FREQUENTLY ASKED QUESTIONS

 

“Frequently Asked Questions” may not be the best description of this section because there aren’t many real questions being frequently asked about Free Capitalism, yet. We welcome all comments and observations by readers and hope some of them will add to our list of frequently asked questions. The following are some of the question or comments that we have received so far. Questions are indented and shown with bullets. Our answer or response follows each question.

 

  • I see at least a potential danger that your “Free Capitalism” may turn out to be less “free” than you make it. For example, deciding on a zero asset tax, or which industries or innovations to promote, compensation through credit premiums … will necessitate a fair amount of central planning and direction. Who is going to decide and how? The central planning in the former East Bloc did not work. Another form of central planning within the traditional capitalist system by MITI in Japan produced results by channelling resources to export-intensive industries. That is more difficult today in a closely interlinked global economic society with penalties for any nation that tries to subsidize certain sectors. Which leads to another point. I believe, that because of the interconnectedness of national economies, it would be difficult, if not impossible, for any nation state to try “Free Capitalism” alone.

The world we live in has dramatically changed since the start of the industrial revolution. Now there are local and global resources and industries that we need to protect and preserve, which was not the case at the start of the industrial revolution. There has to be an economic mechanism to protect resources from over use and rapid depletion; asset tax is just that mechanism. Regulation and subsidies are not the answer.

Except for minor elements of choice, there is not much room for choice with respect to which resources need to be protected or preserved. Asset tax is just a tool to economically internalize the resource realities of the Third Millennium.

The US and Europe are both in trouble and need some solution. Free Capitalism if implemented in America is likely to be viewed favorably in many other countries. It is unlikely that there will be significant number of countries of significant economic sizes who would be willing and able to derail the process of change in the US, and possibly in Europe, towards Free Capitalism. The economic crisis and the resource and environmental challenges are global problems.

Free Capitalism is a free market system therefore Central Planning will not have any significant role in it. Central planning is not needed in Free Capitalism any more than it is already practiced in the US and Europe. Free Capitalism will pose real political choices to the electorate and the elected. Free Capitalism will invigorate democracy.

 

  • Your proposal to a differentiated asset tax structure already has a parallel in some countries by having differentiated income tax rates (incentives). This is always a difficult decision by the legislators.

Free Capitalism will give legislators some real political issues to deal and duel. Free Capitalism will make politics interesting and will significantly increase participation by the populace. Free Capitalism will be good for democracy.

 

  • On details of your model of “Free Capitalism” one can find counterarguments for many of your cardinal points. For example, if you look at the wind-farms in Northern Germany, or Spain, the massive investment, especially of Spanish firms, in solar technology your argument that these alternative forms of energy cannot take off because of interest requirements has plenty of counter-evidence.

The example you cite of wind farms in Germany and Spain is the precisely the example I would cite in favour of Free Capitalism. These assets were financed by subsidies and similar incentives. No government can give enough subsidies to alter the composition of the energy sector to the extent needed. Most sustainable sources of energy are very capital intensive and they also need major investments in distribution systems.

The amount of investment needed to make sustainable energy a reality can only come about if the cost of capital is significantly and permanently reduced. Free Capitalism will change the cost of capital for these industries in a way that they will become viable without government help. Subsidies are not the way to make sustainable energy viable.

It may seem that Free Capitalism is relying heavily on a few known sustainable sources of sources of energy like wind, waves, or sunshine. It is not. It is relying on human nature and human ingenuity; Free Capitalism is an economic system. Given the right incentive structure people would find multitudes of new and sustainable ways to produce energy, food, and other products and values; they would find ways to harness forces of nature in ways that we can’t even imagine today.

For example, nuclear fusion which can provide inexhaustible clean energy is now considered a possibility. Seven countries including the United States have joined together to build an experimental reactor by 2020. Even if long shot ideas like nuclear fusion becomes the answer they will require massive amounts of capital. We live in a capital intensive world, and the sustainable world we need to build is likely to be extremely capital intensive.

