Chapter One of A Just Solution
DEMOCRATIC CAPITALISM:
The Demand Economy
Please . . . It's important to keep in mind that what I’m presenting here is a new and different way of organizing the economy. It would be a relatively simple economy, but, as anyone who has ever tried to hit a golf ball straight can attest, just because something's simple doesn't necessarily make it easy. The subject matter doesn't help. Even someone very good at explaining things would have a hard time making any economic model easily understood. I'm trying to suggest, as gently as possible, that it will be hard enough to get an accurate picture of this new kind of economy in one's mind without attempting, while reading about it, to convince oneself that it really isn't anything new (for example, "It's really just socialism") or trying to visualize how it would function while looking at it through the prism of the capitalistic economy that we all know. So, if you would, take a deep breath, let go of familiar ideas and experiences, and prepare to be exposed to something really new and wonderful to contemplate.
The last great advance in the affairs of humankind, I would say, was the advent of political democracy. I submit that the time has come for the next great advance in the principled organization of human affairs, to apply democracy to the capitalistic economy. Both the spirit of that proposition and its timing have perhaps been made more viable since capitalism has vanquished Marxism and in the process more or less conquered the world.
Democratizing capitalism can in no way be equated with its destruction. Capitalism is an economy with private property and freedom of choice regarding how one wishes to participate in it, in which the economy is divided between public and private sectors, with the latter predominant, and there is no limit on how much income anyone may earn or how much property one may accumulate. Applying democracy to capitalism would require the establishment of a democratically distributed income. (Please note: That is not the same thing as democratically distributing incomes.) Doing so would in no way violate any of the above characteristics of capitalism. It would, however, create an economy with economic security for all, environmental sustainability, no involuntary unemployment, no poverty, and—get this—no taxes. It would retain private property. It would also increase personal liberty and enhance political democracy. (Also, all debts owed purely financial institutions, such as banks, would go away.)
It will be seen that the economic model being presented herein is not a 'managed' economy, much less micro-managed, much less 'commanded.' Rather, it is a rationally designed economy—as opposed to capitalism as we know it, undemocratic capitalism, which developed via social evolution (though the rich and powerful have sought at every twist and turn along the way, with more success than not, to shape it for their benefit). A democratically capitalistic economy would have in place a small number of rules that would define its structure and make the economy function appropriately, just as the constitutions of the
Structure and functioning are the two fundamental aspects of any economic system--or, indeed, any kind of system at all. The functioning of the demand economy is in some respects more speculative than is its structure, and at all events follows from its structure. So, I'll start with the structure of this economic system. In discussing its functioning I'll limit myself to those areas that are less speculative and therefore less debatable.
I first got to this economic model by asking myself how we could have an economy as just in its structure as political democracy is in its structure. The obvious answer is to consider that money is to the economic system as rights are to the political system: No one can participate in the political system of one's community without the rights relevant to participation in it, and no one can participate in the economic system of one's community without money. At the same time, every member of a community will be affected by the choices effected through its political system—whether one wants to be affected by them or not—and no one has any choice but to participate in the economic system. So, for the same reasons that justice requires a just distribution of political rights, it also requires a justly distributed income.
A just distribution is a democratic distribution. A democratic distribution is one in which whatever is being distributed is equally available to all, but for objective restrictions (not based on personal whim and independent of any creed, ideology, etc.), universally applied. Briefly put, the only valid restriction on earning the democratically distributed income would be that one have a job that pays it (or be retired or be genuinely too incapacitated to make a productive contribution), and the only valid restriction on being allowed to get a job earning that income would be age. Of course, particular jobs would still require specific skills, knowledge, training, etc., but there would be a job earning the democratically distributed income for everyone who wanted one (without its costing anyone anything). I want to stress that the existence of a democratically distributed income does not mean that anyone would be required to accept a job earning it; the only limit on devising other ways of earning an income would be people's imaginations. All this is getting us ahead of ourselves, though, and justice (and its relationship to democratic capitalism) is the subject of much of the remainder of this book. So, let's turn to the economic model itself, beginning with a brief overview. [Note: I present the model as much as possible in the present tense, but for no other reason than to keep the syntax as simple as possible.]
