money into other assets. If investments need to be increased it can be achieved by a combination of increase in asset tax on cash
and a decrease on asset tax on other assets; the combination of the two has no zero bound. For example, to increase investments asset tax on a group of physical assets can be set at or near zero while asset tax on cash can be increased till the target level of investment in the economy is achieved. The same process works conversely if investments need to be reduced.

Asset tax will, therefore, always keep the economy investing and running smoothly even when return potentials are low, and will always keep individuals employed and working for the present and the future. Asset tax will be far more effective in increasing investment volumes because, unlike interest, asset tax is not restricted by a zero bound. Asset tax will therefore help reduce volatility in economies. Asset tax will prevent untold sufferings, and save economic value lost in recessions and other economic breakdowns. Systemic stability and higher certainty of outcomes will add prosperity.

Asset tax will make monetary policies potent even under conditions resembling liquidity trap. Financial markets will also perform their function much better than they currently do because allocation of capital will not be hindered by the zero bound of interest rates.

Negative interest was suggested by the early 20th century economist Silvio Gesell. However the danger with negative interest is that economic entities may try to substitute money with other assets in order to avoid paying negative interest. Since Asset tax is a tax on all assets substituting money with another asset will not work. Asset tax is an answer to the problem of negative interest faced by Silvio Gesell and other economists.

 

Speculative bubbles

Since asset tax is a cost of holding assets, it will increase the cost of holding assets for speculation. Asset tax by increasing the cost of speculation will prevent or slowdown speculative bubbles. Asset bubbles will be rare because the tax on assets will slowdown speculation in assets. Credit bubbles will be rare because asset bubbles will be rare.

Central banks and other government agencies are not likely to ignore and abet credit bubbles because they will have better and safer tools to increase economic activity. Consequently, freezing of the financial system, systemic failures due to a few failing institutions and the resulting necessity for bail outs will also be rare.

 

Economic growth and employment 

Asset tax will help create many new industries, including environment friendly and clean energy industries. New industries will create employment and income to replace those lost when industries migrate to developing countries. Cheap clean energy will help developed countries increase income, improve competitiveness, and reduce dependence on foreign oil. Asset tax by helping to add resources will make environmental and other resource constraints less restraining for economic growth. It will change the course of economic growth from one that has approaching dead ends to one that has limitless possibilities.

 

Market failures and political discourse

Since long term planetary resource constraints do not automatically reflect in prices they have to be structurally incorporated in the economy. Some form of taxes and regulation are probably the obvious ways in a capitalistic system. Asset tax will help incorporate planetary and local constraints in the cost and economic structure of an economy – a function that free markets are failing to perform.

Asset tax will bring a new and relevant dimension in political discourse. Politics will be more about economic choices being made by a society, because asset tax will make those choices explicit and part of political discourse. Asset tax will not only revolutionize the economy but also the politics driving the economy.

 

Reconciling the individual good with the common good

Extinction of species, depletion of mineral resources, global warming, environmental pollution, denuding of land, over fishing, sinking water tables etc., have clearly established the urgent need for reconciliation between the “common good” and the “individual good.” Asset tax, by applying different tax rates to different assets, can be used to create incentives for individual good that also serve the common good, e.g. low tax rates for assets that serve the common good. Interest is inherently incapable of performing any such function.

 

Salient Benefits of New Capitalism

Higher Profits

Profits or return on investments will be mostly higher under New Capitalism. Profits or returns on investments are usually net of interest, which in this case has been eliminated.

  • For sustainable industries, with zero or low asset tax, there will be no interest and no income tax, which will translate into higher returns and viability.
  • For non-sustainable industries, asset tax will drain returns in ways similar to interest, but they will greatly benefit from elimination of income tax. Asset tax is likely to be below 2% for most industries.

Business returns in sustainable economies will not only be higher it will be higher with higher certainty. If a wind farm is financially feasible today it is likely to remain feasible because the price of wind and sunshine are not going to go up. Higher return with lower risk is likely to cause a growth explosion.

Business returns under New Capitalism will be higher also because of a stable economy, higher demand, economic growth and greater business opportunities. Since profits, or potential profits, are the engine of economic growth – higher profits will bring back lasting growth in developed economies.

