FREE CAPITALISM

 

 

Free World, Free Markets, Free Capital

 


Chapter 1

 

INTRODUCING FREE CAPITALISM

 

CHAPTER OUTLINE

 

SYNOPSIS. 1

Eliminating Interest 2

Discontinuing Income Tax. 2

Instituting Asset Tax. 2

Free Capitalism.. 3

GLOBAL RESOURCE CHALLENGES. 4

Environmental and Oil Supply Constraints. 4

Unfavorable Composition of Growth. 5

Zero sum global economy. 5

Double squeeze for developed countries. 6

MAKING OF THE CURRENT CRISIS. 6

Low Wage Competition. 7

Overcrowding and Over Capacity. 7

Resource Intensive Mix of Products. 8

The underlying cause. 9

UNSUSTAINABLE FINANCIAL SYSTEM… 10

Squandering natural resources. 10

Ignoring Environmental costs and benefits. 10

Myopia. 11

Capital Destroying Bubbles. 11

REFORMING THE FINANCIAL SYSTEM… 12

PROPOSED SOLUTION.. 13

Eliminating interest 13

Discontinuing Income Tax. 15

Instituting asset tax. 16

Salient Benefits of Free Capitalism.. 19

ANSWER TO GLOBAL ECONOMIC CHALLENGES. 21

Meeting the great labor employment challenge. 21

Meeting the great resource constraints challenge. 22

SHAPING THE FUTURE. 23

Protecting capital and capitalism.. 23

Protecting free markets. 24

Global peace. 25

Global leadership. 26

 

SYNOPSIS

 

Rising human population and increasing per capita consumption of finite resources has brought mankind face to face with the limits of the planet. The resource limits of the planet are impeding global economic growth and causing the current economic crisis.

The mix of products and services produced under the current economic system is very resource intensive, particularly in fossil fuel. Since global resources are shrinking, the product mix and the mix of production facilities of the world should include higher proportion of resource adding and resource preserving products and facilities. Resource adding and resource preserving products and facilities e.g. wind, tide and solar power require huge amounts of capital. Fortunately the world has limitless Capital. A modern economic system should therefore generously allocate capital to economic activities that:

  • add new resources, like wind, wave, tide, sunshine, etc. to mainstream economic use,
  • systematically protect, efficiently use, and increase resources.  

 

However, the current financial system only allows allocation of capital to businesses that can pay interest; most resource adding or sustainable industries don’t make profits high enough to be able to pay interest. The interest based system by preventing allocation of capital to most sustainable industries is preventing the natural economic response to environmental and resource constraints, thus limiting economic opportunities and causing economic slowdowns.

In spite of the global resource constraints, the huge and cheap labor pool in developing countries is still driving growth there. Since resource limits don’t allow the global economy to grow freely, growth in developing countries exerts offsetting downward pressure on growth in developed countries. Growth in developing countries is coming at the cost of growth in developed countries, which is one of the reasons for the intractability of this crisis.

This book titled “Free Capitalism,” presents a new model of a market driven economic system that will generously allocate capital to sustainable industries and similar assets. The proposed system will make the mix of products and industries in an economy, increasingly sustainable. It will minimize the effects of resource constraints causing the global economic crisis and start a new trajectory of sustainable economic growth that will last for generations.

The salient features of “Free Capitalism,” include:

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

Free Capitalism will help achieve sustainability firstly by eliminating interest and secondly by using the Asset tax structure to incorporate resource and environmental considerations in everyday economic decisions. Sustainability is the key to future economic growth.

The proposed system basically replaces Interest and Income tax with Asset tax, an annual tax on all assets including cash.  Eliminating a major economic cost (interest) will significantly bring down costs and consequently improve competitiveness and productivity, particularly that of developed countries. Free Capitalism will bring in prosperity and economic growth by increasing sustainability and decreasing costs.  

Eliminating Interest

 

Interest has to be eliminated, because it is the major reason for most unsustainable choices being made in capitalistic economies. Interest incentivizes rapid extraction and consumption of mineral resources because minerals in the ground don’t earn interest. Interest requires consumption of mineral and other resources by businesses, because the increased financial returns or benefits from the use of fossil fuels and minerals enable them to cross the hurdle of interest. On the other hand, interest will not allow investments to pick up in sustainable industries because they cannot always pay interest.   

If interest is not eliminated most investments would continue to be made in unsustainable industries till the world manifestly starts running out of resources. Global fossil fuel reserves would be dangerously depleted for global peace. In the meantime the global economy will suffocate from increasing resource constraints and lack of business opportunities. Therefore, to change the current mix of products and production facilities to a sustainable one, interest, which drives most unsustainable business and economic choices, needs to be eliminated.