Those who earn the democratically distributed income are "employees of capital," or "capital employees," retirees, and those who are too incapacitated to make a productive contribution, to perform any job in the economy. The total of their incomes is the supply of money for the economy. It is because all money enters the economy in the form of incomes to potential consumers that I refer to this economic system, this particular form of a democratically capitalistic economy, as the demand economy. The democratically distributed income is paid by a monetary agency. That agency has no discretionary power whatsoever; it is a purely administrative body, the 'paymaster' for those earning democratically distributed income. Beyond that, this economy works the way capitalism is supposed to work; all other outcomes get decided by the workings of free markets.
The general idea of the demand economy is to keep money flowing, not to create 'stocks and flows,' as is the case in undemocratic capitalism. Money goes first to potential consumers, in the form of incomes to capital employees, gets transferred to businesses via purchases of goods and services, gets transferred to government via what I'll call the "business transfer," and returns to the monetary agency via what I'll call the "government transfer." I want to emphasize, though, that the business transfer isn't a tax because it isn't generated by affixing a charge to any good or service or by taking some percentage 'off the top' of income. Rather, it comes from the money—if any—left in the account of each business at the end of the relevant period—probably each quarter. (As will be seen, the economy is designed such that once money has entered the account of any business the only place it can go—until the business transfer comes due—is into the account of another business, so that all money paid any business would have to be in the account of some business at all times.) The government transfer isn't a tax either; it's nothing more than a mechanism to complete the circulation of money in the demand economy. (I'll have more to say on these transfers in due course).
As good a way as any to present this model is to start with the various categories of employment in it:
· capital employees (which can also include, as an option, employment in the home—see below)
· singularly self-employed individuals (neither the employee nor the employer of any other person)
· partnerships (possibly two kinds, actually, "limited business partnerships" and, as an option, "full business partnerships")
· employees of "contributory organizations.”
Capital employees are all the people employed in businesses and government (in the latter case, whether elected, appointed, or otherwise hired). They are all paid the democratically distributed income, regardless of the position they hold. (The actual amount of that income is taken up below.) If one is the owner of a business, however, one earns one income for being the owner and can earn another for working in it, say, as the manager—and can hire any number of assistant managers (so that, in practice, every owner of any business receives two incomes). One can own any number of businesses (though one can receive an income as the manager of only one—it's supposed to be pay for a full-time job, after all). One can also be a joint-owner of a business with any number of other people and receive a share (negotiated among the owners) of the owner's income. It is also possible to earn a prorated share of an income for part-time employment as a capital employee, and to have as many as two full-time jobs as a capital employee. As I've mentioned, retired people and people who are too incapacitated to work (for whatever period of time) also are paid the democratically distributed income. One available option would be to pay one or the other parent in a household with at least one child to work in the home and be paid as a capital employee. (All those who have ever cried "Family values!" must at this point pledge allegiance to this idea.)
Singularly self-employed people are, as was noted, neither the employee nor the employer of any other person. They are limited to selling their goods and services to other individuals or contributory organizations; they are not allowed to sell to businesses or government. They can, however, hire businesses and other singularly self-employed people in the process of producing and distributing whatever commodities they produce. It's also possible to work as a singularly self-employed person within the framework of a business. Pay that depends strictly on tips or commissions from sales comes to mind. For that matter, one can be in a situation in which one works within a business’s space yet is paid by one's clients or patients, and one pays rent. A doctor or lawyer or hairdresser ,as examples, could be in such a position as that.
Rent is a legitimate source of income in the demand economy. Space belonging to any individual or business can be rented to any individual, as living space or work space or a combination of the two. Individuals can only rent space to other individuals, not to businesses or government. Of course, things other than space can be rented, as well; the same set of rules applies. Rent is not distinguished from any other form of income; it is income to individuals or revenue to businesses, the same as income or revenue from any other source. By the way, selling property is also perfectly legitimate, subject to the ubiquitous restriction between individuals and capital enterprises (businesses/government).
In limited business partnerships the members decide how the revenues they earn are to be distributed among themselves. For limited business partnerships the opportunities and the restrictions are the same as those for singularly self-employed individuals. They are best thought of as a group of self-employed individuals. Opting for the possibility of having full business partnerships changes many things in the demand economy, and for that reason will be taken up below.
Contributory organizations get their name, not from what they do, but how they are funded. They must rely on contributions from individuals to fund all of their costs, including labor costs. People working in contributory organizations who are not volunteers are paid out of the money contributed to it. Limiting the maximum income an employee of a contributory organization can make to the amount of the democratically distributed income might be a reasonable thing to do. There's no need for any kind of charitable organizations in the demand economy, but churches still exist, and they are contributory organizations. Funding them in this way saves the community from having to determine through the legal system what is or isn't a legitimate church: any contributory organization that can garner sufficient contributions from individuals to sustain itself can exist, whatever it calls itself. Whether such organizations should be subject to the business transfer is another option in the demand economy. Eschewing that option would allow such organizations to retain for future use all contributions not currently spent.
