Economy in need of change

Our economy is in a disastrous state. We need only look at jobless rates, at the public debt which is coming to be of unmanageable proportions, at the debt crisis of the Third world and at the way our social life is organized. The poor are getting poorer and the rich richer, an army of homeless people is sleeping under bridges and in makeshift shelters and even many "normal" families find it difficult to make ends meet with the available income.

To get to the root of the current crisis we have to look at three factors:
  1. The first is an ongoing structural change in the job market. Technical progress is taking the repetitive or low-level jobs out of the list of tasks to be performed by humans. For this reason, there can no longer be a guarantee for everyone to have a job, even in economically prosperous times.

  2. The second factor to look at is an exponential growth of debts, both public and private, caused by the inexorable mechanism of interest. This mechanism is what causes a migration of buying power from the economically weak to those who are already rich, both inside the country and on an international level. In the country, this has led to an increase of the number of poor and homeless people. Internationally, we are witnessing a net transfer of resources from the developing countries to the industrial nations, despite various efforts at relief and development aid.

  3. The third important factor to be considered is a notable absence of technological progress in the fields of energy production and transportation. We are stuck in the times of the steam engine and the car, when we should by rights be having unlimited clean energy and our cars should be airborne. There are strong economic interests behind this immobility, profiting from fossil fuels and throw-away technology.
It becomes obvious thus that we are missing an economic policy tailored to the needs of the people, that will allow economic and technological progress. We must re-think the basics of economy.

Production

The physical production of goods is the basis of any economy. Services have a certain importance, but without hardware it is difficult to provide any meaningful service, so the most important point of economic life is really the production of goods, be they consumer goods or machine tools for industry.

Private enterprise, especially small and medium size, is the backbone of production. Private initiative is of great importance. Neither the state nor large capital interests can effectively take over its function in the economy.

Ecology

It is quite obvious that we must promote ecological behaviour in the economy, if the human species is to survive. But this promotion of ecological behaviour must not consist solely of the punishment and suppression of pollution. We have to promote the development of non-damaging technologies which so far have often been suppressed by those vested interests connected with the exploitation of non-renewable petrochemical and mineral resources.

Investment

The most economically damaging factor in economics today is what I term investment capitalism. This does not mean individual savings but the accumulation of huge masses of non productive capital which get invested in productive activities or in federal or state bonds only and exclusively at the highest possible interest rates. This practice of course adds to the difficulties of private enterprise and accelerates the rapid growth of public debt. Think only of the fact that approximately half of the U.S. state budget is spent on debt service. Mind you, not to repay the debt, but to pay the yearly interest on it!

Transition

The economy nationally as well as internationally is in an important transition phase, which often is not recognized by establishment economists.

Technological progress and the computer revolution have made it possible to produce more with less resources and less work. This brings about a radical structural change in the employment market, where we will no longer be able to guarantee the full employment of all those looking for work.

Of course this will necessitate some sweeping changes in social organization if we are to prevent a growing intolerance towards the economically weak and especially towards immigrant minorities that would necessitate authoritarian "solutions", which in the end always lead to a curtailing of individual freedom.

This is a brief outline of the salient points to be considered if we are to arrive at a sensible reform of economic practice. We shall now examine these points in some more detail and outline possible solutions to the problems encountered:

Energy and Ecology

The largest part by far of ecologically damaging factors is connected with the field of the production and distribution of energy. Resources such as fossil fuels and minerals have formed and accumulated in the earth's crust during hundreds of millions of years. Our current practice of senselessly squandering these precious non-renewable resources will in time inevitably lead to disaster. If not for ourselves, at least for the generations that are to come. We have to find valid alternatives, but our efforts in this direction have so far been hopelessly inadequate.

Alternative

The only real alternative is to be found in technological progress. But research must not be directed by today's economic-scientific establishment, because the very nature of progress demands that the results of research be radically different from what we know today and thus, any conditioning of this research by today's economic or political powers can't help but perpetuate the same errors that have already brought us to the brink of disaster.

Two directions of research are given here as concrete examples of such an alternative, one medium/long term and the other of almost immediate application.