 

New trajectory of economic growth – Environmental revolution

New Capitalism will enable development of an economic structure that is inherently planet friendly. It will gradually reduce dependence on fossil fuel and build a new economy on sustainable sources of energy. It will change the orientation of economies from being driven by fossil minerals to one in which capital intensive structures are used to harness the forces of nature. New Capitalism will start a new range of economic activities in which new infrastructures and cities that protect and preserve the environment while increasing the capacity of the planet to support human life are developed and built.

Desalination of water through reverse osmosis and other non-distillation processes has a good chance of becoming a commercially viable option for most coastal areas if interest is eliminated. Technological advancements are likely to be achieved if there are incentives in place. Desalination plants directly increase the capacity of this planet to support human life. The economic growth opportunities that cheap desalination can bring will spread to all areas of economy because desalination can help build cities where none exist today. Commercial viability of this and other capital intensive industries will usher in the age of capital.

Repeated use of examples of wind and solar energy may give the wrong impression that this book and New Capitalism is mostly about a small part of the economy. New Capitalism is about the whole economy; everything people use, consume or have as part of their lives will be affected by environmental revolution brought about by New Capitalism.

The amount of work that needs to be done to incorporate environmental and resource considerations in the daily lives and structures of modern societies is so huge that it will keep the global economy busy and growing for a very long time. Examples of the work involved include: restructuring or refitting of houses, factories, towns, and cities in addition to producing a large range of environment friendly products and services, and de-carbonizing an even larger range of products and services.

The economic, social, and life style impact of the environmental revolution will be no less than the industrial revolution!

 

Efficient, innovative and high wage economy

A sustainable economy because of its capital intensiveness and the task of harnessing dispersed forces of nature will become very efficient and sophisticated with time. Increasing efficiency and sophistication will have high paybacks because the complexities of harnessing these dispersed and diffused forces of nature are a long way from being mastered. Every machine we use will change or be replaced by a better and more energy efficient machine. Today’s windmills, machines of the early environmental age, will be replaced by better ones as did the machines of the early industrial age.

It is not just efficiency that will drive growth and change; it is also aesthetics and taste because these new machines will also have to find their place in the life and surrounding of people and communities. Windmills and solar panels have yet to find their aesthetic place in our life and surroundings.

Pioneering the sustainable way of life will create opportunities for creating leading product designs, cultural fashion and styles, architectural and ergonomic designs and other artistic expressions that are the functional and aesthetic foundations of towns, communities, buildings and infrastructures. These arts are hard to replicate and provide tremendous marketing advantage for products and services.

Since almost everything will be redesigned or reengineered, the new economy will enable developed countries to maintain their lead in producing and marketing really advanced, efficient, and aesthetically pleasing products, which in turn will justify higher incomes and wages in developed countries.

 

Space and Ocean exploration

Former President Bill Clinton in a television interview, in mid 2012, expressed these thoughts: the US with approximately 4.4% of global population and 24% use of global resources can only maintain that standard of living if it manages to invent new industries or new source of income every ten years or so.

New Capitalism will foster development of new industries and new sources of income not only in sustainable and environment related industries but also in other industries of the future e.g. Space, Ocean exploration and cultivation, and planet friendly towns and cities.

New Capitalism will bring space and related industries in the mainstream. Elimination of interest and consequent elimination of myopia will allow people to look into the distant future for return and investment possibilities. They will find investments in space related businesses and ideas feasible, particularly if the asset tax on these assets is low or zero.

New Capitalism will enable humans to harness ocean tides and air currents for energy needs of the future, and also for addressing global warming. Cultivation of oceans for food, energy, and addressing global warming is already a technological possibility, but the right economic incentives, infrastructure, and global agreements are needed to make it a commercial possibility.

These are the kinds of enterprise that developed countries have excelled and have competitive advantage in, where they can put their innovation, financial power, and professional talent to work and therefore justify higher income levels. Saving the earth and going to the moon or mars are not just lofty goals; they are now economic needs as well.

New Capitalism will give us the freedom to pursue our dreams while meeting our economic needs.

