Two Powerful Mechanisms for Stimulating Economic Activity

Thursday, 5 December 2013 at 09:55
In an economy largely determined by market operations, trade can be stimulated in various ways with the aim to meet resource requirements for general prosperity and well-being.

Trade; the exchange, through money or otherwise, of goods, property rights and services, is the primary way of meeting resource requirements and distributing opportunity for further development within a market-economy. So in that context there is already a sturdy incentive for trade; survival depends on it. Why then would it need to be further stimulated?

The reason that extra stimulation is required for economic activity in a market-economy, can be understood purely from examining the properties of markets.

Markets, left to their own devices (but protected by some official body, such as the State), tend towards increasingly unequal distribution of private wealth and thus resources. This happens due to cumulative competitive advantage, where small differences in wealth will tend to be amplified over time. 

Regardless of mutual gain, in a trade between two parties with unequal wealth, the richer will tend (in proportion to the wealth disparity) to have a stronger bargaining position and greater opportunities to capitalize on the outcome of trade. If you've ever spent much time playing Monopoly you'll know that while luck, and to a degree skill, plays a large part, the more money and property a player has, the more chances they have of amassing more and winning the game. Essentially, the rich get richer and the poor get poorer. That is a fundamental and well recognized property of markets, even in an expanding economy. This means, if the ability to acquire resources is determined by the tradable assets an individual possesses, there will be a growing number of people unable to participate in economic activity. Hence, without some extra stimulation or fuel for trade, the economy – and the population – will shrink into oblivion.

There is naturally a high risk that as circumstances become more dire for more people, the rules break down and instead of everyone starving, the market blows up, to either be reformed with a fresh distribution of wealth – what usually happens – or for some alternative to be attempted – what usually doesn't last long. There are obviously market restraining (and simultaneously protecting) measures, such as income taxes, regulations and social welfare, but without some extra boost to trade, the vast majority of people would end up being dependant on a subsistence social safety net for survival.

The predominant approach to prevent a market-economy from eating itself out of existence, or blowing up, is debt, and especially creating money from the creation of debt (whether backed, or 'securitized' by some physical resource, or otherwise). The global financial system and market-economy is built on this model and is contrasted below with an alternative approach to stimulating economic activity, within a market paradigm.

Money as Debt
The essential feature of debt which allows economic activity to continue beyond the point it would otherwise be forced to stop in a market-economy, is that it extends the lower end of the scale of wealth, from zero or not enough, to (minus) infinity. If you don't have enough to trade for what you need, you can borrow. Without doubt, borrowing is an indispensable activity in a market-economy, not only for the poor or those of modest wealth, but also for those who wish to leverage their assets and multiply their profits. So debt allows the wheels to keep turning.

There are, however, some properties to debt, besides its ability to extend economic activity, that also exacerbate the anti-economic trajectory of pure markets. Accepting debt, in the form of a loan, is itself a trade, with the lender receiving a promise to repay with some additional interest. So the broad economic utility of debt is still dependant on lenders being willing to lend, which is not always the case. The lender naturally wants to ensure a profitable outcome of the trade, which means the borrower successfully repaying the loan plus the interest, which depends on the borrower being able to make sufficient profitable trades (including giving labour for wages) elsewhere. As a trade, a loan is just another market operation which facilitates the market behaviour of concentrating wealth and thus increasing economic inequality, but with the additional pressuring factor of interest payment.

With a money system based on debt, having interest outstanding in a market-economy mathematically requires more money to be created to cover the interest. That then leads to more money being required to cover the debt associated with that money, and so on. On the one hand this provides a pressure for economic growth, but on the other it also creates inflation (rising cost of goods and services through the falling purchasing power of a given sum of currency), by increasing the pool of (debt based) money in the economy. This continuous kind of inflation is generally not completely counteracted by lower cost production technology, and through a number of channels, increases the economic wealth gap between rich and poor.

It is true that inflation can erode savings, but by definition only savings which gain interest at less than the rate of inflation; two examples being keeping your money under the mattress, and the large majority of pension funds (which constitute most of the savings for the least wealthy majority), which under-perform inflation in the long term. For those with substantial wealth there are far better opportunities for investment.

