Rising human population and increasing per capita consumption of finite resources have brought mankind face to face with the limits of the planet. 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. The resource limits of the planet are impeding global economic growth and consequently causing the current economic crisis. This is the first time that the resource limits of the planet have caused an economic crisis.
The current global mix of products is very resource intensive, particularly with respect to fossil fuel. The resource intensiveness of the global mix of products is interacting with global resource and environmental constraints to perpetuate the current economic crisis; for example, when economies pick growth momentum resource limits show up in resource prices and environmental conditions to restrict growth. Resource constraints also limit demand for a large range of products, particularly so because of the resource intensiveness of most products.
Increasing pressure from resource constraints work their way towards equalizing resource use or intensiveness in all parts of the globalized global economy. They do so through resource, labor, end product, and other prices in a globalized free market. Since developed countries’ resource use intensiveness is very high they are on the losing end of this global economic transformation. In other words, developed countries are facing much higher pressures to reduce resource intensiveness of their product mix than are developing countries.
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.
Global resource constraints are limiting growth and growing labor pools in developing countries are taking away economic growth from developed countries. In other words, growing labor pools in developing countries are adding significant momentum to the economic shift going on due to the resource limits. The ongoing transfer of wealth, income, and potentials from developed to developing countries is translating into serious economic troubles and high unemployment rates in developed countries.
It is obvious that if all seven billion people of the planet build their lives on a finite resource (fossil fuel) there won’t be peace or prosperity for anybody. In the 1930s Mahatma Gandhi said; “if the 300 million people of India choose to industrialize the world cannot handle the consequence.” The fossil fuel driven engine of economic growth is not suitable for all of the globalized global economy. It has stopped working for developed countries and will gradually stop working even for developing countries.
To resume economic growth again, particularly in developed countries, economies have to be freed from resource constraints. To free the global economy from resource constraints the current global mix of products has to be changed to a sustainable one. In other words, the driving force of modern economies has to be changed from finite resources (e.g. fossil fuel, forests, etc.) to infinite resources (e.g. wind, wave, sunshine, etc.).
Fortunately, the resource that can help in enhancing sustainability of global product mix has increased tremendously, and can continue to increase without limits. That resource is: Capital. Capital can be systematically employed to protect, efficiently use, and increase resources. Capital can also add new resources, like wind and sunshine, to widespread economic use. If capital is employed in sustainable ways the economic resources of the planet can be increased substantially.
Increase in capital is followed closely by a tremendous increase in the pool of global labor. Labor is a resource but employing its global pool is currently a challenge. Employment of the increasing pool of global labor is important for developed countries because in a globalized world unemployed in developing countries will competitively take away jobs from developed countries. Attaining high employment rate for labor is another major challenge of the current time.
Employment of labor is generally a function of employment of capital. Higher rate of employment of labor can be automatically achieved if many new and promising ways of employing capital are identified and acted upon. Labor is employed when capital is produced and labor is again employed when capital is employed. This virtuous cycle will continue as long as new and sustainable ways of employing capital for profit can be found. In short, the global economy is facing planetary resource limits and increasing pressures for employing more labor; sustainable employment of capital can help with both of these challenges.
Economies currently employ capital mostly in unsustainable ways. This is because the current financial system allocates capital only to businesses that can pay interest. Oil driven power plants have a much better chance of being able to pay interest than can wind turbines. The burden of interest forces businesses to undertake unsustainable activities and prevent them from undertaking sustainable ones. Additionally, the current economic system incentivizes rapid extraction and consumption of mineral resources because minerals in the ground don’t earn interest. The current financial system is the major reason for most unsustainable choices being made in capitalistic economies.
Capital can be employed in sustainable ways if the capital allocation system is reformed to replace interest with a new capital allocation system that besides using financial rate of return also uses factors like resource and environmental constraints in the capital allocation process. These new factors to be used in addition to financial rate of return, which is currently the criterion for allocating capital. New Capitalism replaces interest (and income tax) with a system of asset tax. The salient features of “New Capitalism,” include:
The proposed system basically replaces Interest and Income tax with Asset tax, an annual tax on all assets including cash. Asset tax will perform the functions of interest and income tax and much more.
Currently taxes perform no other major economic function besides generating revenue for the government. Taxes can be made to perform the additional function of introducing sustainability in economies by structuring them to favor sustainable assets. This book presents such a system of asset tax. Asset tax will also perform the function of allocating capital. A reformed capital allocation system can be very effective in incentivizing profitable employment of capital in sustainable and resource enhancing ways.
This book “New Capitalism” presents a new model of a market driven economic system that will make the mix of products, including investment products, increasingly sustainable. New Capitalism will change the engine of modern economies from that based on finite resources (e.g. fossil fuel) to that based on infinite resources (e.g. wind and sunshine). The proposed system will end the current global economic crisis and will start a new trajectory of economic growth that will last for generations.
It may seem that New 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; New 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. New 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. Global resource constraints combined with global abundance of capital and labor demand an economic system that incentivizes employment of capital to produce economic value in sustainable ways. Interest does the opposite: it incentivizes employment of capital in unsustainable ways and prevents its employment in sustainable ways. Interest is the biggest hurdle against sustainability.
New Capitalism is economics suited to the new era of global resource constraints. New Capitalism is the advancement in economics that will change the assumptions and the incentive structure of economics to suit the realities of the current times. It will help humans to transition into the Third Millennium peacefully and prosperously. It will help humans to structure new ways of life that is suited to the planet and the density of human population we have in the Third Millennium.
The position of this book, New Capitalism, with respect to the current economic crisis, explained in great detail in the following pages, can be summarized as follows:
The assumptions of our economic system, particularly those related to global resources and the environment, are no longer true. Some economically critical resources of the planet (fossil fuel and other minerals) are no longer limitless relative to their increasing global demand and consumption. The limits of the planet has been reached. Environment is no longer a factor external to the economic system (an externality); it is a resource used by the economic system. The breakdown of the “limitless planet” assumption of the current economic system has caused this tenacious economic crisis. The limits of the planet have to be part of the economic system in the Third Millennium. Planetary scarcity has to be internalized in the economic system.
Solving this economic crisis obviously requires correcting the assumptions of the economic system. New Capitalism is new model of capitalistic economic system that corrects the assumptions of capitalism and makes them true for the Third millennium. It accordingly builds a new structure of mainstream economic incentives that take into account the limits of the planet.
Learn something new, is an advice often given for Alzheimer’s and Dementia Prevention. For example, study a foreign language, learn sign language, read a good book, or take up a new hobby; the greater the novelty or challenge, the larger the benefit.
“The Bilingual Advantage” a recent NY Times article discusses scientific studies that show that the demands of bilingualism on the brain help it delay the onset of Alzheimer’s disease by around six years. Challenging your brain has been known to help fight Alzheimer’s and other mental illness common in later years of life.
Therefore, if you are age 50 or older, reading and trying to comprehend New Capitalism may help you ward off Alzheimer’s, Dementia or other age related mental illnesses. In any case, doing so will certainly help you better understand the forces that drive economies in this century and help you find your path in the new economic landscape.
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