Interest is an allocation cost not a production cost; if an allocation or administrative cost can be eliminated, it should be eliminated, because the competitiveness resulting from globalization requires that developed countries bring down costs very significantly – - thus, interest which is a huge and unnecessary cost should be eliminated.

Discontinuing Income Tax

 

Income Tax has to be discontinued because it is not needed in the proposed Free Capitalism system.  Currently, income tax performs the function of generating revenue for the government.  Asset tax would do that with higher efficiency and fairness. Wealth is a far better measure of an entity’s ability and fair share of tax than its income in a particular year.

Instituting Asset Tax

 

Asset tax will perform the function of both interest and income tax

  • Asset tax will perform the economic function performed by interest, i.e. allocating capital. Currently capital gets allocated only to entities that can pay interest; similarly, in Free Capitalism, capital will get allocated only to entities that can pay Asset tax.
  • Asset tax on cash will create the incentive for lenders to lend, i.e. to shift the tax burden to the borrower.
  • Asset tax on cash is a far more dependable than interest in making credit available, because it can be increased until liquidity is restored. Interest’s inability to go below zero causes it to often fail in making credit available and in increasing investments.
  • Asset tax will increase investments; it creates two types of incentives for increasing investments. Asset tax on cash creates a push to invest to preserve capital, while low asset tax on specific industries helps those industries attract (pull) investments.   

The proposed Asset tax system will incorporate incentives for investing in sustainable economic assets, and disincentives for unsustainable ones. This is accomplished by the Asset tax rate structure, e.g. low Asset tax for sustainable assets and industries, and high Asset tax for polluting ones. Sustainable industries currently yield low returns primarily due to the fact that current measure of financial return fails to account for the economic benefits of sustainability. Once interest is replaced by asset tax, sustainability benefits will translate into financial return because financial returns will be net of asset tax. Financial return will again become a measure worthy for driving the capitalistic system.

Asset tax will be easier to assess and administer than income tax. As in any tax system, there will be exemptions, thresholds, moratoriums etc. to keep the system fair and productive.

Free Capitalism

 

The current economic system was developed during the time when the environment and other planetary resource constraints were not real issues.  Now they are; therefore, the current economic system needs to be reformed to incorporate in it the ability to handle scarcities and constraints of planetary dimensions.

The proposed Free Capitalism economic system will adapt capitalism to modern times.

  • Free Capitalism will incorporate in economies the ability to handle environmental and other planetary resource scarcities. The role of sustainability is so fundamental in Free Capitalism that it could as well be called “Sustainable Capitalism.”
  • Free Capitalism will enable many new industries to develop. New industries will create jobs, reduce dependence on imported oil, and help economic recovery.
  • New industries are also needed in developed countries to replace those migrating to developing countries.
  • Free Capitalism will start a new era of sustainable economic growth, in which the entire production and supply chains of most products will be restructured or rebuilt.
  • Free capitalism, with zero asset tax, will make it feasible to invest in exploration and development of many new frontiers of human endeavors, including oceans and space.
  • Free Capitalism will create many new and advanced businesses which will require advanced know how and innovation which in turn will enable developed countries to maintain their high wages and high standards of living.
  • Free Capitalism will help developed countries to become globally competitive because it eliminates interest costs and reduces energy costs.
  • Sustainable Capitalism will help to free economies from resource constraints and as a result enable mankind to live in peace and prosperity on this crowded planet.

 

Free Capitalism will bring about the environmental revolution. The economic impact of environmental revolution will be comparable to that of the industrial revolution!

In Free Capitalism, risk to capital of all kind, including business and credit, will be fully compensated through credit premiums. Risks will be better understood, assessed, priced and compensated under Free Capitalism.

GLOBAL RESOURCE CHALLENGES

 

Over population, resource depletion, over dependence on fossil fuels, and environmental degradation are all critical factors that materially affect current economic conditions. Rising population and increasing per capita consumption of finite resources has brought the global economy face to face with the limits of the planet.

Massive industrialization of developing countries is severely stretching the limits of the local and global resources. Developing countries are building factories, homes, and infrastructure that require use of ever increasing volume of finite global resources. Since everybody has started producing and using resource intensive products like cars, air conditioners, and other appliances, the local and global resource limits, particularly that of fuel and of the environment, are restricting and impeding growth.

When economic growth picks momentum the resource limits show up in resource prices and environmental conditions and restrict growth. The 2008 Beijing Olympics provided an example of the limits of the local resources with respect to the environment. An example of global resource limits is the price of oil which has increased more than ten fold in a decade.  Oil price went from a low of $9.48 a barrel in December of 1998 to a high of $137.11 in July of 2008 and has hovered around $75 a barrel in most of 2010.

