The Golden Rule of Reciprocity

The Golden Rule or law of reciprocity is the principle of treating others as one would wish to be treated oneself. It is a maxim of altruism seen in many human religions and human cultures. (Wikipedia)

Remember the Golden Rule – “What’s that” – He who has the Gold Rules (Parker and Hart in the Wizard of ID)

In today’s world an alliance of banks and big business control money (the gold) through debt. With debt, they control governments and through governments the population. Change is about to happen because debt, created with the Wizard of ID Golden Rule, is too expensive. The Golden Rule of Reciprocity is a lower cost way to supply money than debt.

In the exchange of goods and services, the Golden Rule of Reciprocity says that we should behave the same no matter whether we are a buyer or seller. Importantly there is no third party policing our exchanges. Debt introduces a third party and removes the ability for the Golden Rule or Reciprocity to operate.

When a buyer and a seller exchange goods and services they do it by the buyer providing the seller with money and the seller providing the buyer with goods and services. When the exchange takes place over time, we introduce debt where both the buyer and the seller take on debt and instead of exchanging goods and services for money they exchange money. Exchanging money is expensive compared to the exchange of goods and services for money.

We can replace most debt by promising to prepay for goods and services where the goods and services are delivered periodically to the buyer. The details on how we do it will vary depending on the exchange but the principle remains the same. Removing money debt removes most of the financial cost of delayed transactions. Typically these costs are more than half the cost of the transaction. The cost depends on the length of time and the cost of money. The cost is lower when we repay a loan with goods and services as the marginal cost of providing the goods and services is lower than the price we pay for goods and services. With debt, most of the difference between price and cost goes to the providers of debt. Repaying with goods and services means the buyers and the sellers use the Principle of Reciprocity and agree to share the savings.

The Golden Rule of Reciprocity in Practice – ACT Water Rewards

Individuals and Organisations who pay for ICON Water have the Right to pre-pay their future invoices. When they pre-pay, they purchase a Water Reward. The Water Reward earns a 10% discount each year and the value increases with CPI inflation. Water Rewards are used to pay invoices, or sold to someone who uses them to pay their invoices. Periodically, in consultation with the ACT government and ICONWater, ACT Water Rewards issues water users with Rights to purchase Water Rewards. The Rights are transferable, and ACT Water Rewards will help the Rights holder sell their Rights.

ACT Water Rewards works with the ACT government and ICONWater to determine the terms and conditions for ACT Water Rewards.  Each member of ACT Water Rewards has an equal vote so allowing the Golden Rule of Reciprocity to operate.

Banks will provide loans backed by ACT Water Rewards to ACT Water Rewards holders.

To become an ACT Water Rewards member a person or family or organisation downloads the ACT Water Rewards app and agrees to the terms and conditions. They prove they have the Right to obtain Rights and buy and sell or use Water Rewards through the app.  Every member has the same app.

For the ACT community, ICONWater will increase its profits by at least $75M per year for each $1 Billion in Water Rewards purchased. Water Rewards purchasers will have annuity investments of $1Billion that returns twice as much as current government backed inflation-adjusted annuity investments.

Economically Efficient Monopoly Pricing

Economic efficiency implies an economic state in which every resource is optimally allocated to serve each individual or entity in the best way while minimising waste and inefficiency. When an economy is economically efficient, any changes made to assist one entity would harm another. (Investopedia)

This definition is used by free market economists to define economic efficiency.  They assume that many buyers and many sellers participating in a free market, where each acts in their self-interest, will establish economically efficient prices. Setting efficient prices implies economic efficiency.  However, when there is only one seller or buyer, a free market on its own cannot produce an economically efficient outcome because the monopoly buyer or supplier interests will prevail over other participants.

Ecological and Complex Adaptive Systems ideas provide an alternative definition of economic efficiency.

Economic efficiency is an economic state in which every resource is optimally allocated to obtain the greatest value for the least cost to the community using the resource.

The first approximation for an efficient economy is for each resource to be independently optimised. This approach fits with the observed natural world where all entities interact to achieve low energy stability. Different resource systems can use the same principle to allocate overall economic efficiency across resources.

ACT Water Rewards Co-op

Using the resource-based definition ACT Water Rewards Co-op will achieve economic efficiency not through price manipulation but through directing investment.

