Why Capitalism doesn’t work...

...and why the Fractal Economy will really work for the Common Good

Why Capitalism Doesn't Work

Above is a summary in cartoon form explaining why capitalism doesn’t work. The very rich – the part of the population that owns the bulk of our assets – property, natural resources, company shares, and bank licences – do not have to work in order to live.

They extract unearned income from these assets:

  • Rent from property
  • Revenue from the sale of minerals etc from natural resource ownership
  • Share dividends from company ownership
  • Interest payments from bank licences

The extremely wealthy – simplistically referred to as the 1% - make (but not earn) more money than they need to live an already lavish lifestyle. They then plough these surplus incomes into the purchase of more assets (property etcetera) which not only makes more unearned income for them, but also makes it harder for everyone else to cope/survive in the economy. Money made without contribution to the production of goods and services is money stolen from the rest of society. This ‘stolen money’ means that the rest of society has to cope with many socio-economic problems as exemplified, but not summarised, in the six captioned boxes at the bottom – unemployment, poverty and homelessness, loss of political participation, inequality, debt, and environmental catastrophes.

… and Why the Fractal Economy works

In the Fractal Economy as depicted below, the assets that are the sources of unearned income for the 1% are retained in community ownership which we prefer to call commons ownership. This is to say, the commons retains the monopoly right to banking (more specifically the right to banking with credit creation ability which is the right to create new money with every loan); the commons retains ownership of land, and leases it to private parties; and finally, through its banking system, the commons fosters and supports profit sharing cooperatives as the corporate form to displace share ownership. This will give three enormous sources of commons revenue – interest on loans, land rental and transaction tax revenue.

This short article explains in a nutshell why our current economy - the NEOLIBERALISM* version of Capitalism - does not work. The Fractal Economy is designed to tackle the causes, not just the symptoms, of the ills attendant to Capitalism.

In Capitalism, Communism and the Fractal Economy we show that there is no need to be afraid of calling the ruling economic system 'Capitalism'. The fractal economy is no closer to being a communist economy than it is a 'capitalist' economy.

Why Capitalism doesn’t work

Of the two quotes above, the first by Slavoj Zizek encapsulates the situation we are in today in which global society is racking its brains trying to find an answer to the problems created by Capitalism. The second quote, by Bill Haywood, distills the cause of the problems to its very essence, which is to say, unearned income.

John Stuart Mill wrote something very similar back in 1848:

“If some of us grow rich in our sleep, where do we think this wealth is coming from? It doesn’t materialise out of thin air. It doesn’t come without costing someone, another human being. It comes from the fruits of others’ labours, which they don’t receive.”

Capitalism is predicated on a grotesque version of ‘growth’ which has been correctly likened by a number of critics to cancerous growth. This 'growth' in turn is fed by a stream of unearned income – income made without contributing towards the production of goods and services. In practice then ’growth’ translates to this: The very rich will get even richer over time. Some economists refer indirectly to unearned income by distinguishing between value creation and value extraction. We take the rather radical view (not shared by mainstream economists) that all income which does not arise from value creation is value extraction (welfare payments excepted). To tie in with the quotes above, unearned income and value extraction is a form of institutionalised theft.

Some people will argue that the activities or practices which result in value extraction are a necessary byproduct or necessary evil in order to have value creation. It is not so; and when we try to imagine and put into effect an economy without the value extraction ‘services’, we will realise that the ‘services’ are illusory, and that they act instead as a parasitical and destructive force in the economy. We will realise that the economy would be much more productive, fair and sustainable without these services. We will realise that when the commons takes over these services, things will improve dramatically. (In Why banks, corporations, land and natural resources should not be privately owned we show why the privatisation of these assets would not even come about if we had a true understanding of what money and banking is.)

A necessary side comment. Some people whose financial security is dependent on unearned income (such as their pension fund or investment properties) may feel shamed by this fact (of living off unearned income) and consequently decline to participate in, or learn more, about the fractal economy in order to spare their conscience being troubled. As individuals, everyone is perfectly justified in accepting the various kinds of unearned income that Capitalism affords them as 'passive investors'. A passive investor is one who does not actively work to contrive a situation in which the the iniquities of Capitalism are perpetuated (e.g. lobbying or bribing politicians, or writing articles in defence of its practices). It is not an individual's but acollective responsibility to bring an end (peacefully) to unearned income. It is however the individual's free choice to lend his/her weight to this collective action - if it exists - or not. The clarity of their conscience will weigh on this action rather than on whether or not they currently enjoy unearned income.