The current pattern of growth and development, most of which is taking place in developing countries, requires ever increasing amounts of finite and dwindling planetary resources. This path of growth is stretching the resource limits of the planet, which in turn is impeding further growth and growth elsewhere. This path is clearly unsustainable. In other words, given growth in developing countries the resource intensiveness of the global mix of products, particularly with respect to fossil fuel, is interacting with the global resource and environmental constraints and causing the current economic crisis.

Environmental and Oil Supply Constraints

 

Whether there is consensus on the science and reality of Global Warming or not, its impact on the economy is obvious. Investors are shying away from investments in fossil fuel driven industries. The uncertainty about carbon tax or other climate change regulation is increasing risks and cost estimates. Significant economic impact of global warming is already here and very real.

By 2009 remaining proven global reserves of oil stood at 1.3 trillion barrels[i]; at the current rate of consumption we may have just 58 years[ii] of oil left. Supply uncertainties translate into higher business risks. Inelasticity in demand for oil creates severe price shocks in case of supply shortfalls. Sky high oil prices in the recent past have demonstrated the precariousness of the demand-supply balance and its economic impact. The negative impact of oil supply and price uncertainties can be felt on investments and businesses today.

Oil supply constraints and global warming are reinforcing each other in developed countries to reduce investments, not only in fossil fuel industries, but also in a large number of other industries such as automobile, heavy industry, service industries, and even infra structure. Fossil fuel is so much part of the fabric of economic life that uncertainty about it makes everything else less certain and more risky. If developed countries find ways to wean their economies away from fossil fuel and into sustainable energy, it will free their economies to grow and expand without the environmental and supply limits imposed by fossil fuel. The answer obviously lies in changing the mix of products.

Unfavorable Composition of Growth

Even though there is considerable growth in developing countries that growth is not translating into demand for high value products from developed countries, because the growth in real demand in developing countries is in agricultural products, domestic consumer products, and fuel. Most of the growth in demand in developing countries is not helping demand growth in developed countries. Demand growth in every country follows their own pattern or hierarchy of needs, e.g. that proposed by Maslow[iii]. Growth in demand for high value products should not be expected when basic needs are difficult to meet for most people in developing countries.

Demand for advanced high value products will only grow significantly if there is high growth in real income. For instance, real incomes in China have to increase considerably, may be double, for the Chinese consumer to generate significant demand for US products. In short, global resource constraints won’t allow demand growth in developing countries to translate into demand for developed countries’ products. Additionally, the demand growth in developing countries is for global resources, which negatively effect developed countries because of the global resource constraints. In other words, resource intensive growth in developing countries is negatively effecting growth in developed countries.

If there were no global and local resource limits, developing countries’ economic growth would enable real incomes (real wages, profits, environmental quality) to grow freely which in turn would also raise demand for high value and high end industrial and service products. If people in developing countries could consume natural resources at the same per capita level as that in the US, developed countries would have plenty to sell to developing countries and vice versa. There would be economic growth everywhere. But that is not the case, and growth in developing countries is not likely to translate into growth in developed countries.

Zero sum global economy

Since resource limits will not allow the global economy to grow freely; growth in developing countries will exert offsetting downward pressure on growth in developed countries. Under the current financial system economic growth has become a sort of zero sum game among developing and developed countries. Migration of industries without replacement is just one example. Growth in developed countries can only continue if the global economy can grow freely. The global economy can only grow freely if resource limits are removed or made porous. This book is about making resource limits porous.

Double squeeze for developed countries    

The global resource limits are affecting developed and developing countries in very different and opposite ways. The economies most affected by the global resource limits are those of the advanced countries. In a globalized world, low wages enable developing countries to compete globally and generate growth. Given globalized commodities markets, developing countries can produce end products far cheaper than those produced in developed countries. Developing countries can commercially absorb higher oil prices and continue to sell cheap consumer products globally. For commercial and production purposes, developing countries’ ability to absorb high oil or energy prices will continue as long as their wages are very low. Their growth is likely to continue in spite of rising oil and other resource prices.

The additional wages and income generated by producing cheap products gives developing countries the ability to buy additional resources (fuel) for consumption. Additionally, since their per capita use of fossil fuel is far less than that of developed countries, developing countries are also likely to derive higher value from increasing per capita consumption of fossil fuel. Given supply limits, developing countries increasing demand for oil and other resources are likely to keep the upward pressure on resource prices.

It may seem that developed countries have more buying power, but as far as oil and similar global resources are concerned the production and consumption economics favors developing countries and gives them better buying power. Global resource limits are working, through resource, labor, end product and other prices, to reduce developed countries’ resource use and increase that in developing countries. This market pressure to reduce resource use in developed countries may be called a “market driven correction” but its real life impact is the economic crisis!  