The first step is to establish a tariff structure where a change in supply does not increase demand. ICONWater’s current water tariff achieves that outcome. To reduce demand during the Millenium Drought ICONWater increased prices. Now the drought has broken demand has not increased. In other Australian jurisdictions with different pricing regimes, demand has increased.

However, this is not an optimal price because the cost is too high particularly for low volume customers. ICONWater makes monopoly profits, but reducing the price defeats the purpose of using price to control demand. An alternative is to return value to users in another way. Instead of returning funds directly we can return funds and require customers to invest them in reducing the future cost of delivery. Such investments are to discharge existing debt, invest in delivering lower-cost non-potable water or invest in smart metering to reduce water wastage. For the benefit of the whole community, investments do not have to be in the water supply. Investments can reduce the cost of other community resources such as health services.

Investors require a return on investment and for ICONWater giving investors discounts on water costs one-third the cost of cash payments to provide the same return.

This approach will reduce the cost to the community of supplying the same value of water. The cost reduction comes from the returns on investment not from lower prices on water.

Economic efficiency comes by giving a higher return on investment to the community not by increasing prices.

Outline of ACT Water Rewards Co-op

Every user of ICONWater can volunteer to join the Co-op. The ACT Water Rewards Co-op distributes part of the profit from ICONWater to members. Members periodically receive the Right to purchase Water Rewards. Customers buy Water Rewards using their savings or by borrowing money from banks. Water Rewards are pre-payments of water at a discount. The discount is 10% per year, and the face value of Rewards increases with inflation. Water Rewards are only redeemable to pay for water from ICONWater. They are transferable, but if sold they cease accumulating discounts or inflation adjustments. Rights are transferable and expire after one year.

The direct operating costs of ICONWater are about $100M and are one-third the price of water. It is economically safe to sell $3Billion worth of Water Rewards to retire government debt. At present government debt on average costs about 5%. Removing debt will improve the bottom line of the ACT Government by $150M, ensure the ACT government retains its AAA rating while providing water customers with a high return, inflation protected, government-backed investment of $3Billion.

Instead of interest payments going out of the community the returns on investment stay with the Co-op members. They can use the returns to reduce their water payments, or they can use the returns for any other purpose.

Identity is Not a Thing

Identity is not a Thing. Identification happens when Things connect. A Thing does not have an Identity until another Thing identifies it and then the identification is only for the other Thing. It is not a new Thing.

Designing systems where we make Identity a Thing proves to be challenging and expensive. It happens because Things have properties because they are Things. When we make an abstraction become something it isn’t, we have to compensate for the anomalies.

The idea of the Name of an Identity illustrates the issue. Let us say a person has an Identity as a Thing. When we say, the Identity has a name we need to qualify the name property. What other Identities use the name? What name do we use for a particular purpose? Who is allowed to see the name of the Identity?

Instead of thinking of an Identity as a thing let us forget about having Identities and see what happens.

We have two Things, and one wants to send a message to the other. Let us assume that they have never communicated before. However one of them knows that if they send an email address to the other party, they are likely to get it. Once the two parties are connected, they then exchange messages to establish they are connecting with the party they wish to. They then remember the connection by giving each other unique identifiers. The identifiers are peer to peer and are only known to the naming Thing. The connection plus the two identifiers can now become the building block of further connections with other parties. The building block is a new Thing which may combine with other connection Things via distributed applications. There is no Identity nor is there any need for one.

When we say the building block is the connection it is a new Thing and it has properties.

Identifiers exist, but they are properties of the Things. They are not Identities. We do not need the idea of an Identity. Having Identities creates unnecessary complexity and overheads. Removing them and replacing the functionality required for identification with the new Connection Thing reduces costs by reducing complexity.

It is asserted that emergent properties of systems built on peer to peer connections can be low-cost, private, and made from autonomous entities.

Stop Using Bank Loans for Infrastructure

Money Loans are an expensive way to borrow money to build infrastructure to supply goods and service. It is cheaper to use loans where the community lends the money and are repaid with discounted goods, services or taxes.

ACT Water Rewards Co-op is an example. The Co-op will first replace existing loans that have already financed water infrastructure. ICONWater holds loans of $1.3Billion and pays interest of $70M annually. If ICONWater increased payments to about $100M, they would remove their debt within 20 years. ACT Water Rewards Co-op will replace money loans with loans from Co-op members within one year. The loans are called Water Rewards and are used to pay for water.  The discounts provide a return on investment for the Water Rewards Loans.

