What is a Fractal Economy?
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The Fractal Economy Cooperative is more than just a niche project designed to strengthen communities by funding not-for-profits (which is the main message projected in our homepage). The Cooperative is designed to effect systemic changes in our capitalist economy, an economy which is highly unjust and unsustainable, to say the least. We aim to do this by modelling the changes – exactly the same measures – which are required in the national and global economy and, when we gather enough strength, to challenge the existing system. As our name suggests, we are a fractal which means that we intend to implement the very measures that are required in the national economy. Such changes include: a new taxation system (which is called ‘community contribution’ in our literature), a different form of banking altogether, support for cooperatives over share ownership, and commonly owned land. We do not have a banking licence at the moment, which restricts our ability to effect many of these policies, but we are building the community – a network of buyers, sellers and community groups – which will form the foundation for a truly different kind of community banking.
Why Capitalism doesn’t work
This is a very simplified explanation for why capitalism doesn’t work, and why we have the social problems we have today. Nonetheless it captures the essence of the matter.
One constantly reads that Capitalism is based on ‘free market’ principles in which individual choices and individual freedom shapes the collective experience. This is perfectly right when it comes to goods and services such as growing fruit, erecting a house, or selling clothes. There are things which are not goods and services; which are not produced by anyone, and which are not consumed like real goods and services. And yet they are purchaseable or privately ownable on the marketplace. These things, which economists call assets, provide an ongoing source of unearned income – income made without contributing anything towards the production of goods and services. The assets and their corresponding unearned income are:
- Banking licence (private banks) – interest on loans
- Share owned company – share dividend
- Land – land rental
Unearned income not only allows the very rich to make a claim on goods and services that they have had no part in producing; it allows them to get even wealthier in future, and then to be able to claim more unearned goods and services. The wealthy get wealthier and wealthier without contributing anything productive to the economy. This necessitates that on the other side of the equation, the vast majority will find it harder and harder to earn a living over time. Below is a cartoon illustration of how this process works.
This picture shows the very wealthy – simplistically called the 1% – making unearned income through the various means mentioned above – interest on loans, corporate profits, land rental, and ownership of natural resources. Of the unearned income so made, only a small portion of it is spent on the purchase of goods and services. This spending recycles the money back into the goods and services economy in which people earn a living. A lot of the unearned income of the wealthy is however not spent on the purchase of goods and services. It is instead rolled over to purchase even more assets like shares, bonds and property. In the case of banks, it increases their right to create new money for loans. This increases the price of land among other things, and makes it harder for working people to get out of debt (mortgages) or bondage to a landlord (rent).
The picture shows only six items – social problems that become progressively worse as the wealthy corner more and more of the wealth over time. There are many more such problems which are not depicted. One or two examples might help explain how these problems come about.
Firstly, income made that is then diverted to pay rent, interest on loans, and corporate profits is income not being spent on goods and services. This creates a shortfall in the demand for goods and services. This lack of monetary demand is the real cause of unemployment.
Secondly, all sources of unearned income becomes a cost of production. For example, a person who has to pay interest on her mortgage, or rent to a landlord, has to cover those costs in her wage demands. Something similar goes for all businesses. So costs of goods and services go up and everyone has to pass on not only their own costs (from rent etc.) but also those of their suppliers, and suppliers’ suppliers, etcetera. This is why we have stagflation – rising prices as well as high unemployment. Standard economic theory cannot explain why stagflation happens.
The process of the wealthy getting wealthier at the expense of the rest of society has knock on effects – environmental devastation, corruption of legislatures by the wealthy (who are trying to maximise their returns), a loss of taxation revenue and hence the sharp deterioration in welfare safety nets, and so on.
Why the banking system is the key to all our problems – and our answers
In modern banking systems, banks are not intermediaries between depositors and borrowers. People are not borrowing depositors’ money when they borrow from a bank. Banks practise what is called credit creation – new money is created by banks in their computer ledgers every time they make a loan. Even though this money appears very different to paper money, it is no less ‘real money’. It is not ‘fictitious’ money. It is money which is totally interchangeable with paper money at the teller. Central banks, which are nominally public entities, create our paper money. Central banks also authorise private, for-profit banks to create money via credit creation. The difference in quantity between paper money and money in bank accounts tells you the proportion of money created publicly and privately. In the UK and Australia, central bank created (paper) money accounts for 3% of the money supply; 97% of our money is created by private banks in their computerised ledgers.
There is thus no ‘free market’ working in the banking system. What is happening is that a public institution (central bank) is authorising private for-profit entities (commercial banks) to issue money for the purposes on loaning out and, very importantly, to stipulate the conditions of the loans. The commercial banks thus not only derive a huge and illicit income in the form of interest on loans; they also shape the rest of the economy – as shall be demonstrated shortly.
Here at the Fractal Economy Cooperative, we are adamant that the right to create money – paper money and ledger money, is the sole right of the commons (we prefer this term to ‘public’). When private banks are no longer permitted to practise credit creation (by central banks’ withdrawal of their licence), then they will effectively cease to exist. This leaves the central bank with sole monopoly rights to credit creation. Imagine if such a central bank opens up ‘retail branches’ in which people deposit their money, apply for loans, and do their general banking. We call such a bank a commons bank.
A commons bank will function very differently to the private banks. It will change the entire landscape of the economy – not just the banking-financial aspect. This is what we envisage to be the four critical ways that commons banking will be different to commercial banking:
- Loans are only made for the purpose of purchasing goods and services; no money is loaned out for property, shares, currency purchases, or any financial instruments such as options, futures etc. The commons bank will not contribute towards a speculative economy, and all loans will further the ‘real’ economy of goods and services production-consumption.