Since resources, demand for goods and services, and employment opportunities are all limited, there will always be a certain part of a population who simply cannot make sufficient profitable trades to repay loans for resources they need. There will also be those who are hit by unforeseen circumstances, or who decide to cheat. That is, loans will not always be offered when needed, and will not always be repaid.

To avoid market breakdown due to lack of credit (availability of debt) or ability to repay, the total pool of wealth within an economy and consequent opportunity for trade and profit must continually grow. If growth stops, debt may provide a short buffer, but as the market concentrates wealth, the prospects of debt being repaid diminish, and so credit will dry up. In support of the debt approach to stimulating economic activity, it is argued that the social impact of being in debt, and having interest to work off, motivates people to work harder, thus creating the economic growth required.

As already mentioned, there are certain intrinsic motivations for economic activity, the sustaining and development of life and well-being, and markets in their pure form concentrate economic opportunity into ever fewer hands. While debt can keep a market-economy rolling, because it also reinforces economic inequality it will alter the character of motivation and economic activity (and consequently much non-economic activity) for much of the population.

When working to repay debt, or just managing to service the interest, while granted much better than starving or going without shelter, there is a tendency for the mind to narrow, especially where economic freedom is low and the debt payments take a significant chunk of the income. In this state (compared to having adequate wealth to avoid debt or keep it to a small and easily managed level) there is less time to listen to our various human needs beside the matter at hand of paying the debt, along with the other bills and covering the basics. Less time to pursue interests, even where they would not require much additional resources. Less time to think, learn, create, connect and innovate. Less time or mental space to relax and enjoy. When in debt there is also less opportunity to be selective about what work to accept, and more pressure simply to take what will pay, to service the debt.

This narrowing of the mind and restriction of broader individual development presents a significant opportunity cost to society, through the quality of culture and innovation that might have been created, through a more widespread, fuller development of human potential. In short, the debt approach offers a choice between going hungry or varying degrees of servitude to concentrated wealth, while in so doing creating a high opportunity cost for society. The global research of the Equality Trust clearly shows that substantial inequality is indeed harmful not just to the poor, but in a variety of ways to everyone in society.

There is also the minor issue of the debt approach requirement for indefinite geometric growth, on a finite planet. A minor issue which is fast casting its shadow across the globe. To clarify, in an economy with ten acres of land and ten blocks of gold, the GDP (total sum of all trade) can vary according to how much trade is made, which can increase through new services and technological innovation to allow more to be done with less. This is known as intensive economic growth. However, there is a limit to how much and how fast those factors can grow an economy, especially where a large number of people have relatively low economic opportunity, and ultimately the wealth concentrating property of markets will force (regardless of other factors which may do the same) new land and new gold and other resources to be acquired. This is known as extensive economic growth, and is the kind that bumps up against the hard limit of a finite planet.

It is almost certain that so long as a market paradigm is used for economic management, debt will be a necessary evil. Were the base currency not linked with the creation of national debt (as is invariably the case with central banks now), such as proposed by Positive Money and others, the overall debt burden would be reduced. But the availability of individual loans would most probably still be a necessary buffer or enabler of opportunity for some of the population. The negative impacts and extent of debt may be further reduced though, through various redistributive economic measures.

Tax on Property
A tax on property amounts to a redistributive approach to stimulating economic activity (as in principle most taxes are), whether the tax revenue is redistributed directly, or via government spending. It is not directly concerned with the creation of money or the use of debt. When used in combination with a particular debt approach, providing redistribution is either direct, or effectively managed, it will reduce the need for individual debt. 

The idea presented here is a particular form of property tax, where all private wealth is taxed, periodically, not when it is traded, but while it is owned, and redistributed largely in a direct form. It would include real-estate, land, food, materials, industrial equipment, stocks, patents, interest baring bank accounts, every kind of owned economic asset. Hence a more descriptive name for it could be 'Universal, Recurring, Directly Redistributive Tax'. The tax would principally be financial, but could also be in the form of produce. Through national or local government the tax (or a large majority portion of it) would then be evenly distributed to the population.