Free or cheap capital is essential for building a sustainable economy. Free Capitalism will put the incentives in place to make sustainable energy economically viable.

Free Capitalism is based on great faith in human creativity but also in the knowledge that the right incentives have to be in place for human creativity to show its magic. Correcting the economic structure of incentives is the first step towards unleashing human powers of invention and enterprise for building a new and sustainable world with limitless economic opportunities.

 

  • In general, I wonder whether you really need to link your whole “Free Capitalism” model to the sustainability question. I think that it could be explained without getting into the morass of population growth (which only happens in the lower income countries) or resource constraints. I realize, of course, that making a change here would require a dramatic rewriting of your whole document.

Resource constraints and population growth may not have started this crisis but are the reasons for the continuation of this crisis. There can be no lasting solution to the global economic crisis without finding a way to significantly enhance sustainability of economies.  Sustainability is the challenge that will define our age. There is no escape from it, and we cannot postpone dealing with it much longer.

The link between sustainability and Free Capitalism is the same as that between a problem and its solution. Free Capitalism can as well be called Sustainable Capitalism.

 

  • Most certainly, it was not resource constraints that caused the GFC (Global Financial Crisis), but rather the working of the apparently eternal “formula” in financial institutions, i.e., Greed > Fear (which you negate in your final chapter). For balance, one should add that the villains were not just greedy and imprudent bankers, but equally greedy and imprudent individual consumers who felt that they could maintain real estate without any equity or income to cover debt services.

Speculative bubbles and over leveraging are not new to the current capitalistic system; in fact they have been happening with significant regularity, approximately a dozen times in the last sixty years. This crisis may have been triggered by over leveraging and speculative bubbles but its tenacity is driven by resource constraints. There are not enough resources, particularly oil, to fuel the current kind of global economic growth, for long.

If it was not for resource constraints, this crisis, like many before it, would have subsided or started to subside by now. Unsustainable global economic growth has to start slowing somewhere; it is evidently slowing in developed countries, for many reasons including that of its higher degree of un-sustainability.

 

  • As you propose substituting Income Tax by Asset Tax, you will want to look at nation states that already work without income tax, e.g., The Bahamas – government revenue comes from import duties and, yes, asset tax, such as real estate. In Switzerland, unlike the USA, we already have asset tax on all of our assets, including cash, and a tax on the space in our house that we occupy, rather than rent, roughly equivalent to the potential rental income. All to say, that you will have to become more “expert” on tax systems.

Asset tax has been used for ages in different forms in different countries. Therefore there is plenty of expertise in asset tax around the world, which will help in implementing the asset tax proposal of Free Capitalism. Thanks for pointing out that we can be rest assured that there will be expertise in asset tax available when we get to implementing Free Capitalism.

I have looked at examples of asset tax and will continue to so. I am still working on the chapter on Asset Tax, of this book.

 

  • I currently happen to be close to the natural resources industry in Australia, and I have worked for one of the major oil companies. It is not the existence of interest that “incentivizes rapid extraction” but plain and simply demand. The Australian mining corporations respond to the enormous demand of their “neighbor” China; and Chinese consumption is not driven by the existence of interest but by the national ambition and need to develop their infrastructure.

The current demand conditions are partly a result of the “rapid extraction incentive” working over a long period of time and creating a structure of life and living that is extremely dependent on fossil fuel and other minerals.  Structural dependence on fossil fuel in most developed countries is discussed in the section on “structural consumption.”

Currently the interest driven incentive for “rapid extraction” is made redundant by the more powerful forces of demand, which itself is partly the result of structural consumption. Present demand conditions for fossil fuel and other minerals coupled with lack of good investment opportunities (deteriorating risk-return trade-off), has made the interest driven incentive for rapid extraction of minerals temporarily redundant.

In fact there are recent indications that the Saudis are not happy extracting their minerals as fast they are. There are few good and safe avenues for investments; the US and European bond and stock markets have become very unattractive (high risk low return). They expect far better returns by leaving the oil in the ground.

