Markets in goods and services work well to stabilise prices and get the best return for both buyers and sellers. On the other hand, many capital markets are dysfunctional and unstable and in turn, destabilise other markets.
Share market prices follow a random walk. Foreign exchange markets transfer the yearly value of GDP every few days. The total daily turnover of financial markets is about the same as a year’s GDP. The total cost of the financial sector may well exceed the cost of all other goods and services.
The financial markets are meant to serve the markets in goods and services. Instead, they randomly influence the markets in goods and services as traders gamble in a zero-sum worldwide casino where the casino always wins and takes a percentage.
There is a solution to the problem that can be implemented incrementally without dislocating the existing system. We can evolve the system to become more efficient by removing most of the cost of financial markets.
Instead of using capital that earns money by making more money let us use capital that makes money by producing more goods and services. We do this by removing the ability of some capital to make money when it is unused. For example, instead of interest on debt replace it with more goods and services purchased with the same amount of money.
We do not have to change all or even most financial markets with this approach. We can start with any debt and replace it with credit between buyers and sellers. The ones that are easy are infrastructure in natural monopolies where the community has funded the infrastructure with debt. Examples are water, energy distribution networks, ports, roads, broadband services, money, commercial law enforcement, and public transport. We set prices by consensus. An agreement is possible if users replace debt with pre-payments of goods and services as users get a return on their capital and the use of the infrastructure.
The prices set for capital in these areas will set the price of money in other financial markets. Many other markets will likely follow and also fix the price of money for their markets.
In any area that adopts this approach, we incentivise users of capital by rewarding them when they increase operating profits without increasing prices.
This method will keep the best characteristics of markets and the best of capitalism.
Politically it has advantages. It is more inclusive and gives more people more money paid for from the reduced cost of operating financial markets. It means a more efficient operation of other markets in goods and services which in turn lowers prices. It provides more people more returns from capital and reduces the need for transfer payments and taxes. Finally, it allows local communities to take control of their community finances.