The rationale of such a tax on property is to encourage the profitable use of resources, where they are privately owned. It would only make sense to hold property, for those with more than average wealth, if it was creating profit above the rate of tax. If an individual's amount of property was below the average they would receive more tax revenue than they give, and vice versa.

This kind of tax on property is quite distinct from income tax, corporation tax, or tax on trade (stamp duty, VAT, import). These other types of taxes essentially tax profits or economic activity itself, which creates understandable resistance and can be avoided in various clever ways. A property tax is not concerned with profits, and encourages trade. It is also relatively simple to calculate; if something is owned, it gets taxed. But like with most taxes, it may also allow for deferrals and exemptions under special circumstances, and have potentially different rates for different types of asset. 

Other forms of property tax exist, such as council tax and inheritance tax. These forms are either much more limited in the scope of property they apply to, or apply once per generation (providing loopholes are not exploited), rather than on a rolling annual or quarterly basis. Stamp duty is also a property tax, but applies only when trade occurs. The type of property tax being discussed here is a comprehensive, recurring tax, designed to have a redistributive force strong enough to sufficiently counteract the anti-economic, wealth concentrating characteristic of markets, thus allowing more collectively prosperous economic opportunities and development. The virtue of making redistribution primarily in direct form, rather than managed through government programs, is to ensure that economic freedom and opportunity is widely distributed.

Besides the practical economic benefits, the ideological basis of it is that the government provides a service of protecting private property and the safe, stable operation of the market, with the opportunity for profit that comes with it. And in return for that valuable service and the resources required to render it, the government on behalf of the public interest requires a percentage, which it distributes to the public. Each member of the public is given an equal share, simply by being part of the economy from which profit can be made, and recognising the value in giving everyone a more equal chance to contribute, through a more equal economic opportunity. (There is no need to adopt a false doctrine of absolute economic equality.) If someone is a successful wealth accumulator, whether through innovation of business acumen, they can carry on doing that and profiting. But the idea of the tax is that it strongly deters anyone from simply sitting on accumulated wealth, or letting it appreciate through unproductive uses, which is harmful to the rest of society.

Let's consider the example of a home. What happens when someone retires from business and the tax on their property, which includes the house they live in, comes around? If the owner's total wealth including the value of the home is less than the average, they would have nothing to pay, because their contribution would be less than the dividend they receive. If the owner's total wealth is more than the average, then tax would be due in proportion to their additional wealth. So if someone wants to live in a 20 bedroom mansion, that's fine, but they would need to figure out a way of making their total wealth continue to be economically productive, and thus hopefully useful to society, to cover the tax. (Or, less probably, to have had so much wealth accumulated that they can carry on paying the tax without it affecting their chosen lifestyle.) The idea is to shift distribution towards human needs and provision of opportunity, and away from human greed. Greed, to put it simply, is supported only so far as it provides a measurable net benefit for the rest of society, otherwise it is collectively detrimental.

Even though it may be simpler to calculate and more difficult to evade, a tax on property, like any other tax, would still be subject to some people and corporations not wanting to pay it. One reason to expect more honesty than with other taxes on profits or trade, is insurance. Particularly valuable property is often insured, to cover loss or damage. But if such property is not declared and counted in tax contributions, then no legal insurance claim could be made. With a property tax, there would be no need for income tax, corporation tax, or trade tax. So to replace three types of taxes with one, which is more favourable to trade, would surely aid its popular acceptance. 

One obvious exemption to the tax, that might enhance the sharing and development of practical skills, would be the value added from a person's direct labour. So if for example someone builds an extension to (or the whole of) their own house, the value added to the property embodied in that labour would be tax deductible.

A tax on property not only encourages economic activity by providing additional incentive for property owners to turn a profit on that property, but also through its redistributive function, which directly creates more economic opportunity for most of the population. In turn that more widespread economic opportunity fosters technological and social innovation. A tax on property is one way of providing a Basic Income. But as a stimulator of economic activity it does not create a pressure for perpetual, geometric, extensive growth of the economy, as debt does. It keeps the wheels turning, but without requiring an ever bigger cart.

Shifting to a redistributive method of stimulating economic activity, would help spread a deeper understanding of the practical benefits of peaceful collaboration with equal respect of each others needs.



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