I am not only aware of the demand factor but also of the current redundancy of the incentive of “rapid extraction.” This incentive will work again as soon as demand goes down or supply increases. The existence of this incentive will remain an additional threat to sustainable industries because it will tend to drive down oil prices if sustainable industries take off and the demand for oil stops to grow. Presence of interest presently works and will continue to work against sustainability.

 

  • The principal question you want to ask yourself is, “What is the purpose of writing this?” If it were to change the world, the draft will in all probability be a futile undertaking. If it were to just stimulate thinking of improving our way of living without starting a revolutionary change process, you will probably succeed.

I strongly believe that this global economic crisis, particularly the part in developed countries, will not abate with time. The tenacity of this crisis is driven by fundamental factors that will tend to exacerbate this crisis over time. Those fundamental factors of “sustainability” have to be addressed before any lasting recovery can be expected.

The solutions being tried from existing macroeconomic tool kits will not fix the underlying problem because this is the first time planetary resource constraints are driving an economic crisis; this crisis has no precedent and therefore no tool for it in the toolkit. If the conventional measures were to work they would have shown results by now, or would have started to turn the tide. The Obama administration would not have lost most of its top economist by now (2011). We currently see news of the tide growing bigger; we talk about Greece and in the same breath mention four other countries.

The global economy is going in the wrong direction. It is building increasing dependence on a dwindling resource. The world’s current economic model is channelling resources towards building more reliance on a dwindling resource and is not allowing sustainable industries to take real hold. There are not enough jobs in the wrong direction particularly in developed countries because those countries have already built a very high degree of dependence on fossil fuel.

I am not trying to start a revolution; I am just trying to find a solution that needs to be found.  It is just a matter of time before everybody realizes that we need a new and unconventional solution. In a June 2011 survey by the US Chamber of Commerce, around 85% of small businesses said that they needed certainty more than help, to start hiring again. Free Capitalism presents a clear path and vision of economic progress, and therefore will provide the kind of certainty that businesses need to grow and thrive.

 

  • You need to be careful with broad generalizations, such as “growth in developing countries is coming at the cost of growth in developed countries.” First, one must expect that percentage growth from a low base, e.g., Poland, should be “easier” than growing at an equal rate in a highly developed economy, e.g., the USA. Secondly, it is not factual: For example, over the last quarter, Germany’s GDP grew at 6.1%, that of Mexico by 2.1%. Moreover, growth is not just determined by resource limits (look at Singapore, Hong Kong, South Korea) but decisively by the stability of the economic, legal, social, and political system.

The following is a quote from the home page of my website www.Freecap.org. “Even though global economic growth is slowing, many developing countries are growing rapidly. Growing labor pools in developing countries are competitively taking work away from developed countries. The migration of industries is an obvious example of migration of jobs from developed to developing countries. Part of growth in developing countries is coming at the cost of growth in developed countries.” This generalization is not only based on observation of broad trends but also on actual process of migration of industries. However, like other generalizations this generalization also has some counter examples.

The following is a quote from Chapter 5 of this book. “Compounding the difficulty is the mathematical reality that a certain percentage growth, say 5%, is a much bigger quantity for countries with a larger income or capital base.” Yes, I am aware of the difficulty that large economies face in achieving high rates of growth and have discussed it in detail in Chapter 5.

“Stability of the economic, legal, social, and political system” does drive growth; but currently we are facing a factor that is impeding growth e.g. resource constraints. There are factors that contribute to growth and there are factors that impede growth. In the following quote which is also from this book; resource constraints are considered a factor impeding growth.  “If the rest of the world could potentially consume planetary resources at the same per capita rate as the US and Europe, developed countries would have plenty to sell to developing countries, and vice versa. There would be economic growth everywhere. Instead the world is facing an economic crisis.” If we remove resource constraints that are impeding growth “stability of the economic, legal, social, and political system” will again start to drive growth as they always have.