The long term alternative is without doubt a radical change of the basic concepts of physics. We can see that there is a certain resistance to this change considering the example of cold fusion, which has been subjected to a public media smear campaign and has been deprived of all state funding, at least in the U.S. Fleischmann and Pons seem to be now working in France continuing their research for Japanese interests. In any case, this change in physics must go in the direction of space energy or zero-point energy conversion. The concept of space energy conversion is connected with recognition of the existence of an ether or "space background" of very high energetic potential and the possibility to directly convert this ubiquitous potential energy into usable electricity.

Research in this field has so far been progressing without public funding. It has been carried on by individuals who are ignored by the scientific establishment and what is worse, their efforts are often subjected to deliberately contrived difficulties. There are some good results but none of these have been developed to be ready for industrial production, probably due to lack of interest and financing.

Let us now look at the immediate alternative. It is based on a better utilization of the immense potentialities of water, a relatively abundant element on this planet. As we all know, water is chiefly composed of two elements: hydrogen and oxygen. In the last few decades various methods have been discovered to split water into its component elements, with very little expenditure of energy. The gas thus obtained can be used just like a normal fuel.

This alternative would make it possible to maintain in service the entirety of today's technology, from cars and trucks to thermoelectric power plants. With only slight modifications, this machinery could be converted to run on a gaseous fuel such as is obtained from water, eliminating pressing pollution problems. The method of producing the gas directly at the place of consumption would make it possible to avoid any danger due to the highly explosive nature of hydrogen, an argument which has often been used to "explain" the unworkability of such a technology. The fuel that is stored would simply be water.

It seems that a similar solution is at this time being tested in China, and that already in the late 50s a small fleet of swiss postal trucks were fueled by water, only to be later taken quietly out of service.

But the system has already been proposed in many countries. To name only a few of the inventors: Yull Brown from Australia, Archie Blue from New Zealand, Stanley Meyer in Ohio. They are waiting for someone to show serious interest in their inventions.

At this point we could ask why this technology is not yet widely in use, with a clean air bill mandating the changeover to non-polluting transport by the year 2000. Fact is, it is not always the best solution that finds its way into industrial application, but the one that promises the greatest economic return. And so it happens that competing technologies not only get neglected but are even actively suppressed.

A serious obstacle against the development of alternative technologies seems to be the fact that all investments have to be profitable. No one is apt to invest capital, even in an ecologically important activity, if the normal interest on capital is not guaranteed.

Interest

It would be ideal, not only for the productive economy but also for the country's finances, if interest on money loaned could be eliminated or at least reduced to the percentage of the yearly inflation rate.

There were, even in ancient times, various attempts to eleminate the practice of taking interest. We only need to look at the history of the great religions, which in one form or another have tried to prohibit their adherents taking interest, condemning the practice as immoral. These attempts have had no lasting results; economic realities cannot be changed by religious or moral dictate.

How could we then achieve the goal of "zero interest"? There is a practicable solution and it is not even a very complicated one. However we shall first have a closer look at the financial side of the economy.

For the economy to function, the means of payment - money - must be permitted to circulate without hindrance. Without money our economy cannot function and even the amount of money in circulation is very important; it has to be in an exact relation to the amount of goods and services on offer in the country. If there is too much money in circulation, prices will rise and we have inflation. If too little money is available, the consequences are falling prices (deflation), recession and economic crisis.

Interest now is basically a kind of compensation given to those who have accumulated money that is not needed for immediate spending, so as to make sure that these persons will let others use this money, loaning it to them. Without interest, these persons could decide to just sit on their cash, with disastrous consequences for the economy as a whole. Since there would no longer be enough buying power, the products manufactured in the country would remain on the shelves and the economy of the country would fall into recession, laying off workers, which in turn would further reduce available buying power, initiating the spiral of an economic crash. Of course other factors may be involved, but this is the basic mechanism that determines inflation and recession.

If interest on the one hand makes sure that money keeps circulating, on the other hand it is also the mechanism that allows and actually promotes the accumulation of masses of unproductive capital, by causing exponential growth of invested funds. That is why it would be important to find a monetary mechanism which guarantees the circulation of money without the high social cost and the negative influence on productivity which are characteristic of interest.

In fact, it is possible to supplant the interest mechanism by putting a tax on liquidity!