The cost to ICONWater of Co-op loans is about 1/3 the cost of bank loans because ICONWater operating costs are about 1/3rd the price charged by ICONWater. The repayment and investor returns are lower cost to ICONWater, and so ICONWater gives investors higher returns than bank loans.  Because Water Rewards are more valuable as an investment than Bank Loans the Right to purchase Water Rewards is valuable.  The Co-op, after consulting the ACT government, can give different Rights to different members of the community to meet social objectives while leaving the price of water the same. For example, low per head consumers of water can receive more Rights to Rewards for conserving water.

If ICONWater uses this approach with a 10% yearly discount, it no longer needs to pay $100M each year for 20 years to remove its debt. Instead, Water Rewards holders could use 1/20th of their Rewards each year to pay for discounted water. Doing this will increase ICONWater profits by $35M each year and give the customers lower cost water of value of $65M each year. Over the 20 years, the infrastructure cost to the ACT Community reduces by about $2 Billion or $100M each year.

The cost of building and operating ACT Water Rewards Co-op is a water infrastructure cost. As it is part of the water infrastructure, the Co-op can issue Water Rewards to pay for it. The Co-op can recover the money by charging a fee in Water Rewards on all money transfers. It means the Co-op is self-funding.

Click here to see the spreadsheet on which the above is based.

Efficient Low-Cost Capitalism

Capitalism is an economic and political system in which a country’s trade and industry are controlled by private owners for profit, rather than by the state.

Capitalism, as we know it, is grossly inefficient. It is high cost and does not distribute resources efficiently or equitably.

We represent capital as money, but it is really the surplus left over after an exchange of value or the profit made from transactions. Our current system works by representing the profit as money. The money becomes a transferrable store of value. Because it is a store of value, we can rent it out and charge for its use. We call these charges interest.

This system works well. Unfortunately, it is expensive (at least two orders of magnitude more than it needs to be) because of the way we create new money with loans and because of the way we repay the loans.

Governments can create new money as a loan provided they can tax the borrowers to ensure repayments. Governments need to create enough money to ensure the economy has enough money for regular transactions. Creating money is zero cost, so governments have to be careful not to create too much money and so cause inflation, but that is easy to do provided we are careful how we create non-government money.

Costs arise because of the way we create non-government money. We create new money whenever we make a loan. All loans are promises to repay or IOUs. An IOU creates new money. IOUs come in many shapes and sizes. When we issue a share certificate, we create an IOU. When we create a unit trust, we create an IOU. When we charge interest, we create new government money. Whenever a bank issues a loan, it creates new government money. Share certificates, unit trusts, interest, bank loans are all new money tokens.

The expense occurs because interest and bank loans are government money tokens and have the same value as money tokens created by the government. Unfortunately, these money tokens do not have the same value as the IOUs they represent and are less likely to be honoured than government IOUs. An interest charge on a person who is bankrupt is highly unlikely to be of any value, yet we have created a money token that has real value. A loan to an out of work individual is less likely to be repaid than a loan to a government-owned utility. It costs a lot to reconcile all these differences. That is why the financial system is so expensive to operate. It is not wrong or corrupt, but it is expensive. It is so expensive that it costs at least 100 times more than it needs to be.

How can we reduce costs? We can lower costs by eliminating compound interest and by repaying loans with more goods and services using discounts rather than repaying loans with interest. The expense arises because of the uncertainty caused by putting a time value on money tokens. By getting rid of the time value of money, we can eliminate the cost of inflation and remove the cost of compound interest. By getting rid of new money tokens for loans, we get rid of the cost of interest on those money tokens. It turns out we can handle insurance coverage without having to save money, and we no longer have the cost of depreciation. We can remove many of the additional cost associated with real estate and other transfer of assets.

The cost of failed loans and destroyed assets are localised, and the methods of compensation to innocent parties are lower cost than using expensive insurance.

We save money by repaying loans in goods and services rather than with government money.  The reason is that the cost of goods and services is the marginal cost of production.  This is less than the cost of production plus finance costs plus profit plus government charges.  Typically these costs are 2/3 the marginal cost of production.