The global resource limits and the explosive growth in the global labor pool are creating a “double squeeze” for developed economies. The global resource limits are not allowing the global economy to grow; but the growing labor pool in developing countries is competitively driving growth there, which results in taking business away from developed countries. Due to limited global resources, growth in developing economies is coming at the cost of growth in developed economies. Global resource constraints have currently put developed countries at a significant disadvantage vis-à-vis developing countries.

MAKING OF THE CURRENT CRISIS

 

In the 1930s Mahatma Gandhi said; “if the 300 million people of India choose to industrialize the world cannot handle the consequence.” Now that the two billion people of India and China have chosen to industrialize, the world must handle the consequences. Global resource constraints and the cutthroat competitive pressure for jobs and resources are the consequences that the developed world has to handle immediately.

Globalization and the big wave of industrialization in developing countries have not only altered resource conditions but also the competitive positions of most advanced countries. These competitive changes are having disastrous effects on most developed economies, and leading to the current crisis. Let us ignore for the time being the regulatory lapses, the financial excesses committed by lenders and borrowers, and other similar causes that may have made this crisis worse or allowed it to happen in the way that it did, and focus on the underlying economic factors that continue to drive this crisis even today. An analysis of these continuing economic factors will help us see clearly the global resource constraints and the declining competitiveness of most developed countries, and thereby help us in formulating a strategy for dealing with this crisis. The current economic crisis is also a competitiveness crisis for developed countries. The analysis follows.

Low Wage Competition

Extremely low wages in developing countries, like China and India, provide a cost advantage in labor intensive industries that is currently not matched by other advantages of developed countries. As a result, a large number of labor intensive businesses in developed countries migrated or moved production to developing countries to take advantage of low labor costs. Most manufactured goods sold in the global consumer markets are now being profitably produced in developing countries with low wages.

In a globalized world if there is a job that can be efficiently done in India it will be done there and not in the U.S. because of low wages in India. Since the bulk of global production is increasingly being done in low wage countries, employment and investment opportunities are moving there as well. When production moves overseas, a significant part of the economy goes with it, the most significant of which is employment.

Furthermore, resource constraints will not allow real wages in developing countries to grow freely. As long as global resource constraints are not allowing real incomes in developing countries to grow freely, low real wages in developing countries will keep attracting jobs and businesses. It seems that low wage competition is here to stay, unless developed countries find ways to alleviate the effects of resource constraints. Changing the resource intensive product mix to a sustainable one will certainly allow wages to really increase in developing countries and consequently improve competitiveness of developed countries. Every country will have plenty to do domestically; developing countries will no longer need exports to survive or to drive economic growth. They need exports to pay for current and future imports of fuel and other resources.

As long as the current mix of products continues developed countries will keep losing jobs and business to developing countries. 

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 has therefore severely intensified. Businesses in the US have been badly hit by competition from developing countries. The competition for jobs and markets is intense, globally. The world seems to have more labor and production capacity than it can profitably use for the current mix of products.

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 can drive a global economy which will be far smaller than the economy that can be potentially built by employing most of the globally available labor and capital. In short, the global mix of products, including investment and service products, is not broad or diverse enough for employing the globally available labor and capital.

As elaborated in the following section, which starts the concluding segment of this analysis, the remediable and strategically actionable cause of the current economic crisis is hidden deep inside the global mix of products. Global resource constraints and massive resource intensive industrialization in developing countries have created the inevitable need for change in the product mix to a sustainable one. There really is: no other way.

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, 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 effective 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 land fills are used. When oceans are cultivated for food and for carbon sinking[iv] the resource pie increases, but when oceans are just fished the resource is consumed. Every product used is 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 also be unsustainable. 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. The current mix of products is doubly or extremely unsustainable or unsustainable squared.

  • The current mix of products and economic activities will just intensify competition for resources and raise the standard of living of one at the cost of the other.
  • The current mix will not create the additional resources needed to meet the demands of billions of additional people if they are employed.
  • It will not allow economic growth to continue for long even in developing countries.

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 is not resource intensive and includes many resource-adding products. Since the new global mix will be sustainable and would consequently not be affected as much by the resource constraints, the global economy will be able to grow freely. There will be plenty for every body and every country to produce and to sell. The global labor and product markets will no more be suffering from over crowding and over capacity. The labor pools in developing countries will then not represent cutthroat competition but provide the thriving markets that developed countries need.

The underlying cause

Global resource constraints, overcrowding of global workforce, low wage competition, global warming and oil supply uncertainties 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 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 consumption and investment, which in turn would translate into higher employment opportunities for labor and available capital. The villain in the ongoing drama of global economic crisis is therefore the current mix of products.

Many societies and economies stay at a certain level of development or affluence not because they choose to stay at that level, but because many other choices and decisions they make, in turn, determine their affluence and other levels of prosperity. The same happens on the personal level, if we choose to regularly consume certain substances and refuse to take the stress of hard work, these decisions, in turn, determine one’s level of prosperity and affluence. As stated in the previous section, our choice of product mix is among the kind of choices which in turn determine the potential size of the economy and its potential prosperity.