 

Larger Economy

New capitalism will significantly increase the size of the economy. Asset tax will enable many businesses to exist that would not exist under the interest based system. The range of businesses and products would be much larger than that possible under an interest based system. Most of the products that exist today will continue in some form and there would be an addition of a new range of sustainable and capital intensive products.

Harnessing non-fossil sources of energy requires very capital intensive structures and systems. Therefore the cumulative value of investments in a sustainable economy will be much higher than that possible in an economy based on fossil fuel. Most of the types of assets and investments that we current have will also continue to exist. The size of the economy will not only be bigger in terms of income and economic activities but also in terms of assets and investments. A sustainable economy will also be a wealthier economy.

A sustainable economy will be wealthier also because of its long term income potentials. A financial system that has gotten rid of its myopia will be able to see the income potentials in distant future and be able to value sustainable assets accordingly. Tangible wealth is created when people are able to capitalize on long term potentials.

The economy will also be larger because business risk taking in the economy will increase many fold. With interest, a big source of risk, being eliminated the appetite for business risk in a New Capitalistic economy will be much higher. In industries with low asset tax the level of innovation and risk taking will be comparable to the level seen during the Internet boom. The range and number of new business and industries will bring about a rate of economic growth recently seen only in developing countries.

 

Better economic and social management

Asset tax can work its way to almost every decision making point in the economy. It will help place right economic incentives at the right place. It can be used as a tool to affect policy outcomes in almost every sphere of public life including healthcare, housing, environmental protection, jobs creation, and the economy.

The lack of tools to incentivize socially beneficial economic decisions by individuals and businesses creates difficulties for societies aspiring to be responsible members of the global community. Exercising collective choices is a necessity in an era of global environmental challenges and resource constraints. New Capitalism will help countries implement fiscally and environmentally responsible policies and influence social and economic outcomes without expanding government.

 

New Capitalism in a nutshell

Developed countries have built their economies and way of life around use of energy, now that fossil fuel is scarce, expensive and environmentally harmful they have to find another source of cheap energy. Wind, sunshine and other sustainable sources of energy are very cheap, clean and permanent source of energy if interest is replaced by asset tax.

The global economy has more labor and more capacity to produce capital than it can use under the fossil fuel based economic structure. The result is crippling unemployment and economic distress. The sustainable energy and other industries of the future will keep the global economy busy and growing for a generation. The assets created will add resources and economic value; they would greatly add wealth and insure prosperity.

New Capitalism will significantly increase the size of the economic pie, nationally and globally.

 

MEETING GLOBAL ECONOMIC CHALLENGES

Meeting the great labor employment challenge

Interest prevents economic growth to continue after the level of profitability has fallen to equal the interest rate. Interest rate does not often fall to the level necessary for full employment. That is why central banks manipulate interest rate with the hope of achieving their target employment rate.

Monetary efforts are often not enough to achieve full employment. On the fiscal front, the economist John Maynard Keynes metaphorically suggested, amongst other things, “building pyramids” and “digging holes in the ground” as possible ways for increasing economic activity and employment. All these efforts are needed because interest based economies do not automatically attain full employment.

Economies frequently run out of profitable things to do in the presence of the hurdle of interest. There will always be more industries and businesses if there is no hurdle rate to cross. Unemployment or under employment is a tendency inherent in the interest based economic system. Interest based system had difficulty creating adequate employment even under earlier conditions which were not as challenging as the current ones; that difficulty will become a permanent failure under the increasingly greater employment pressures building up globally.

The current global employment problem can be summed as follows,

  • The resource limits of the planet will not allow the cycle of production and consumption to run at the volume it needs to run to fully employ the growing global workforce, given the current mix of products.
  • Interest will not allow the planet friendly mix of products to attain the widespread usage and volumes necessary to fully employ the growing global workforce.

The planet friendly mix of products can only evolve if interest is no longer the hurdle in the development of sustainable industries. After eliminating interest appropriate incentives can be embedded in the economic structure, through asset tax, which will enable the alternative mix of products, the planet friendly one, to run the whole cycle of production and consumption at the volumes it needs to run to fully employ the growing global workforce.

