The post 2008 crises ridden economic landscape of the world can be described by the following features:

  1. Plenty of available capital (both financial and real) and abundant capacity to build capital; i.e. abundant supply of capital.
  2. Low demand for capital even at very low interest rates.
  3. Resulting in unending economic troubles and high unemployment of labor.

Abundance of capital in the 21st century

After the globalization driven industrialization that took place at massive levels in developing countries the global economy has reached a stage where it has abundant production capabilities. Additionally, increasing automation in workplaces continues to further add productivity and capacity. The global economy has far more production capabilities than it can find demand for. It needs a tremendous amount of additional opportunities for labor and capital employment but the current 21st century economy is not only not offering enough new opportunities, it is in fact limiting opportunities that used to exist in fossil fuel based development and industrialization.

There is a great and ever increasing demand-supply mismatch occurring around the world. Relative demand is weak whereas potential supply is abundant and increasing.

A comparison with the Great Depression of 1929

The main culprit behind the 1929 great depression was the same abundance of production capabilities relative to demand, as it is now. The solution then was World War II which created demand for capital goods (tanks, ships, airplanes etc.). War suited the psyche of people then. The destruction of the war kept high level of demand alive and well for decades.

Now we face the same abundance of capital problem and we wish the solution to be investments that enhance possibilities for human wellbeing now and in the future. Investments in space exploration and exploitation; environment friendly energy, infra structure and living spaces; ocean water based living and numerous similar endeavors are among the many obvious choices. These investments suit our desires and survival needs and we need to make them happen but they are not being made at the scale necessary to keep the economy working smoothly.  If we don’t find a way to convert those desirable investments into actual demand, World War III may present itself as a solution for demand shortfalls.

An economic theory view of the problem with demand in this century

Demand has two components: consumption and investments. Since consumption is proportionally healthy we would leave it aside for now. The weakness in demand is mostly in investments. This is so because marginal return prospects are low or limited in most industries.

Though there are many ways to explain this phenomenon of low marginal returns on investments but the “law of diminishing marginal returns” gives a satisfactory answer. The amount of capital we have to employ to keep the world economy and labor employed will drive down the marginal return on capital to zero and even below.

But interest, the mechanism used to price and allocate capital, cannot go below zero. Interest rate has been around zero for decades, therefore it cannot drive any further increase in demand for capital.

The capital allocation system, interest, starts to fail as returns approach zero (i.e. go below 2%) because of interest’s zero bound and also because of the expectations created by the history of interest rates over centuries.

Interest’s zero bound and the expectations created by the history of interest rates

Interest rates have hovered around 5% for centuries. Investors generally expect interest rates to rebound once it goes significantly below 5%. So, long before interest rates get to zero, at around 2%, the expectation of its upward rise nullifies the potential benefits of low interest rates on long term investments.

Interest rates have been close to zero for a long time but businesses still need further stimulation. The world economy either needs interest rates to go further down (maybe even negative) or needs the expectation of its upward rise completely eliminated. Because of interest’s zero bound it cannot go below zero. And because of the asymmetric movement possibilities of interest rates at zero coupled with the history of interest rates the expectation of its upward rise cannot be eliminated. Consequently major economies will remain stuck in crises for the foreseeable future.

An appropriate capital allocation tool without a zero bound would have solved the problem much earlier. The world economy immediately needs a capital allocation system that can allocate capital under conditions of abundance i.e. a tool that can also push capital towards business and industry. Sinless capitalism has such a tool.

Interest therefore fails under conditions of abundance of capital

Interest was very effective as a capital allocation tool during the times when capital was very scarce relative to its demand e.g. during the early centuries of industrial revolution. Its hurdle mechanism, in which only those projects that earn above the interest rate get capital, worked well. Hurdle or rationing mechanisms works well in times of scarcity, but in times of abundance the hurdle (interest rate) is counter-productive. In times of abundance of capital we don’t need to restrict its flow but need to cause it to flow. Interest is not really a tool for allocation of capital, it is a tool for rationing capital; it works well only under conditions of scarcity. Now that there is widespread abundance of capital interest is unable to cause it to flow thus failing to allocate all the capital that is potentially available. This failure slows down production of goods and consequently constrains income and employment. Interest needs to be replaced with a system of allocation of capital that works well under conditions of both scarcity and abundance. Sinless Capitalism has such a system.