We do not have to change the current financial system. We replace expensive loans one by one with less expensive loans. We modify the way we calculate interest to remove compounding. We set up no-fault compensation regimes instead of using insurance. We finance enterprises with lower-cost customer loans rather than equity.

We do not replace capitalism. We make it less expensive to operate.

ICRC Water Tariff Review Public Hearings

The ICRC has a public forum on its tariff review on Tuesday 6th December 2016.

I have previously made submissions to this review

and to a previous review in 2014

At the public forum I will present the following.

The ICRC says its tariff review recommendations are to make ICONWater economically efficient. One definition of economic efficiency is:

“Economic efficiency implies an economic state in which every resource is optimally allocated to serve individual and entities in the best way while minimising waste and inefficiency. When an economy is economically efficient, any changes made to assist one entity would harm another.”

The ICRC recommendations, in a regulated environment, do not achieve the stated goal of economic efficiency as reducing the price of water to large users of water at the expense of increasing the price to households harms households.

The ICRC has difficulty using market principles to establish prices as there is no market and the price elasticity of water is low. The price of water has little effect on demand. ACT residents reduced consumption of water, not due to price increases, but because they “did the right thing” by the community. To now increase the price of water because they have changed their behaviour during the drought and not reverted to their previous patterns of consumption is perverse. If the objective of the ICRC is for ICONWater to increase sales of water then dropping the price to households and encouraging Canberrans to consume water is another way to achieve higher consumption. But that would work against the idea of having a long-term sustainable water supply.

ACT residents have come to terms with the current price structure, but they should gain some benefit from the extra profits made by ICONWater. It could take the form of lower prices, or, as with Water Rewards it takes the form of a secure investment for household savings while increasing ICONWater profits.

In a regulated market, another measure of economic efficiency is to supply the same amount of water at a lower cost.

If we look at the costs of ICONWater for 2016 we have

Income from water and sewerage of $319M
Depreciation $48M
Employment and Operating Costs $134M
Interest Expense of $72M

Depreciation and Interest charges are $120M or 38% of income and are close to employment and operating costs.

If we reduce financial costs, we can make ICONWater economically efficient. In my submission on Water Rewards, I outline how we can reduce these costs to near zero. Reducing these costs increases economic efficiency without any change to prices.

I am on a community consultative forum run by ICONWater. We have sat through two long sessions where ICONWater presented variations on the ICRC Proposals and asked for our comments and what we thought were the best variations. No variations on the ICRC recommendations are acceptable as the ICRC recommendations are not economically efficient.

Water Rewards is a radical proposal, and so ICONWater made a suggestion that we try to gauge community support for Water Rewards.
Accordingly, along with SEE-Change, we are forming ACT Water Rewards Co-op to propose to the ACT government that they replace bank loans with Water Rewards loans from the ACT Water Rewards Co-op. To deploy Water Rewards the ACT government only needs to give permission for the ACT Water Reward Co-op to provide loan money to ICON Water and for ICON Water to give discounts to water users when they pay their water invoices using Water Rewards.

ACT Water Rewards Co-op recommends that Water Rewards loans replace existing ICONWater interest bearing debt. Doing this will increase ICONWater profits by $120M in the first full year of operation.

The approach requires no change to ICON Water. It can be built and operate with no cost to the ACT government or ICON Water. A small transaction fee on all money transactions will cover all ACT Water Rewards Co-op costs. Membership of ACT Water Rewards Co-op is open to all people who consume ICON Water. Each member will, on average, initially receive a free Right to Buy Water Rewards of an estimated cash value of $1,000.

The cost of the discount to Water Rewards holders is whatever makes Water Rewards an attractive investment. The reason is that cost of the discount is born by the same group who obtain the benefit from Water Rewards. We have set it at an inflation-adjusted 10% discount per annum, as that discount rate makes it an attractive investment.

It is recommended the ICRC support the introduction of Water Rewards as it also provides a way for ICON Water to fund alternative sources of water for large water customers. That way ICON Water can retain large customers and still derive income from their use of non-potable water and so achieve the ICRC objectives.

At 5 pm on the 13th of December at Entry29, we will hold an information session to explain and answer questions about Water Rewards and what it will take to get the system operational. Please let us know you are coming by registering here.

Further information on Water Rewards is available at

A FAQ on Water Rewards is at

You can join the ACT Water Rewards Co-op by subscribing to the mailing list.