Creating peaceful, sustainable, and economically productive employment for the huge global workforce is the greatest economic challenge of current times. Once a way is found for creating employment, or potentials for employment, for the global workforce a gateway is found to global economic prosperity.

Once the interest free model is successful in theUS, other countries around the world will start adopting it and employment conditions will improve around the world. Developing countries will get occupied with transitioning to sustainable industries and infrastructure which would shift their focus away from exports. Greater volume of work and increased sustainable resources at home will raise their wages accordingly; developed countries will no longer have to face cutthroat low wage competition.

Once interest is eliminated the help of government expenditures for attaining full employment would not be necessary. An interest free economy will tend to attain full employment on its own and stay there. The appropriate Asset tax structure for full employment will be one in which sustainability is of prime importance. Sustainability frees the economy to grow and consequently create employment.

Employment in the USwill only go up significantly if a business and economic model that works for the world is established with the UStaking the lead, which has been the case in some form, since the start of the industrial revolution. Employment in the U.S., the largest economy in the world, will not go up in isolation; it will only go up if the US works to make the world a better economic engine. Protectionism will make things worse.

 

Meeting the great resource constraints challenge

Resource constraints should create new and additional economic activities and employment to produce additional resources and protect existing ones. The resource and environmental challenges faced today require that the abundant labor and capital available be employed for building a sustainable and prosperous global economy. There are so many people to provide for (economically support) and so much work to do in order to protect the planet and its resources that there is no reason for any significant unemployment of labor or waste of capital.

The key to building an economy that delivers prosperity in spite of resource constraints is profitable employment of capital towards sustainable economic activities. Eliminating interest is the first step towards making capital employment in sustainable industries profitable. After elimination of interest, asset tax will be the policy tool that will guide capital towards investments that would build assets, facilities, and infrastructure to add and protect resources. Asset tax rate structure can be effectively used to protect the resources that are finite and are becoming increasingly scarce.

The resource intensiveness of most products will abate under New Capitalism because profitable employment of labor and capital will help replace some of the resource content (e.g. fossil fuel) of the products by producing sustainable energy and other resources. Additionally, cheap clean energy, and absence of incentives to quickly convert minerals into cash will reflect in market prices and everyday economic decisions and will work their way into the global product mix and make them sustainable.

As a result resource constraints will not remain as much of an obstacle, as they are, to prosperity and full employment. A sustainable economy will also enable us to save some mineral and fossil resources for our future and leave some for future generations.

In this book, the economic challenges of the current times: resource constraints, employment of labor, and productive employment of capital are being handled through an overarching strategy of building sustainability in assets and the economy. Under the sustainability strategy,

  • Resource constraints won’t prevent growth because sustainable economies don’t use much finite resources and they also create additional resources through use of capital and labor.
  • More labor will be employed because a sustainable economy will undertake more production activities and consequently have more jobs. Sustainable economies will have more work because sustainable economies allow more economic activities (e.g. resource adding activities) than that allowed in resource intensive economies.
  • More capital will be productively employed because capital will be used to create new resources. Sustainable economy is capital intensive.
  • New sustainable economic structure and infrastructure will be built which will require additional labor and capital to be employed

Widespread and lasting prosperity and high employment will be the result of this strategy.

 

SHAPING THE FUTURE

Protecting capital

There is abundance of capital in the world.Japan,China,India,South Korea,Braziland other countries are ready to inundate the world with real capital. Employing the huge amounts of capital that is available and similarly huge amounts that could potentially be available globally has become a challenge under the current financial system. Massive unemployment, asset bubbles and economic slowdowns around the world are the consequences of capital unemployment problem.

It is obvious that charging “usage fee” on something as abundant as capital is causing capital unemployment problems. The “scarcity of capital” justification for charging usage fee (interest) is dead. Capital can no longer be expected to earn risk free return in the form of interest.

Financial capital and physical capital are two sides of the same coin. On the financial side, capital or money owners should no longer be rewarded for “not hoarding” financial capital. Fiat money can be produced at will by governments and the financial system, so the threat of hoarding capital is no longer valid. Risk free return on capital is no longer necessary in order to handle its scarcity or to deal with the possibility of hoarding. Additionally, asset tax on cash will be a strong tool to make money circulate.