- The current practice of financial guarantee will be replaced by the practice of social guarantee. Anyone applying for a loan has to have social guarantors to endorse him/her as a person. The social guarantors are not themselves offering financial collateral/guarantees. This means that the poor have equal access to loans as the rich. Loans are based on a person’s productive potential. ‘Credit’ and ‘credibility’ have the same origin in the Latin credere – to believe in.
- Large corporate loans will be denied to share-owned corporations and instead reserved for profit-sharing cooperatives. Starved of credit (since private banks will not exist), share-owned corporations will fade away and their work will be replaced by profit-sharing cooperatives.
- The commons will no longer give loans for property purchases to private parties; instead all property loans will be reserved for a commons land trust. The rental from such land will pay off the loan and eventually become a major source of commons/public revenue.
One can see that a commons bank will eventually cut off all sources of unearned income in the economy. The underlying asset will either be commons owned (banking and property) or will cease to exist (share ownership of companies). It will not be a socialist or communist economy because there is still a free market in the production, distribution, and consumption of goods and services. It will be an economy where there is every incentive to produce; where all income is earned; where everyone is invited to participate in the making of social policies rather than it being the reserve of the rich and powerful; where there are three huge sources of commons revenue (interest on loans, tax revenue from what we call a transaction tax, and land rental. It will be an economy with no unemployment and no inflation; with plenty of commons/public money for education, healthcare and welfare.
How does the Fractal Economy Cooperative (FEC) fit into this picture?
Believe it or not, this broad picture of a ‘post-capitalist’ economy can be achieved as a model created at grassroots level. If the appropriate measures are in place at the grassroots level, it will inherently be much stronger than the capitalist economy – even while playing under the rules established by powerful capitalist forces. With a banking licence, i.e. the authority to take deposits and to practise credit creation, a genuinely community financial entity such as a credit union or mutual bank, can undertake the four key practices of commons banking mentioned above. However, it cannot work without an extra practice inserted. This is the implementation of a transaction tax. Briefly, this is how it will work. Members of this new bank are encouraged to purchase goods and services from each other. People will not need much encouragement as they will have good incentives to do so, as we explain in our Hands-on Guide . Every transaction in goods and services between members will incur a flat rate tax (currently called ‘community contribution’ and currently 3% in the FEC, but may be variable in the future). This tax money revenue is given to various not-for-profits, and thus strengthens the life of our communities against capitalist depredations. Importantly, this tax revenue also ‘guarantees’ our loans, meaning that any failed (unpaid) loans can be addressed with our tax revenue. This allows us to be very generous and ‘risk-taking’ with our loans, and enables us to do away with the unjust practice of financial guarantee and to replace it with the practice of social guarantee. With our banking system and tax revenue, we can finance profit sharing cooperatives to compete with the share owned companies (again, only possible because we do not require collateral with our loans). We can also do the following: we loan money to a sister organisation – a land trust – and then allow the land rental to pay off the loan over time. Remember: this is money created out of thin air (credit creation) just like the other banks do. Just by purchasing goods and services preferentially from fellow members of this bank-community, and by transferring our deposits out of other banks into this bank, we will have the money to do this as a grassroots community.
Currently, the FEC is not in the position to implement this banking side of things since we do not have a banking licence (any community banks interested in a partnership?) but we are building the groundwork for a community that will really make a bank licence work to create a healthy post-capitalist economy. What we have ready to put into practice is a transaction tax that works via a phone app, the practice of direct democracy in place, a way of distributing no-strings-attached funding to not-for-profits, and more.
Such a short explanation as above cannot cover a myriad of details about how things work, or not, in the capitalist economy; nor about how things can work in the economy advocated by the FEC. The following is a selected list of articles to explain a lot of things not covered in the above explanation. Note that these articles are themselves greatly shortened so as not to bog down the reader in too much detail; they do not cover a lot of points or more nuanced arguments that a more exhaustive study would explore.
- Private Banks and Credit Creation
- Increasing inequality as a necessary part of a capitalist economy.
- Why the transaction tax needs to replace all our other taxes – personal income tax, company tax, GST (or VAT) etc.
- Direct democracy as a way for democracies to protect itself against the ravages of capitalism.
- Why the economy advocated by the FEC is the ‘middle path’ (dialectic) between capitalism and Bolshevism.
- The origins of unaffordable housing in the practice of private ownership of land and private banking
- Why land must be commonly owned – and how we can get there.
- Why share owned companies need to be replaced with profit sharing cooperatives.
- Unearned income, unemployment and inflation.
- Participation and inclusivity in the FEC-advocated ‘post-capitalist’ economy.
- The mutually exclusive relationship between unearned income and a sustainable economy.
- Unearned income, financial speculation and financial crisis.
- Global domination: the relationship between unearned income and the three key institutions dominating the world capitalist economy – the military, share owned corporations, and banks.
- How banks and corporations take advantage of the public, in the latter’s shortage of tax revenue, to enrich themselves even further.
- The corporate owned media and the ‘engineering of consent’ over the ruled
- Central banks are not managed by governments, and therefore not by citizens – governance of the banks, by the banks, for the banks.
- The relationship between share owned corporations and democratic government – and why the former dominates the latter.
Please feel welcomed to contact us with any questions via this contact form and we will respond to you promptly.