Interest is a hurdle against investment in environment and space related industries

Sustainable energy industries, like wind and solar power, have relatively low financial returns because their capital requirement is many times of the capital investment required in fossil fuel power-plants. A one-gigawatt wind facility costs more than $2.5 billion to build, whereas a gas facility of the same capacity costs $600 million (Learning curve declines in prices of wind facilities will not materially change this capital intensity ratio). Harvesting wind or sunshine takes far more capital than harvesting fossil fuels which are concentrated packages of energy. Most sustainable energy or resource adding industries are very capital intensive; their profit rates are not high enough to be able to pay interest consistently. Interest is the biggest impediment to mainstreaming renewable sources of energy. No practical amount of subsidy can fully counter that impediment.

Interest is even more detrimental to space endeavors and industries. Space industries and businesses will never go mainstream till interest is part of the economic system. Interest is the reason that there has been little or no self-sustaining business activity in space even though humans have been there for 60 years. If it was not for interest humans would probably be ready by now to build colonies on moon or mars.

Even though interest rates have been low and extremely low for all of this century but still investments in these industries have not picked up sufficiently. Temporary low interest rates do not much help industries with inherently low returns because of the fear of interest rates going up. The lower the interest rate the higher the chances of its going up and the larger the potential magnitude of its upward rise. The mere existence of interest discourages long-term investments in low return industries such as renewable energy and space exploration.

Interest is the major impediment against progress in the industries of the 21st century. Humans can no longer ignore climate change and other degradations of the planet not only because of its effects on lives of future generations but most importantly because of their effects on the economies of today. Unsustainable economies will be constrained by environmental and planetary limits and remain stagnant whereas sustainable economies will not face such constraints and will grow freely. Most drivers of human progress are driving us towards sustainable and environment friendly living and greater space explorations and exploitation but interest is driving us away from such progress.

21st century economic opportunities

The 21st century economy has huge capacities to produce capital and it also needs huge amounts of capital. The need for capital in this century are so immense that they can be easily compared to that present at the advent of the industrial revolution. The amount of work involved in making all of the global economy shift to sustainable and environment friendly ways of living and working is so huge that it will take a 100 years. Space exploration and exploitation is another area where huge opportunities await mankind; its promise is unmatched by any earthly endeavor.

A new global economic growth trajectory is waiting to be started by any country that sees the opportunities of this century; that country will be the true leader of the world in this century and beyond. It will start a new way of living for mankind. It is obvious that the resource intensive way of living currently practiced in Europe and America cannot be adopted by the seven billion people of the planet. We need a new model of living that is friendlier to the planet and the environment and is perpetually sustainable.

Sinless Capitalism – feature details and explanations

Interest is an impediment against environment friendly and space friendly industries; and interest also fails to allocate capital under conditions of abundance. Both these failures are causing economic distress and taking humans towards a catastrophe that could endanger their survival. Presence of interest endangers both the present and future of mankind. Therefore it is extremely important that interest is eliminated from the economic system. Sinless Capitalism does that in an economically sound and practical way through the following changes in the present form of capitalism:

  1. Eliminate interest on money from the economic system;
  2. Institute Asset Tax – Annual tax on all assets including cash;
  3. Discontinue Income Tax.

The three proposed changes are very well thought and all three are required to give Sinless Capitalism a sound economic and social foundation so that the system could last forever. Replacing interest is an extremely challenging task both in theory and in practice and Sinless Capitalism’s design is up to it.

Eliminating interest will keep the world employed; build a sustainable and secure future for mankind and make commercial exploitation of space an everyday reality.

The elimination of interest would also greatly enhance social justice in the society. Interest is unfairly exploitative; it is socially unjust; it is the mother of most other social injustices. Interest and the environment are incompatible; interest and humanity have been incompatible for a very long time. Aristotle and almost every luminary after him was against interest.

There is really no justification for interest any more. Interest was necessary in the gold system because hoarding of gold could bring the economy to a halt. However, that is not the case in a fiat money system because money can be produced at will. 4000 years of tyranny of interest is about to end.

Lord Keynes would be very happy at elimination of interest. In chapters 23 and 24 of his mighty work, “The General Theory of Employment, Interest, and Money” he devoted a significant amount of space on the issues addressed by Sinless Capitalism. In Chapter 23 of the book, Keynes discusses and agrees to a great extent with the economist Silvio Gesell, who, in the earlier part of the twentieth century, tried to trim the powers of money. Sinless Capitalism shares the basic objective of Silvio Gesell’s effort. The main thrust of Silvio Gesell’s work was adding a carrying cost to money so that it could not be hoarded; thus stripping money of the power to demand interest.