Capitalism will fail to bring about production of economic values to the full potentials of most advanced economies if interest continues. Failure to produce assets and values will result in lost income and reduction in the rate of wealth accumulation. Assets need to be replaced by new assets e.g. horse carriages were replaced by automobiles, coal plants need to be replaced by solar powered plants etc. For an economy to remain wealth it has to keep producing new assets and new capital. Interest has to be eliminated to protect wealth and capital.

Except for government borrowings, all assets or wealth have to have a counterpart in real (physical) assets. New Capitalism will help create a huge amount of assets with economic value; these sustainable industry and other assets will be the physical counterpart for a large portion of the wealth that exists today and those that will be created in future. Prosperity is not possible without creating new assets of lasting economic value.

Assets currently in the form of government debts and other intangibles will find a home in these assets when governments retire their debts. In simple words: wealth is real assets. New Capitalism by creating large amounts new assets will create large amounts of wealth. If these assets are not created there will be less wealth, consequently the wealthy will lose part of their wealth.

 

Protecting capitalism

Interest is also making economies increasingly unsustainable thus causing another kind of frustration with capitalism. In the presence of interest capitalism will not deliver broad based prosperity. Continuing adherence to capitalism from suffering economies may be no longer certain; there is already a gradual shift to socialistic policies.

Failure of capitalism will invite socialism, which is the only other economic system widely known and still in practice. The best way to prevent a resurgence of socialism on a grand scale is to make capitalism work.

Capitalism can only continue unadulterated if all capital is efficiently employed and produces real value and profits. The current form of capitalism is wasting capital by preventing its employment in sustainable and other assets and by favoring creation of speculative bubbles.

New and sustainable industries will open up new avenues for capital to be profitably employed and produce lasting economic value. There is a huge amount of work that needs to be done and there is plenty of capital to employ, the only thing missing is the right set of incentives to profitably employ capital for building a sustainable industrial base and for producing products and services that will form backbone of a sustainable and prosperous economy. Therefore to save capitalism, businesses have to be incentivized to find new and sustainable ways to profitably employ capital. To save capitalism, capitalistic economies have to make all capital work.

New capitalism by eliminating interest removes the hurdle between capital and its profitable employment; and by instituting asset tax provides an effective tool to channel capital towards businesses and uses that produce economic value and lasting economic growth.

Due to globalization and other challenges including environmental and resource constraints capital has to be employed with multiple considerations and a long term vision. New Capitalism will enable economies to embed multiple considerations and long term strategic effectiveness in the asset tax structure. Profit motive will then be enough to produce the unprecedented economic value that the global economy is capable of producing and that is needed to meet the needs of the global population.

New Capitalism will reinvigorate the entrepreneurial spirit in capitalism by providing more opportunities to employ capital and more opportunities to make profits. New Capitalism will renew and revitalize capitalism by making it produce prosperity and growth in one of the toughest economic conditions ever faced by mankind. The best proof of continuing effectiveness of capitalism is good economic results under the current economic conditions.

 

Protecting free markets

It is obvious that massive amounts of sustainable economic activities are necessary to keep the global economy growing peacefully. The myopia and other factors introduced by the interest based financial system do not allow markets to reflect long term scarcities of the planetary kind e.g. finite minerals and finite environmental capacities.

Failure of economies to automatically start shifting to sustainable means of production is a failure of free markets. The interaction of forces that currently determine prices and its consequent outcomes is restrained primarily by the time horizon permitted by interest. Elimination of interest is therefore necessary to enable free markets, and its participants, to see far and to value assets accordingly. For example, sustainable energy producing assets will have much higher value if interest is eliminated.

Free markets are a human creation and therefore sometimes need to be upgraded with replacement of old mechanisms and institutions with new ones. The magic of the markets and human ingenuity only works in the presence of the right structure and right incentives.

The economic system in China and many other countries allows its government to allocate capital to industries and assets that it finds important for strategic and other long term objectives. Free market economies should not allow “command economy” countries to capitalize on one of the few current failings of free market economies. They should immediately eliminate interest. Asset tax is the tool that will enable theUS and other developed free market economies to respond to major changes and strategic necessities in a well thought and organized manner.