Humans have so far chosen to take the easy path of fossil fuel consumption which can only deliver a certain finite amount of prosperity to the global population. Our continued reliance on fossil fuel limits the potential size of the global economy to a level far below its potential, given the supply of labor and capital.

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 outdated and resource intensive global product mix, therefore, needs to change to a sustainable and resource efficient product mix. 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 for other developed countries.

 

UNSUSTAINABLE FINANCIAL SYSTEM

 

While the product mix may be the villain, the financial system is the force behind the villain because the current financial system won’t allow sustainability into economies and product mixes. The current financial system has a major role in determining the global product mix. The current financial system therefore is the major source of un-sustainability of most contemporary economies. The following are some of the ways it incorporates un-sustainability in economies and their product mix.

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 minerals 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 whether needed or not.

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, particularly in the energy sector. The rate of return driven financial system strongly favors increasing use of fossil fuels because fossil fuel delivers almost four times the energy per unit of capital than that delivered by wind or sunshine. The increased financial returns or benefits from the use of fossil fuels and minerals enable businesses and other assets to cross the hurdle of interest.

Since rate of return on capital is the sole qualifying criterion for business and investment in an interest based system, it is obvious that the current financial system will favor fossil fuels over wind or sunshine for energy production as long as fossil fuel continues to be commonly available. Interest based system is causing depletion of earth’s resources with maximum speed; it needs to be replaced by a system that incorporates measures of sustainability as part of the qualifying criteria for investments while allowing financial rate of return to play its final role in the investment process.

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 because they use weak and thinly spread sources of energy like wind and sunshine as compared to fossil fuel, which is very concentrated. 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 humankind. 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 loss and harm caused to humankind 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. The proposed Asset tax embeds environmental costs in the Asset Tax structure. 

Myopia

Another shortcoming of the current financial system that works against most potential investments is myopia.  The current financial system does not see much beyond a certain point in time because cash flows after that become too small to be of significance, due to present value discounting. The compound interest method of cash flow discounting exponentially diminishes the present value of the cash flow the farther they are in future. The current financial system has a vanishing point of approximately 30 years in the future depending upon interest rates, beyond which cash flow and other values tend to vanish. 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.

The myopia of the current financial system restricts investments in all industries. If the vanishing point of the financial system was extended from 30 to 60 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[v] would translate into higher economic benefits than that from continuing to use fossil fuel.

Interest is robbing humans of our sight and preventing us from seeing the un-sustainability of our current economic way of life. If it were not for this myopia, the dwindling reserves of finite natural resource would have easily come into economic considerations and calculations. The fate of the global economy, which hinges on its ability deal with challenges and constraints at the planetary level, 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 economic benefits for any generation. We have to get rid of this myopia to build sustainability in our economies and to chart a secure and prosperous future.

Capital Destroying Bubbles

Higher accumulation of capital assets in developed countries makes additional investments relatively less attractive. Massive world wide industrialization and low wage competition from developing countries has further added to the difficulty of finding good business and investment opportunities. Additionally, 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 viable real investment opportunities in developed countries resulted in diversion of capital to speculative activities. This is observed in the large scale speculative asset bubbles in 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, particularly when they get closer to zero. The financial system will let capital be wasted in speculative bubbles and credit bubbles rather than allowing investments that provide low and sustainable rates of return to materialize.  

Additionally, temporary low interest rates do not help sustainable or environment related industries because their returns are permanently low under the current financial system. 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, commodities, and other assets.  It is not surprising that speculative activities pick up during low interest rates.

Under the current economic conditions, most monetary efforts to spur demand 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 resource and environmental constraints.

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 significantly decreasing resource intensiveness, including significant resource additions. 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. Depending on where interest is, these industries will either be 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. Pricing failure is discussed in detail in Chapter 7. 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 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 content 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 incorporating planetary scarcities 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 [vi]and Adam Smith[vii]; a system designed in their days certainly needs to be updated.

PROPOSED SOLUTION 

 

The proposed system, dubbed “Free 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

 

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 potential from the industrial use of fossil fuel and related industrialization materialized, particularly for developed countries. Recently however, massive industrialization in developing countries has brought down the returns from such industrialization, particularly for developed countries. Additionally, due to resource constraints fossil fuel based industrialization no longer offers the huge and unqualified benefits that it did until the 20th century.

Looking ahead, the focus should shift towards non fossil fuel driven growth and development. 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 costs, or the cost of capital, in spite of the fact that capital is abundant. In fact there is so much capital that it has caused toxicity in the financial system (asset bubbles and credit bubbles).

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.

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, absence of fuel price and supply risks, and more importantly also because it would 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.