There are three basic kinds of unearned income, and they in turn are derived from the ownership of three basic kinds of assets. These assets and their corresponding unearned incomes are:

  1. Banking licence, government bonds: interest on loans
  2. Share owned companies: share dividend
  3. Land: land rental ( and natural resources as well, considered from a different angle)

Note: capital gains are a different category of unearned income which stem from an increase in price of an asset - shares, bonds, property. The above types of unearned income are primary unearned incomes. Capital gains are secondary forms of unearned income. A tertiary form of unearned income resides in options and derivatives - which will be explained later.

The field of economics identifies three ‘factors of production’ which form the basis of a modern industrialised economy. They correlate to the above three assets and unearned income. Respectively, they are:

  1. Capital
  2. Labour
  3. Land

There are many ills that may be identified with the concentration of financial power in Capitalism, including the utter corrosion of democratic government. However, to sum up the three main elements...

  • Unemployment results from unearned income not being spent on the purchase of goods and services. Investors and creditors make unearned income and then roll over the bulk of their unearned income into the purchase of more assets, and also recycled into more loans. This money is NOT being spent on goods and services, which means there is a shortfall or short-circuit in the monetary demand for goods and services (while the prices of these goods and services have to carry the unearned income as a factored-in cost of production). Unemployment results from this shortfall.
  • Inequality of wealth and income between a very rich minority and the large majority becomes ever more severe and exaggerated as the former hold an ever greater proportion of assets and enjoy an ever greater proportion of the income. Value extraction income is not counterbalanced by an equal injection of funds back into the value creation economy.
  • Environmental destruction is accelerated as members of society are forced to, or enticed to, deplete the environment in order to service the returns to ‘investors’ and creditors. Collectively speaking, those with extreme economic power in our economy can't seem to refrain from using the most mendacious methods to plunder the environment in order to enrich themselves - for example, the coal seam gas industry and the so called free trade agreements.

Below is a graphic summary of the above process that describes the cancerous growth concomitant with the capitalist economy. The first diagram shows the relationship between the real economy in which goods and services are produced (value creating economy) on the one hand; on the other hand is the ‘investment economy’ (value extracting economy) in which unearned income is made.

Why the Fractal Economy will really work for the Common Good

In the Fractal Economy we create a ‘space’ in which there is no avenue for private parties to make unearned income. We achieve this by creating the condition in which the three assets listed above – banks, large companies and land – are commonly owned. (In the case of large companies, we foster profit sharing cooperatives which are not owned by anyone). In the fractal economy, people can only earn money through value creating activity; and they can't buy value extracting assets. We can methodically achieve such an economy over a fairly short period (after we gain a banking licence). The diagram below illustrates the kind of fair and sustainable economy we are striving for.

In Global governance and the three factors of production we show how supra-national economic institutions like the World Trade Organisation and the International Monetary Fund relate to one of the three factors of production. As supra-national institutions, they dictate terms to, or control, democratically elected governments and can thus perpetuate Capitalism against a global citizenry. In Our six core practices we show how, step by step, it is possible for the commons to gain the financial clout to buy out, or displace, all the assets that capitalists use for value extraction.

*As even its harshest critics concede, neoliberalism is hard to pin down. In broad terms, it denotes a preference for markets over government, economic incentives over social or cultural norms, and private entrepreneurship over collective or community action. It has been used to describe a wide range of phenomena—from Augusto Pinochet to Margaret Thatcher and Ronald Reagan, from the Clinton Democrats and Britain’s New Labour to the economic opening in China and the reform of the welfare state in Sweden.
The term is used as a catchall for anything that smacks of deregulation, liberalization, privatization, or fiscal austerity. Today it is reviled routinely as a short-hand for the ideas and the practices that have produced growing economic insecurity and inequality, led to the loss of our political values and ideals, and even precipitated our current populist backlash.