New capitalism by making capitalism work will help free markets subdue the forces of protectionism currently gaining strength. New Capitalism will save globalization and global free markets.

 

Global peace

An interest-based financial system will not allow economies to change their current mix of products to a sustainable one. As long as fossil fuel is commonly affordable, interest will keep pushing towards higher use of fossil fuel. Since fossil fuel based assets are being built with frantic pace in developing countries, the longer it takes to make a change the higher will be the dependence built on fossil fuel and consequently higher will be the loss and suffering on the exhaustion of fossil fuel reserves.

When oil starts to become unavailable there will be a global scramble to get hold of the remaining deposits of oil. Depletion or disappearance of fossil fuel, particularly oil, is a huge threat to peace. Since there is no way to know or predict the time (decade or year) when oil will become extremely expensive or cease to be a staple; the threat of war is hanging over humanity’s head like the sword of Damocles even today.

Mineral resources take millions of years to form. As mentioned earlier, interest and its use as the sole criterion for allocating capital increases the use of fossil fuel in many ways. The global rate of consumption of oil and other fuel resources is high and increasing exponentially. Exponential growth on already high current consumption guarantees exhaustion of a finite resource. There is no plausible scenario for global peace and prosperity in the second half of this century if fossil fuel continues to be a staple around the world.  

Continuing the use of interest as the sole criterion for allocating capital will continue the fossil fuel trajectory which will inevitably lead to global resource wars. It seems, Mahatma Gandhi had the current mix of products in mind when he predicted catastrophe if the massively populous countries of the world chose to industrialize.

Additionally, if peaceful ways of employing the growing global population are not found, they may get employed in war and its preparations. War is a big employer. Competition for resources (including oil) and markets and old rivalries are already pushing countries in that direction. In the current age of atomic warfare, global wars may spell doom for all of humanity.

Therefore, interest needs to be eliminated to allow a peaceful transformation of the global economy into a sustainable one. Asset tax will further ensure global peace by providing countries the ability to create additional resources through appropriate asset tax rate structure. New Capitalism will secure global peace first by eliminating the potential cause (interest) for resource wars and then by providing a tool (asset tax) for increasing resources.

 

Global leadership

The US is better placed than others to benefit from New Capitalism because of, amongst other things, the reserve status of the US dollar. There is no alternative to the US dollar for large international savers, and elimination of interest will not change that. Being a country where people and governments from around the world want to keep their savings, the US is in an advantageous position to make long term investments in assets, technologies, visions, potentials, industries, research, development, and projects of sustainable kind.

The abundance of capital around the world needs to be channeled to productive investments; all theUSneeds to do is to remove obstacles through elimination of interest and to provide the incentives for sustainability through an appropriate asset tax structure. These investments will start a new trajectory of economic growth, employ most labor and capital, and help theUSbuild a sure and secure future.

The world is at crossroads. Global leadership will go to the nation that helps the world chart a sustainable course to the future. It is of great strategic advantage for the US to develop a planet friendly model of economic growth that will serve as an example for the rest of the world. New Capitalism will help theUS lead the world to a peaceful, free, and prosperous future.

 

 


 

 

 

 



[1] Carbon sinking is an effort to absorb or remove carbon from the atmosphere and sink it in the ocean.

[2] Long term here is the time period that extends beyond the vanishing point of the interest based system.

[3] David Hume was a philosopher and economist of the early 18th century. He is considered to be one of the most important figures in western philosophy, and one of the earliest economists. The industrial revolution had begun to take shape during his days. The population of the world was approximately 700 million in his days.

 

[4] Adam Smith was an economist of the early 18th century. His magnum opus “The Wealth of Nations” is considered to be the book that laid the foundations of economic thinking and of economics. Adam Smith is considered to be the father of modern economics and capitalism.

[5] Return fragmentation is a condition where returns from different industries differ on a regular basis. Free markets generally even out the differences but due to overpopulation, over dependence on fossil fuel, and other geographical and geopolitical factors the correction process will cause widespread suffering, distress and destruction. The term is discussed in subsequent chapters.

 

 

Chapter 2

Table of Contents