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, can not 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.

There is also a strong case for diverting capital away from fossil fuel and into sustainable energy. The financial return that comes from using finite fossil fuel will always be there to capture when it is most needed. As time passes fossil fuel would only increase in value. 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. If the world had a management this shift would be obvious to them.

Not only is the wind or sunshine not harnessed lost for ever, the income that would come from doing so is also lost. The wages and profits that would have been earned are lost, particularly so 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. Presently there is no upside or gain from the losses just mentioned; none whatsoever.

If interest remains the sole criterion in allocating capital, investment in fossil fuel power will keep on increasing till oil is 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 slow down 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.

The opportunities lost due to economic slow down prior to the point of inflection and the losses due to dismantling and devaluing of business and other assets will eventually shrink economies. Losses and shrinking of the real economy may materialize through a number of economic mechanisms including credit crises, economic slowdowns, speculative bubbles, inflation, higher taxes etc. For a sizeable long term and diversified investor it will be impossible to escape these losses. Financial returns earned under the current economic conditions are a phantom which will be eroded or disappear sooner or later. Capital cannot continue to earn or accumulate returns for long if economies remain in distress.

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. Not so, in a fiat money system because money can be produced at will. Fiat money is discussed in Chapter 2. There is no real scarcity of capital and there is no scarcity of facilities 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. Given the future outlook we have in 2010 the time value of money currently appears to be negative.

Eliminating interest is the only scenario under which a thriving US economy and lasting prosperity can be visualized. There is no other peaceful scenario under which developed economies will be able to maintain high employment and long term economic growth.

Additionally elimination of interest will:

  • significantly bring down costs and enable developed countries to compete effectively with low wage countries,
  • help most traditional industries to survive,
  • expand the range of feasible economic activities, and bring more sustainable resources in economic use,
  • reduce dependence on foreign oil because cheap, clean energy will become available, 
  • 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; there is no valuation reason for credit risk to be priced on an annul basis. Under free capitalism, risk will be better modeled, assessed, and finely priced for each of its components, which includes time. As discussed in later chapters, interest is one of the main reasons for risk being so poorly understood and roughly priced in the current financial system, with such disastrous consequences.

Discontinuing Income Tax

The reason for suggesting discontinuation of income tax is simple: it is not needed in Free Capitalism. Income tax performs the function of generating revenue for the government; asset tax would do that with higher efficiency and fairness. Wealth is a better measure of an entity’s ability and fair share of tax 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. Asset tax is friendlier to the practice of honesty and integrity.

Under the current income tax system there are many examples of millionaires and even billionaires paying less tax than many middle class individuals. Leaving loop holes and special tax breaks aside, this may happen due to lower taxable income in a particular year and also due to the difficulty in determining income for businesses and entrepreneurs.

Income tax protects the rich from competition from the talented and ambitious new comers, because income tax progressively slows down their progress. Income tax tends to slow down the progress of the poor towards prosperity and by comparison tends to help the rich stay rich. Income tax tends to perpetuate the class structure of a society. Asset tax by basically taxing wealth will tend to equalize the wealth levels in a 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. 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

 

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.

Asset tax 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 has to have a 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 return or more.

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. There will be two tiers of financial returns, the first will go to the government in the form of asset tax and the second will go to the entrepreneurs as profit. 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.

Unlike Interest, 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. Unlike interest, asset tax rate changes will have few unintended consequences.

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 most developed economies. In other words, there is return fragmentation[viii] in developed economies. Migration of industries to developing countries is also a result of return fragmentation. Some of the low return segments, including sustainable energy, basic industries, and agriculture, are critical for the future of developed economies. Interest which acts as a single and uniform qualifying rate of return for all economic activities is, therefore, a hurdle too high for many critical industries in many countries. Interest 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 a huge part of the economy.

If developed economies wish for return fragmentation to end through natural economic adjustments and corrections and let financial rate of return to continue to be the sole criterion for investments, then most investments would head to developing countries till wages and standard of living all around the world equalize, the environment is completely ruined, or the world practically runs out of oil, whichever comes first. A single hurdle or rate of interest belongs to the days when the earth was limitless and there were always more resources waiting to be found. Return fragmentation has to be addressed on the basis of sustainability, national priorities, and other 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

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. No matter how much people saved the saving would find avenues for productive investment, even if the return was zero or even negative.  

Since Asset tax is also a tax on cash it is similar to negative interest rate in that respect. It 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 its 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 enhance prosperity. 

Asset tax through the power of “negative interest rates” will make financial markets perform their function much better than they currently do. Free Capitalism will prevent speculative bubbles, credit bubbles, freezing of the financial system, systemic failures due to a few failing institutions, and the resulting necessity for bail outs. These benefits are discussed in detail in Chapter 3. Since Asset tax is a tax on all assets it will not have the perverse effects that negative interest rates may have, due to efforts by economic entities to substitute money with other assets in order to avoid negative interest.

