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.

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