The reform that is needed by the market economy

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In order to have a sustainable reform of the capitalist system we need a heart transplantation through which the pseudo heart that is commercial lending can be removed and the actual heart that is private property and free markets that has been dislocated can be relocated to its right position.

Capitalism has survived several heart attacks like symptoms from the Great Depression to the Global Financial Crisis and many more in between, yet it has survived and has remained resilient.

What is that the one thing that works as the heart for capitalism as a system?

Two institutions compete and often we are not sure which one is actually the heart. The first institution is private property and free markets and the second institution is interest-based commercial lending.
Private property and free markets should have been functioning as the heart of capitalist system but in fact for all practices purposes – the de-facto heart of capitalism has been interest-based commercial lending. Therefore, the argument, in order to have a sustainable reform of capitalism we need a heart transplant through which the pseudo heart that is commercial lending must be removed and the actual heart that is private property and free markets that has been dislocated shall be relocated to its right position.

The basis of private property and free markets is the condition that an asset has risks and returns and these risks and returns shall not be separated and traded separately. Commercial lending facilitates the violation of this basic risk-return condition of the free markets and private property, because the lender keeps the ownership and the returns of the loan and the borrower takes all the risks of the loan.
For markets to be truly free, money must function as a neutral medium of exchange. Commercial lending also destroys the neutrality of money as money becomes a subject of exchange in itself and doesn't remain a neutral medium of exchange – dollars 100 of today sold for dollars 105 of future date assuming 5% interest rate, without a neutral medium of exchange or exchangeable goods and services. Hence no wonder that the size of the financial assets counting for the trillions of dollars of derivatives exceeds the real economy several folds.

Contrary to commercial lending, selling an asset on credit for a higher price as compared to the cash price, maintains the neutrality of money as a medium of exchange while still serving as a financing mechanism. Such a credit mechanism will also keep financial services within the range of that is required by the real economy.


These simple arguments support the suggested call for the long awaited heart transplantation for the survival of the capitalist system, i.e., replacing lending with deferred trading as the heart and restoring the neutrality of money.

Comments

Unknown said…
You have a nice view on these matters. As a learner, it's very much useful. Thanks for the post. financial planning knowledge
November 7, 2014 at 7:05 AM
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