 

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.

Asset tax will not only revolutionize the economy but also the politics and economics driving the economy. It is well known that taxes have economic consequences. Wouldn’t it be better if taxes could be so structured that their economic consequences were also beneficial for the economy. Since planetary resource constraints do not automatically reflect in prices they have to be structurally incorporated in the economy. Taxes and regulation are probably the obvious ways. Asset tax besides performing the functions of interest and income tax combined will also perform a function that free markets are failing to perform. Asset tax is needed in a modern economy. We won’t need carbon tax in the presence of asset tax.

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 Free Capitalism

Free capitalism will significantly increase the size of the economy. Asset tax will allow many viable businesses to exist that would not exist under the interest based system. The range of businesses and products would be much wider or bigger than it is possible under an interest based system. Most of the products that exist today will continue in some form and there would an addition of a new range of sustainable products.  

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

  • For sustainable industries, with zero 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.

 

Generally, business returns under Free Capitalism will not only be higher because of elimination of interest and income tax but also because of a stable economy, higher demand and greater business opportunities.

Free Capitalism will enable development of an economic structure that is inherently planet friendly. It will gradually reduce the 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; and environment preserving infrastructures are used to serve the needs of the population and the economy.

The amount of work that needs to be done to incorporate environmental 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. Repeated use of examples of wind and solar energy may give the wrong impression that this book and free capitalism is mostly about a small part of the economy. Free Capitalism is about the whole economy; everything people use, consume or have as part of their lives will be affected by free capitalism.

 

Free Capitalism will bring space and related industries in the mainstream. Elimination of interest will allow people to look into the distant future for return and investment possibilities, which will make investments in space related businesses and ideas feasible. Saving the earth and going to the moon or mars are not just lofty goals; they are now pressing economic needs. Free Capitalism will give us the freedom to pursue our dreams.

Free Capitalism will allow the immense power of capital to be put to work in all spheres of human activity. It will usher in the age of capital. Free 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 talent to work, and therefore justify higher income levels.

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. 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 because of its capital intensiveness and the task of harnessing diffused forces of nature will also become very efficient and sophisticated with time. Increasing efficiency and sophistication will have high paybacks because of the low intensity, wide variations, and a multitude of other variables that will have to be captured or managed while harnessing these forces of nature. 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.

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

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 overall economy as a whole. 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 resource constraints. Free Capitalism will help countries implement fiscally and environmentally responsible policies and influence social and economic outcomes without expanding government.

ANSWER TO GLOBAL ECONOMIC CHALLENGES

Meeting the great labor employment challenge

Interest prevents economic growth to continue below a certain level of profitability, determined by interest, which, as is discussed in the following chapter, does not often fall to the level necessary for full employment. It is extremely unlikely to employ most of the growing labor pool in an interest based economic system because, under the current global economic conditions, economies will run out of profitable things to do earlier and often if they have to accommodate interest.

If an economic activity can generate enough revenue to pay for all the materials, rent, wages, and profits, and it is sustainable; is it fair to the unemployed workers, the eager entrepreneurs, and the poor consumers that this activity be disallowed just because interest can’t be paid.  In the 21st century it would amount to creating poverty. 

The economist John Maynard Keynes suggested, amongst other things “building pyramids” and “digging holes in the ground” as possible ways for increasing economic activity and employment, 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. 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.

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 employment potentials, for the global workforce a gateway is found to global economic prosperity.

The current global employment problem can be summed as follows, i.e.

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

 

In the final analysis, interest is the major hurdle against high employment and prosperity. Interest will keep economies around the world, particularly developed ones, struggling due to lack of business opportunities. Competition from the rapidly growing labor pool in developing countries will make things worse by the day. As long as there is high unemployment in rapidly developing countries employment in developed countries will consequently suffer.

The planet friendly mix of products can only evolve if interest is no longer the hurdle in the development of sustainable industries and is not pushing the economy towards higher resource consumption. After eliminating interest, incentives can be built in an economy, 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 employ the growing global workforce.   

Once the interest free model is successful in the US, 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 followed by employment.

Employment in the US will only go up significantly if a business and economic model that works for the world is established, with the US taking the lead, which has been the case, in some form, since the start of the industrial revolution. From a global perspective, employment in the U.S. 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

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

The key to building an economy that delivers prosperity in spite of resource constraints is adequate and efficient employment of capital towards sustainable economic activities. Eliminating interest is the first step towards making capital available for a sustainable economy. 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.  

Resources that are finite and are becoming increasingly scarce include minerals, particularly oil, and some materials; asset tax can be effectively used to protect these resources. The resource intensiveness of most products will automatically abate because competitive labor and capital will help replace some of the resource content (e.g. fossil fuel) of the products by producing sustainable resources. In addition to the incentives created by Asset tax, 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.  

