What is Wrong with Finance?
The financial system has unnecessary costs because of the way communities distribute the earnings from Capital. When we sell output from Capital, the profits from the asset become the owner's property, and the asset value remains with the owner. Making a profit from an asset while still retaining the asset to make further profits at the buyer's expense brings resentment over ownership and is often seen as unfair. It is particularly acute when the asset is money, information, and land that many see as shared assets.
The accounting issue is the division of asset earnings while the asset value remains the same. Societies find complicated ways of addressing it. The main one is taxing profits and redistributing the taxes to those who do not own Capital. Working out the tax on Capital leads to complicated, expensive rules and procedures, including monetising assets and money markets to distribute Capital.
Public Capital solves this problem by sharing the asset output profits at the time of sale with lower prices. Currently, the asset owner keeps all the profits and the Capital after each transaction, and the government uses taxes to redistribute the profits and money markets to transfer the Capital. The beneficiaries of the current system are the asset owner, the investor in assets and the government. Public Capital also benefits buyers with lower prices and with the transfer of Capital.
Not sharing complicates the financial system and increases the cost of investing. Capital is treated differently from other expenses like labour. If a business can own something, like a machine, all the profit from work goes to the owner. Owning things rather than sharing the profits from their use has become the foundation of economics.
Treating profits from ownership as distinct from earnings from operations leads to an unfair society, and unjust communities are expensive to maintain. When we buy products, we pay for the work that goes into making the product, and we pay for the Capital. Capital is that part of the sale price which still exists after we pay for it and which the seller can sell again and again. As the complexity of products grows, the proportion of Capital profits becomes more significant, and the gains accruing to the owners of Capital become greater.
It is bad for society because Capital accrues to those who already have it and inevitably leads to haves and have-nots and dysfunctional resentful communities.
Eliminating profits from Capital or sharing the profit from Capital between the owners and buyers of products at the time of sale are ways to address the problem. Removing profits from Capital is the cheapest approach but can lead to the neglect of Capital as no one is paid to look after it. Sharing the earnings from Capital with buyers simplifies accounting, is fairer and costs nothing to operate because it can be an extension of the product payments system. Sharing works well because someone is paid to look after the Capital and reduces the total cost. Sharing leads to a fairer and wealthier society.
Sharing Profits from Parking Spaces
To illustrate sharing Capital, consider a Public Car park. Assume a community decides to charge for parking cars in a free Public Parking area. Assume it will cost $10,000,000 to set up the car park charging, it costs $500,000 a year to operate, there is an interest rate of 10% on funds, and the Capital is repaid in 10 years.
If we use a loan, there is a $6.25M charge for interest. Assume the Car Parking makes a profit of $10M after the interest charge. We need money to set up car parking. Instead of a loan, we can get investors to prepay for parking. The prepayments attract a discount at the time of sale, and investors get their return at the time of purchase and some of the capital value that generated the return transfers to the person buying parking. The transfer of the profits from Capital happens at the time of sale, saving tax transfers and, more importantly, the cost of operating money markets.
Rather than profit before interest and tax being $16.25M, we can reduce the parking charges by $6.25M. Investors of the $10M who prepay will receive a10% return on their investment each year plus their money back over the next ten years. Each person parking will get 50% of the Capital component of their payment back as parking prepayments or Capital. The discount amount determines the share of profit going to the government and the share going to prepayment holders.
This spreadsheet shows the calculations. By saving the cost of interest:
- Investor returns increase by 23%
- The government retains ownership of the parking and distributes profits.
- The profits to the government from parking go up by 12%
- The cost of parking drops by an average of 23%
- 50% of the Capital component of parking fees goes to the buyer.
When Capital and the earnings from Capital stay within a community of users of the output of Capital, the buyer community grows in wealth; investors get higher returns and the cost of goods and services drops. The division of Capital earnings is determined by the government and the community who park. The savings come from removing the need for Capital markets to distribute the profits from Capital.