We would have to make of course a clear distinction between what is liquidity and what are individual savings. The tax of about 4 to 5 % a year would apply only to liquid funds, such as cash or money available for daily use in bank accounts or within credit card overdraw limits. Savings that are invested into bonds, shares, or simply put into bank accounts for a specified fixed term, such as three months or more, would not be subject to this taxation, because they are anyway available to the economy: funds in long term savings accounts are already being "loaned out" again by the bank or they have become part of the bank's own liquidity.

The purpose of such a tax would be to make sure that whoever has accumulated cash that is not necessary for his or her immediate use, will put that cash back into circulation by either spending it, loaning it out or by putting it into long-term savings and thus allowing the bank to loan out the money to others. The reward in this case would not be interest, but would be an escape from the taxation of cash. In this way capital would be more abundantly available for productive investment and interest rates would naturally tend towards a low level, equal to the inflation rate plus a small percentage to compensate the risks connected with loaning out money.

We could ask now whether such taxation would be of disadvantage to the individual or family, saving their money for a rainy day. It might appear so at first sight, because interest rates would be very much tending towards a low point. But if we consider all the consequences, these individuals and families would be more than reconpensed by a marked fall in the prices of goods, in rents, in mortgage rates as well as taxes, all destined to decrease to such an extent, that the gain to individuals would more than make up for any loss due to lower interest rates.

Why would prices, rents, mortgages and taxes go down? Because currently, a large percentage of the costs of these expenditures is due to the fact that interest must be paid on invested capital. This is a hidden cost factor, already contained in all prices.

As for the prices of goods, the capital is invested in factories, machinery, buildings and infrastructure, and interest on this capital adds between 30 and 40% to the final price.

In the case of rents, the part destined to payment of interest is as high as 70%.

Mortgages are of course directly connected to the interest rate and become less expensive every time long term interest rates goes down. Any home owner will easily be able to calculate how much the interest on mortgage adds to the price of his home.

Taxes may seem removed from the question of interest rates at first sight, but if we consider that the U.S. budget has an off the top expenditure for interest of about 50%, (yes, that's approximately half of all tax money going each year for payment of interest on the federal debt!) it becomes clear how an effective lowering of the interest rate would also be a reason to decrease taxes.

Thus we see how everyone would have advantages from this proposed change: The individual worker because of lower cost of living, the productive economy because of the ample availability of capital for productive investment and the state because it would finally find it possible to escape from the claws of an all-devouring federal deficit, which has been growing into a voracious monster and which, under the current system, is destined to keep growing!

Inflation

As we have already seen, inflation is a matter of too much money in circulation compared to the production of goods and services of the country's economy. Under the current system, the amount of money in circulation is controlled indirectly by raising or lowering the interest rates. However interest, as an instrument of monetary control, is not only costly from a social viewpoint, it has also some very contradictory effects.

High interest is supposed to attract more cash into circulation, but at the same time it makes it difficult for business and industry to get at that money, as the price for a loan is high. Thus monetary speculation is favored over production.

Low interest on the other hand is supposed to lessen the amount of money by decreasing the reward for putting cash into circulation, but the effect is often the opposite, because people suddenly can afford to borrow and will do so, increasing spending and heating up the economy (which now easily overheats, as industry also has easy access to new funds) and we suddenly get inflation flaring up.

Economists and government "experts" go crazy trying to sort out these fits and jumps, but as long as their major instrument for monetary control is the rate of interest, the "rollercoaster" of the economy is destined to continue.

The proposed taxation of liquidity would relieve the interest rate of its important but inappropriate role of regulating mechanism and it would finally be possible for the central bank to control the amount of money in circulation by direct emission and retirement of cash or credit. This would give the central bank a tool to directly control and, if desired, to completely eliminate inflation.

All that needs to be done to get inflation under control is, to directly and closely control the amount of liquidity in circulation, carefully following the price index:
Falling prices: inject more liquidity into the economy.
Rising prices: retire liquidity to decrease the amount of cash in circulation.

 If this increase or decrease of liquidity is achieved by the central bank giving out or retiring credit or cash, control of inflation would become easy and effective. It might seem almost too simple to be true.

Speculation

If on the one hand, taxation of liquidity would bring many advantages, there is a definite and distinct drawback that needs to be taken into account.