It can be seen that remuneration in the demand economy is governed by one rule: No money from any entity which has capital employees can end up in the hand of any individual, directly or indirectly, for any reason whatsoever. That limits the opportunities for fraud and keeps the money circulating appropriately. Once money has been transferred to a business with capital employees via the purchase of some commodity by an individual (or household) or limited business partnership or contributory organization, it can only circulate among businesses until it is transferred to government via the business transfer. (Exports/imports will be taken up below.)
Other than the categories of employment, the other part of the basic structure of the demand economy is the monetary agency. It would replace all purely financial institutions, such as banks, finance corporations, credit unions, etc. It would have branches, just like banks do at present. The branches would be organized around the various categories of employment: businesses would have a set of branches, capital employees would have their own branches, singularly self-employed/members of limited business partnerships their own branches, etc. That would make guarding against fraud much easier than it would be if all branches of the monetary agency handled all kinds of accounts.
I can imagine that some readers are reeling in horror at the very idea of an economic system in which there is some agency outside the domestic economy that would be involved in the domestic economy of every nation in the system. If one can sufficiently recover to continue reading, though, I think I can convince most people of the cogency of such a system.
In the first place, the monetary agency mustn't be confused with an international government. In fact, nations that were members of this economic system would have more liberty vis-à-vis one another than at present. For instance, every member-nation could pursue its own environmental policy without regard for any other nation (because there would be no incentive to have any environmental policy other than having the physical environment be as clean and healthy as possible). For another thing, I can't state too strongly that the monetary agency has no discretionary power whatsoever. There is no way it can do anything but pay the appropriate incomes to the capital employees of the nations in the system. It has no standing to get involved in any manner in the domestic concerns of any nation. It cannot influence in any way any domestic policy. Besides, nations would be free to join the system and leave it as they saw fit. Also, the various options available within the context of the system, such as paying one parent in each household with children as a capital employee, or whether to allow full business partnerships to exist, would be the sole discretion of the domestic political system of individual nations in the system. Furthermore, each nation would police the employees of the monetary agency and the accounts within the various branches of the agency within its borders. Finally, while people in the so-called
All accounts in all branches of the monetary agency would be demand deposits; no interest would be paid on any account (more on interest in the demand economy below). Capital employees would receive their income payments at fixed intervals via direct deposit. They would then use checks, debit cards, or cash they have withdrawn to purchase commodities or make contributions to contributory organizations. The demand economy certainly offers the possibility of going to a cash-free economy, but, personally, I think the liberty associated with cash far outweighs any costs associated with it. In all other accounts withdrawals would have the same possible forms, but deposits would be made as revenue allowed and the individual or business or organization wanted/needed. The money for paying capital employees would be 'printed' as needed. That, too, may shock some readers, but it makes money no more abstract than it is in our economy at present (more on that in Chapter Six).
As the business transfer and government transfer straddle the divide between structure and functioning, I'll discuss them next. The business transfer, as mentioned, is the means of funding government in the demand economy. The amount of the transfer is set, once and for all time (after, perhaps, a period of adjustment to determine its optimum level), as some percentage of the money in the account of every business at the end of the relevant period (the quarter being the period we'll use for present purposes). As I’ve mentioned, since any money which has reached the account of one or another business has no place it can go except to another business, all revenues collected by any business during the period must be in the account of some business somewhere in the economy. (Again, we’re excluding, for now, exports and imports, which will be considered later.) To reiterate, government can only make purchases from businesses, not from individuals. How money gets divided among the various levels of government need not detain us. Also, while the precise functions of government are to some extent irrelevant to the present discussion, it may be noted that there is no need for welfare, Medicare, Medicaid, Social Security, or any other kind of transfer program, nor is there any form of fiscal policy, in the sense of managing the economy; government simply collects some percentage of whatever is in the accounts of businesses and purchases whatever goods and services it requires to effect choices for the community as a whole, as its part in the functioning of the political process. The business transfer would be set as high as possible, though, to fund government as fully as possible, while leaving businesses enough money to tide them over from one quarter to the next. This is one of those places where our familiar patterns of thought have to be adjusted in thinking about the demand economy. Funding government is a good thing and takes no money whatsoever out of anyone's pocket. At the same time, all we want or need for any business is for it to survive; the less money left to it while accomplishing that the better. This isn't being 'anti-business,' it's just the way of things in the demand economy.