It should be clear by now that all the challenges of the current times: resource constraints, productive employment of capital, and employment of labor are being handled through an overarching strategy of building sustainability in assets and the economy. Resource constraints won’t prevent growth because additional resources are being created through use of capital and labor. More capital will be productively employed because capital is being used to create new resources. More labor will be employed because a sustainable economy will undertake more production activities and consequently have more jobs. High prosperity and employment will be the result of this strategy.  

SHAPING THE FUTURE

Protecting capital and capitalism

There is abundance of capital in the world. China, India, Japan, South Korea, Brazil and others are ready to inundate the world with real capital. Employing the huge amount of capital that is globally available has become a challenge under the current financial system. Charging “usage fee” on something as abundant as capital will naturally cause capital employment problems. The “scarcity of capital” justification for interest is dead. Capital can no longer be expected to earn risk free return in the form of interest.

Capital or money owners should not be rewarded for “not hoarding” money or financial capital. Fiat money can be produced at will by governments and the financial system, and there is abundant supply of physical capital. There is no justification for any risk free return. In fact, financial capital should pay fees or charges for safe keeping and maintenance of value. Since governments are mostly responsible for maintaining the value of the currency asset tax on cash would seem fair.

Interest is severely hindering production of economic value and is preventing economies from meeting their potentials. Interest is preventing a significant part of available capital from being employed. The recent failure to employ capital productively has resulted in the global speculative (asset) bubble and subsequently the current economic crisis. The current form of capitalism is destroying capital in speculative bubbles and also by preventing its employment in sustainable assets and activities. 

If capital insists on collecting interest it will fail to produce the economic value that would justify continuing adherence to capitalism from economies. Interest may also cause destruction of capitalism because it is making economies increasingly unsustainable. Failure of capitalism will invite socialism. The best way to prevent a resurgence of socialism on a grand scale is to make capitalism work.

To save capitalism, capitalistic economies have to make capital work. If capital (or capitalist) works, takes business risks, and produces value it should earn profits, without limits. Capitalism can only continue if capital continues to produces real value. Employing capital in new and sustainable ways will open up new paths for capital to produce value. Businesses have to be incentivized to find new and sustainable ways to employ capital and produce value, to save capital and capitalism.

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 set of right incentives to profitably employ capital for the work ahead. Interest is preventing economies from putting the two: work and capital, together. Free capitalism by eliminating interest significantly increases opportunities to employ capital; and by instituting asset tax provides an effective and efficient tool to channel capital to sustainable activities without sacrificing the efficiency of free markets. 

Given the environmental and resource constraints, employing capital with efficiency and long term strategic effectiveness is the existential challenge of the current time. Free Capitalism will enable economies to employ capital with efficiency and 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 and the limits of global resources.

Free Capitalism will reinvigorate the entrepreneurial spirit in capitalism by providing more opportunities to employ capital and more opportunities to make profits. Free Capitalism will renew capitalism by making it work in the toughest economic conditions ever faced by humankind.  

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 economic system do not allow markets to reflect long term scarcities of the planetary kind e.g. finite minerals and the environment. 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.

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 failings of the free market economies. Free markets are a human creation and therefore sometimes need to be upgraded with new tools, mechanisms, and institutions.

Asset tax is the tool that will enable the US to respond to major changes and strategic necessities in a well thought and organized manner. The magic of the markets and human ingenuity only works in the presence of the right structure and right incentives.

 

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

Global peace

An interest-based financial system will not allow economies to change the mix of products to the one that is sustainable. 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 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 rate of consumption of mineral and other resources is so high that there is no plausible scenario for global peace and prosperity in the next century. Continuing the use of interest as the sole criterion for allocating capital 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. Since elimination of interest and institution of asset tax are two consecutive steps in the same direction: from un-sustainability to increasing sustainability, asset tax will further ensure global peace by providing countries the ability to create additional resources through appropriate asset tax rate structure. Free 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 Free 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 very long term investments in assets, technologies, visions, potentials, industries, research and development, and in projects of sustainable growth.

The abundance of capital around the world needs to be channeled to productive investments; all the US needs 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 the US build 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. Free Capitalism will help the US lead the world to a peaceful, free, and prosperous future.


[i] The Energy Information Administration, an agency of the US government Department of Energy.

[ii] Consumption data: The Energy Information Administration an agency of the US government. 

[iii] Maslow’s hierarchy of needs is a theory in psychology proposed by Abraham Maslow in 1943. The hierarchy, from the most basic upwards is: physiological, safety, love/belonging, esteem, and self-actualization.

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

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

[vi] 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. He was 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.

[vii] 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.

[viii] 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 10

Table of Contents