Complex adaptive systems consist of communicating autonomous agents. Communication is peer to peer with no central control. The agents work together for a common purpose.
Promise Theory says:
- if peer to peer messages are obligations the system will incur overheads.
- with many agents these overheads will tend to outweigh the advantages gained from cooperation.
- if the peer to peer messages are promises (weak connections) the overheads will be less.
Complex adaptive systems that exhibit inefficiencies at scale will likely have many obligation (strong) connections.
Existing financial systems are inefficient. In most developed economies the cost of financial services is high. The combined value of financial services, taxation, insurance, law enforcement of transactions is high. These services are overheads to support the transmission of monetary value between agents.
When the agents wish to work together to meet a common need they struggle. Housing affordability is one such problem. To address this problem we can look for obligations and change them to promises. By doing this we may be able to reduce overhead costs and make the system more efficient.
In a developed economy funds to buy a home come in the form of bank loans. When a bank lends money for a home they create the money to lend. Repayments reduce the money supply. Banks must also keep reserves of money from Savers to act as a buffer to control the flow of funds.
The bank lends the money and the borrower has an obligation to repay the money with interest. If the interest rates change then many loans change. Inflation changes all loans. If the bank fails then it affect all loans. This is a system with strong connections. The costs exhibit themselves as interest on interest and in inflation. Keeping money in reserve is also a cost because it is not used for productive purposes.
The Banks have strong connections with each other in the form of interbank loans. If one Bank fails then it affects all Banks. Addressing this is a further cost.
Promise Theory says efficiency will increase if loans are not strongly connected. That is if one loan fails it does not impact any other loan. If interest rates change then it does not affect any loan. Inflation will have no impact on loans. A Bank failure will not impact the Loans it administers.
Rent and Buy Loans
Rent and Buy Loans make each loan independent. It does this by Banks organising loans but not being part of the loan itself. With Rent and Buy, Savers provide the money to buy a given property. The Renter owns property. The Savers have a mortgage over the property. If the Renter cannot meet their promise of paying rent then they vacate the property. Another Renter takes over the promises of repayment. The previous Renter is now a mortgage holder and a Saver.
Each Loan is independent of any other Loan. The system consists of autonomous Loans that have weak connections. These weak connections are through the Bank being the organiser of Loans.
Does this reduce Costs?
Each loan is independent. Adjusting the Loan Balance for inflation removes the cost of inflation for Savers. Setting the Loan conditions at the start of the Loan removes the cost of interest on interest. By Banks not having to hold Reserves reduces the cost of idle money.
Making mortgages transferrable and divisible reduces the cost of ownership transfer. Insurance can become part of the mortgage and can remain with the home. This will reduce the cost of insurance.
Changing a typical loan to Rent and Buy reduces the funding costs by about half.
Cost reduction occurs because there are fewer strong connections and this results in lower overheads.
This confirms the Promise Theory Hypothesis.