Furthermore, a distinction has to be made between local resource constraint like that of Singapore, Hong Kong, Japan and many other countries and that of the planet. Local resource constraints can be mitigated through imports but the solution for planetary resource constraints is to create new resources or to preserve existing ones. Free Capitalism is about creating new and sustainable resources and preserving existing ones.

 

  • An equally broad generalization is your statement, “investors are shying away from fossil fuel driven industries.” That is certainly not born out by China or Germany (especially after the ban on expansion of nuclear energy supply in the latter). One could argue that these are exceptions from the rule – all I am trying to do is alert you to care about unconvincing generalizations.

In September 2010, Petrobras, the Brazilian oil company, raised $70 billion in the world’s largest IPO ever.  So, yes, the investors are not shying away from some kinds of fossil fuel based investments. Investments in oil exploration and development have gone up significantly, which is natural outcome of resource constraints.

In developing countries like China fossil fuel power plants are being built with speed and regularity. So, yes again, in some countries all kinds of fossil fuel investments are being made to catch up with developed countries. There are multitudes of reasons for catching up with developed countries in fossil fuel consumption; however the most cynical of those reasons is to increase emissions, the result of international negotiations that use historical emissions to set national targets for future emissions.

So there are plenty of reasons for investments in fossil fuel driven industries to increase in certain instances, but not in the US industrial sector which is the context for the generalization “investors are shying away from fossil fuel driven industries.” However, even in the US there are demands for “drill baby drill.”

 

  • And yet another generalization (last), “growth in developing countries is not likely to translate into growth in developed countries.” Major trading partners (growth generators) for Western Australia are China, India, Korea, and Thailand. The gigantic positive trade balance of Germany (bigger than that of China) is a significant factor for the economy’s growth and results significantly from production and sales of goods in developing countries.

Germany as an exception is mentioned in detail in Chapter 6. Japan is also discussed. Before making any export related generalization about Germany please ask why is that not true of Japan. Why is Japan in such a mess after being such a great exporter? Germany has a place to absorb growth: East Germany.  Japan has no place to absorb old fashioned fossil fuel based growth.

Germany is an exception even within Europe. Its success cannot be scaled up to all developed countries because of so many reasons, particularly because of the global resource constraints. Under the current level of resource constraints few countries will be able to grow, but not all or most.

 

  • The question of whether the shift of labor-intensive industries to less developed countries will reduce employment in developed economies has been and is being debated endlessly without reaching final conclusions. You may want to look at the literature on this question before stating categorically “developed countries will keep losing jobs.”

Sure, I would. The point I am trying to make is that due to resource constraints and an antiquated economic system the global jobs pie will not grow fast enough to accommodate all the growing global labor pool. The low paid will squeeze out the high paid for increasing number of jobs.

 

  • This leads me to a more general suggestion: Your paper would gain by bringing in more balance, present opposing views to your own, deal with those logically.

I would be happy to present opposing views if I can find them. Free Capitalism has yet to reach that critical mass of people when opposing views are formed and come to lime light. I wish for that day when I have to accommodate opposing views.

 

  • Your Chapter 7 reminds the reader of the predictions of Robert Malthus about the consequences of population growth. Malthus underestimated the force of creativity and innovation to solve the food supply problem, leading him to questionable recommendations. Are you possibly underestimating the ability of our current system to adjust? What alternatives are there without attempting a “revolution similar to the industrial revolution?”

Free Capitalism is an adjustment to the current system. So, I am very optimistic of the ability of the current system to adjust. I am so optimistic that I am actually making an effort to help it adjust.

Malthus was not wrong; he was right all along if we see his predictions as mathematical projections and not as religious prophecies. The industrial revolution brought us from a population 700 million to 7000 million. As I see it, revolutionary changes were needed to deal with his projections, and revolutionary changes did come about.

We now need another episode of something comparable to the industrial revolution to sustain the human population from seven billion onwards.

 

  • I don’t want to go into more detail on each and every chapter. I have enjoyed the intellectual stimulation of reading your draft, and I hope that my comments may help you in refining your document.

Thanks. Your comments and suggestions have already helped to provide material for this section of my website; they will certainly help in improving the book.