Background
In 2005, the Australian government passed a law allowing electronic identification or verification of credentials. We - a group of investors - developed one called Edentiti. It used the same model the government used manually, called the 100-point identification at the Australian Post Office, but with one distinction. Instead of having someone verify an individual’s credentials, Edentiti provided tools for the individual to verify the credentials themselves without needing a third party.
The approach worked and was cheap. Today, the system is under a different name, has different owners, and is the identity credential provider of 50%+ of Australians and New Zealanders.
I left the company when the major shareholder decided not to continue the project to verify people for all transactions, not just the initial identification. The idea was (and is) to develop an identification system so that the entities exchanging information identify themselves each time they interact with another party.
Unfortunately, the major shareholder was not interested in spending the extra money on research and development. Their business model is acquiring proven innovation and extracting value rather than spending money developing new products. I realised that this was the dominant business model for innovation. Success was measured by developing and selling an idea for capital gains. Accordingly, I decided to change to a business model where innovation was the company's core business model, and the objective was to continue to build better and cheaper products—” not make money.”
Today, as it was 20 years ago, the dominant business model is to extract as much value from customers as possible and accumulate wealth for shareholders. Shareholders get all the profit, and businesses set the price to match customers' willingness to pay. Businesses set their prices by “how much can we charge for our services” because their shareholders want to extract profit and take it away for other purposes.
I found that all sources of funds had the same approach to maximising profits, so I set about trying to understand why, and I have spent the last fifteen years trying to understand why the production of profits is the dominant driver of the economic system rather the production of goods and services for a lower cost.
It all starts with the business of banking.
Increasing the Productivity of Banking
Banking is a business that distributes money. Banks store savings, move money from one party to another, and provide loans to people and enterprises. They also inject new government money into the economy by lending government money.
The success of the Banking system is measured by its profits, which are also a measure of its costs. An efficient Banking system uses the minimum amount of money to transfer the maximum value. However, banking has always been inefficient and organised to use maximum charges to transfer the minimum value so that bank shareholders could extract high profits from low costs.
When a bank makes a loan, it uses new government money. One way to make banking more efficient is to use simple interest rather than compound interest on loans. Compound interest slows down loan repayment by charging interest twice. It assumes that if the loan is successful, the bank is entitled to some of the profit made by the borrower. Slowing the movement of money slows the economy and transfers more money to the bank shareholders.
Governments tolerate this because it allows the government to collect taxes on interest payments. Those when the borrower pays back the money and those when the bank makes a profit. If the bank shareholders are the government, this is a form of taxation. However, there are many ways businesses can reduce their taxation obligations. Examples are calling interest a business expense, converting profits into untaxed capital expenditure, paying some employees with structured stock options so there is little or no tax, or loans with lower interest charges.
Bank loans to individuals who buy houses that do not generate profits are particularly wasteful, as individuals have little or no way to reduce their loan costs unless they rent out the houses.
Solutions to banking inefficiencies are:
Use simple interest, not compound interest.
Do not use new money to transfer existing assets.
Create permanent community asset markets, which keep asset value within the entity and remove the need for loans, interest, insurance, and unnecessary capital markets.
These simple changes will reduce the need for taxation, loans and expensive capital markets. They will accelerate the transfer of money for investment and increase the productivity of any community that adopts them.
Increasing Business Productivity
As with banks, business finance productivity is often lower the greater the profits. Productivity is the amount of value created for the least amount of money, and if a business increases the price of goods without adding value, it makes more profit if it can continue to sell the goods. This is the case with monopolies and many other businesses.
What is a way to stop this happening? A simple strategy is for customers to be part owners of the businesses. We can do this by selling shares of 50% of the value of the profit to the customer. The shares to buy come by requiring owners to sell 50% of their holdings each month, where the value of the shares is the value of the anticipated future profit. This moves capital continuously and keeps it within the organisation, meaning it is not extracted for another purpose.
Increasing Government Productivity
Governments spend money on infrastructure. The infrastructure does not make a profit. Today, governments collect taxes or take out loans to build infrastructure. Instead of doing this - which is very expensive - the government can take out loans with regular banks. Instead of destroying the money when the loan is repaid, the bank can transfer the money to the government, and the government can use the money to invest again. If the loan is not repaid, the government has to find money to repay the loan. This recycles money for investments and uses taxes to top up the money.
The Role of the Reserve Bank
The Reserve Bank can enforce banks' use of simple interest loans. It works with the government to specify which loans should use government money rather than existing money. The Reserve Bank also tells the government how many taxes it should collect to top up the government loans.
The Role of the Government
The government invests money through local community organisations and decides which communities get new government money and for what purpose. Communities can use their money as long as the businesses that invest have consumers as owners. The Reserve Bank supervises the distribution of money. This keeps assets within the communities that use them and makes communities custodians rather than owners of assets.
Community Identity
The government could use new government money to fund the development of local community identity systems, in which the individuals identified are the owners and investors. These identity systems could be low-cost, secure, private, and benefit the entities who use them. The value created by the community identity systems would stay within the community.
A Productive Economy
Marketplaces for most goods and services can use the same approach.
Removing rent on money and giving the people who use products and services some say and some profits from selling the goods and services will create a productive economy. It will create a custodial society where surpluses (profits) are shared. Markets in goods and services will exist, but the objective will be to reduce the cost of producing the goods and services to make a profit rather than the current extractive system, which increases profits by increasing the price of the same goods and services and extracts value from the community.
The economic system will concentrate on reducing the cost of goods and services through innovations. Knowledge of how to use innovations will spread because groups of community entities thrive if they, too, share innovations and share the profits rather than extract profits.