Asset tax besides performing the economic functions of interest and income tax will also ensure economic prosperity in a socially just and planet friendly way. Lending will continue in the absence of interest because of asset tax; lenders will lend to transfer their asset tax on cash to borrowers.

Income tax has been eliminated because it is not needed in the presence of asset tax; taxing wealth is much fairer than taxing income particularly if we wish to reduce economic inequality. Sinless Capitalism is big on reducing economic inequality: Interest perpetuates wealth inequality, eliminating it reduces inequality; asset tax reduces inequality by taxing wealth; and elimination of income tax lets the poor accumulate wealth fast.

Sinless Capitalism does not favor the rich nor does it favor the poor; it is a just economic system, more just than any in human history. Sinless Capitalism has all the good points of capitalism because all the fundamentals of capitalism are left intact e.g. free markets, free trade, private property, etc.

The government through the asset tax structure has the role to choose assets and industries that it wants to favor through low or no taxes (e.g. renewable energy and space industries) and those it wants to discourage through high taxes (e.g. polluting assets and industries). Asset tax on cash is like a penalty for leaving cash idle (similar to negative interest rate); governments will be able to force capital to be employed by increasing that penalty thus increasing economic activity, employment and income. Japan, Germany, China and many other countries have effectively and beneficially used government intervention to favor or disfavor industries and business.

Employment is created when capital is produced and again when capital is employed. Sinless Capitalism is inherently friendlier to investment, employment and other economic wellbeing needs of individuals and societies.

Sinless Capitalism protects future generations. Capitalism not only utterly fails to take care of the future generations it in fact creates incentives to rob future generations. Therefore for the sake of future generations capitalism has to be replaced by Sinless Capitalism.

For details of the new system and for answers to FAQs please visit my website: www.SinlessCapitalism.com . Seven chapters of my book on the subject are there; some of those chapters need revision.

Sinless Capitalism – summary of benefits

The economic challenges presented by this century are in fact a great opportunity for formulating a fresh economic leadership agenda that is exciting, popular and can last for generations. The following economic and political benefits of Sinless Capitalism clearly show its immense potentials:

  1. Abundance of economic opportunities for investments.
  2. Abundance and economic prosperity nationally and subsequently globally.
  3. Greatly enhanced environmental protection. Gradual shift away from fossil fuels to renewable sources of energy in the country and subsequently in most of the world. Consequently climate change will be effectively addressed.
  4. Engineering products in the sustainable energy, space and related industries will lead growth in high value added sectors of the national economy.
  5. Global leadership in space exploration and exploitation. Space industries will have explosive growth and become mainstream under Sinless Capitalism.
  6. Low or very low capital costs, which will make most products competitive nationally and very competitive globally.
  7. Low or no inflation.
  8. Significant and continuing reduction over time in income and wealth inequality among citizens. The new system will eliminate institutions that make the rich richer e.g. interest; it will counter accumulation of wealth by introducing taxes that will be proportional to wealth (not income); it will help the poor accumulate wealth faster by eliminating income tax.
  9. Full employment of labor, the way classical economics said would tend to happen in the long run, would happen in the short run as well.

10. Enhanced protection of the rights of the future generations. This is a concept that urgently needs to be defined and practiced, the sooner the better. This ought to be the defining moral agenda of the current generation.

11. Global leadership in economic thought and practice which is likely to translate into political, cultural, and technological leadership as well.

12. Economic and social harmony in the country.

13. The economy would operate much like the way classical economics said it should. The major flaws that caused it to behave otherwise will be removed.

The long list of almost miraculous benefits mentioned above should persuade people and leaders to adopt this most innovative economic system. It is a silver bullet for climate change and current global economic illnesses, to say the least. For the first time in human history there will be an economic system that will deliver both economic efficiency and social justice, in spades.

Interest as a threat to humanity

Interest is also the major villain in the tragedy of the planet. The planet, including its environment, used to be limitless for human economic activity but now it is showing exhaustion from polluting and depleting effects of a range of human activities; the planet is demanding protection from these activities. Protecting the planet is a public good of the global kind. Capitalism, in its present form, has no means of incorporating public good in its basic structure; it can only achieve that through appendages e.g. subsidies, taxes, regulations etc. In addressing climate change appendages may at best work at the national level but at the global level it has no chance of working.

Interest by hindering investments in environmentally friendly industries is the major hurdle against addressing climate change. It is consequently a threat to the future of humanity.

Measures currently suggested for addressing climate change are economically costly and globally impractical. These include government subsidies and business killing regulations which have huge economic costs; and then there are globally impractical suggestions like carbon tax or cap and trade. These ill-conceived measures offer only partial remedies at very heavy and globally asymmetric costs.