Large amounts of privately held capital, including the great fortunes that have accumulated in the hands of criminals through the flourishing drug business, would look for other profitable investments, as soon as the taxation of liquidity made financial speculation difficult and investment for interest less profitable.

It can be predicted therefore, that these capitals would seek refuge in speculative real estate dealings. Through massive buying of land, a monopoly situation could be created, and the owners of such speculative capital could attempt to use that new position of monopolistic control to extract by rent what formerly they gained using the mechanism of interest.

Forseeing such a situation, it can however be circumvented.

The proposal that was made already at the beginning of the century by Silvio Gesell (who is also the originator of the idea of taxation of liquidity) is quite simple: It would be wise for cities and towns to acquire the land in their respective areas, and to lease it out to private persons or companies on long term leases. Thus the land could be used by private individuals and corpoations, but would be owned by all the citizens collectively and administered (leased out or not, as the case may be), by the city authority. The leasing out of this land should be done in public auction, and on long term leases, long enough where it wold be safe to build houses or factories or to better the conditions of farmland.

Gesell did not propose to forcibly acquire the land, but to buy it as possibilities arose. It would be sufficient for the local community (city, town or other local government) to have an option on all land sales in its area, and to subject any privately held land to a taxation equivalent to or just a little higher than what would be the price of leasing a similar area from the city. Little by little, land ownership would be acquired by the city or town, and control of that land would fall into its exclusive purview.

Apart from establishing a predictable source of income for each local community, this system would make it comparatively easy to ensure that the land is used in an ecologically compatible way. City planning would become more easily enforcible and land speculation virtually eliminated. Such a regulation to prevent large-scale land speculation, would be an important part of the proposed taxation of liquidity.

Anyone interested to know more about Silvio Gesell's proposals for a people friendly economy should read his book "The Natural Economic Order", published by Peter Owen Ltd, London, 1953 (available from: INWO, Exeleigh South, Starcross, Devon EXP 8PB, England, UK).

Partial occupation

As mentioned above, our economy is in an important transition phase. Due to technological progress in manufacturing, and due to the "computer revolution", we are able to produce much more than just we did just 20 or 30 years ago, with an equivalent human work force. Thus, thanks to these factors, the economy will no longer be able to guarantee the full employment of everyone. I am saying "thanks to", because this is a great opportunity we must not miss. If on the one hand it seems a serious problem not to be able to guarantee employment for all, on the other hand this can also be interpreted as a positive development.

We are finally able to produce the necessities of life with the employment of only part of the population! That is progress! We will finally be able to do some creative thinking, being relieved of much of the repetitive work. Of course this change will have to be organized. A way will have to be found to guarantee the basic needs of everyone, regardless of whether they have a formal employment in the traditional sense or not. And the immense human potential freed from the yoke of repetitive work will have to be put to use in a creative and socially positive way.

Those things will have to be discussed and organized, but the present article is too limited in scope to make any detailed proposals in this regard. Only one very general suggestion: In whatever way we want to organize our future, we should go towards individual freedom and individual responsibility. Social programs should be moved from federal to local level. The federal government should not have direct dealings with the induvidual citizen. It is too large to do so. It cannot deal effectively with the problems of individuals. As a general rule, federal government should deal only with state governments and with other countries. State governments should deal only with counties. Counties should administer only their cities and towns, and only when we arrive at the level of the local community, should we start dealing with the problems of individuals. That is proper organizational structure. But in all of this, one thing must never be overlooked: the freedom of the individual.

It might seem too much to ask of you, to participate in deciding such important matters. But if we don't, we must be aware that changes will be imposed on us. And those changes imposed "from above" might not be entirely to our satisfaction.

Conclusion

The ideas introduced with this article are by no means meant to be a complete program of action but rather a stimulus for discussion, a bit of food for thought, a starting point for developing our ideas of how we would like to organize our economic and social life in the next millennium. Why should we, simple people with a life expectancy of 70, maybe 80 years, be thinking about such extraordinary problems, why should we project such far-reaching changes?

For one thing, life expectancy may be changing and people born today may be expecting to live much longer than their parents. Secondly, even if we do not live to see much of the next millennium, our children and grandchildren will, and that should be reason enough for us to give a serious thought to these matters.

In summary, the proposals made in this article would make it possible to
Josef Hasslberger
Rome, Italy
July 1993