In many economic and political circles it is correctly thought that addressing climate change will bring about or worsen economic slump; climate change denial is probably driven by this belief. Climate change deniers include people who think that there is no workable solution to climate change; so instead of uselessly trying e.g. putting business killing regulations in place, they deny the problem. Climate change solutions as currently formulated are economically costly and effectually ambiguous. No wonder that environmental movements and environmentalists have had little or no success on climate change; they are not likely to have any with the current package of solutions. On climate change environmentalists are not part of the solution they are part of the problem because they promote non-solutions as solutions.

The range of solutions being proposed in bestseller books, in political platforms, and by international and multilateral organization and accords strongly suggest a socialistic approach to addressing climate change. If climate change was a national problem socialism would probably have a shot at addressing it at an extremely high economic cost but since it is global problem socialism is no better at solving this problem than plain old capitalism.

Interest makes technological progress a curse

Generally speaking, as technology advances more can be done by less labor, so technological progress contributes to unemployment and consequently loss of income and bargaining power for workers. Technological progress also contributes to income inequality through concentration of power in the hands of technocrats and capitalists.

Technological advancement will provide prosperity if the society is able to find better things to do with the labor freed; if not it will immiserate labor and society. The solution should therefore include creation of more work for workers, i.e. increased investments in employment generating enterprises, so that employment could increase again. Persistently higher rates of employment tends to minimize income inequality. In my view the pyramids were built to employ the labor freed due to continued technological advancements; the genius of the investment was that it provided better income to the workers and society and lifted the society to a higher level of skills, possibilities, power, wealth and prestige; it is still providing income to the society; it was an extremely good investment. If the Pharos had not built the pyramids in the years that they did their society would have descended into chaos. Modern economies also have to keep finding better and better investments to keep their pool of labor employed and to lift their societies to higher levels of current and future wellbeing. The fundamental essence of statesmanship is to find and develop investment avenues for the society, either in war or in peace. The current European and US economic situation is primarily due to failures in this kind of statesmanship, the effects of which have been highly magnified by the competitive pressures of globalization.

Sinless Capitalism will make it easy for leaders to provide ample means and avenues for new investments in industries that will not only address the employment problem but will also address major national and global problems including climate change. Technological progress gives the leaders an opportunity to determine a course for the nation and mankind that will ensure its survival and improve the chances of having a better future. Interest by limiting investment options does not allow leaders and societies to avail the benefits of technological progress; it in fact makes technological progress a curse.

Urgent necessity of Sinless Capitalism

The global economy has been in turmoil for a decade and it continues to go into deeper trouble even if there are some temporary signs of recovery. The International Monetary Fund (IMF) in May 2018 warned that worldwide debt has now reached a new record high of $164 trillion, equal to 225pc of global GDP. The world economy is more indebted now than before the global financial crisis (GFC) more than a decade ago. The most widely tried solution to the ongoing crisis has been creation of debt, both public and private, a lot of which has been going in consumption and in speculation. These debts have been subsequently supported by printing of money. Since 2007 the central banks of US, Europe and Japan have together pumped $10 trillion of extra cash into the global economy just to keep their economies functioning; in the process they have created a series of disastrous asset bubbles. China is worse. These asset bubbles have spread far and wide; real estate prices even in poor countries are piercing the sky.

These debts and recurring bubbles over decades are evidences that known economic stimulation tools have not only failed but have become counterproductive. If this indebtedness keeps rising the way it is, unmanageable financial crises are inevitable. The IMF thinks that the current economic boom will not last long; I agree.

Sinless Capitalism is the only solution that will eliminate the root cause of current global economic problems and start a new economic growth trajectory that will last for generations. As long as the cause of the ongoing economic problems are not removed from the current economic system wars including World War III will keep coming closer to reality. Wars have economic logic e.g. when demand is low preparations for war is a good way to create demand. Japanese Prime Minister Shinzō Abe’s economic recovery strategy included spending on defense. Sinless Capitalism will create demand in building a sustainable, prosperous and space friendly future; we will not need to stimulate our economies through war and related spending.

This ongoing perilous economic conditions will not heal on its own. If the current system is left to continue either a new economic order on the failed socialistic model will emerge or the world will go towards major wars; or both. Sinless Capitalism is an effort to “save the world.” Sinless Capitalism is probably the most important idea of the current times.

 

Comments are closed.

Write a Comment

Let me know what you think?