The government transfer, as I've said, completes the circulation of money in the demand economy. It's paid by government to the monetary agency upon government's collecting the current business transfer. It is an absolute amount, not a percentage: It must equal the amount of 'new' money that entered the economy in the quarter (though a lag of one quarter may be necessary to establish what it should be). New money is the total amount of money collected by businesses via the purchases of goods and services from them by individuals, households, limited business partnerships, and contributory organizations during the quarter (once again leaving aside, for now, exports/imports). Note that purchases by government don't count as new money.
We now have sufficient information to get an overall picture of the operation of the demand economy (except for exports/imports). The following chart demonstrates the operation of the demand economy for one year. It shows the purchases of goods and services of the private (Priv.) and public (Govt.) sectors from all businesses, the business transfer (Bus. Tr.) and government transfer (Gov. Tr.), and the amount of money left in the accounts of businesses after the previous business transfer, the residual (Res.). It assumes that the democratically distributed income for each quarter equals two trillion dollars (so that all figures in it are in trillions); that all of it is used to purchase goods and services during each quarter; that all available government funds are also used to purchase goods and services each quarter; and that the business transfer is set at 80%.
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The Operation of the Demand Economy for 4 Quarters | ||||||
Qtr. | Priv. | Govt. | Res. | Sub- | Bus. | Govt |
1 | $2..0 | $1.2 | $0.8 | $4.0 | $3.2 | $2..0 |
2 | 2.0 | 1.2 | 0.8 | 4.0 | 3.2 | 2.0 |
3 | 2.0 | 1.2 | 0.8 | 4.0 | 3.2 | 2.0 |
4 | 2.0 | 1.2 | 0.8 | 4.0 | 3.2 | 2.0 |
(x 1,000,000,000,000)
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While the actual income earned by capital employees will be taken up below, the numbers in the chart represent a reasonable approximation of the money we would be talking about in the
Of course, the demand economy would never operate quite that regularly if it were implemented in the real world. The most important point, however, is that it would tend toward equilibrium, which is what we want of a macro-economic model. That makes this a good place to elaborate a bit on the stability of the demand economy, especially in comparison with undemocratic capitalism.
Our present economy is held together much like a star: There are always certain forces pressing for its expansion, and other forces seeking to make it contract. In stars the outcome of that process is linear and predictable: They will remain in equilibrium for a time, then begin to contract, and then either continue to contract 'peacefully' to a certain point, at which they remain while slowly growing cooler, or undergo a more massive ('supernova') or less massive ('nova') explosion, depending on how much mass the star had initially. In the chaos of the undemocratic capitalistic economy, one or the other of those countervailing forces is always stronger than the other. It is impossible to predict definitively at any time which will prevail, or to what degree, or for how long.
This instability is the result of a situation in which all of the variables that determine the performance of the economy are interdependent. That state of affairs is the definition of a chaotic system. The weather is a prime example of a chaotic system. Each ingredient in the mix affects and is affected in turn by all others. Add to such a mixture the unpredictability of human beings in their responses to the real and perceived state (and expected future state) of the economy in general and one's own affairs in particular, and one has a system more unpredictable than the weather.
In the demand economy, on the other hand, there is one factor, the money supply, to which all the other variables in the economy must respond. The money supply is determined only by the number of capital employees (and their ages, if age is used as a discriminator in the distribution of the democratically distributed income—see below). That, plus the absence of involuntary unemployment, means that the economy would be as stable as the nickel-and-iron core of planet Earth.
We can now include imports and exports in this model of the demand economy. In considering them it turns out that the demand economy as a system must be closed (though, see below). That is, there can be no imports from or exports to any nation outside the system. This implies that the system must include more than one nation, unless one country could and would be self-sufficient. For that matter, let's assume that all nations of the world are members of the system. If it were otherwise, and trade were allowed between nations within this economic system and those without it, two possibilities would arise. If the demand economy had a net trade deficit vis-à-vis the rest of the global economy there would be a flow of money into the global economy, causing, if it continued, global inflation. At the same time, this would mean that money would be 'leaking' from the domestic economies of those nations in the demand economy with a trade deficit with the nations outside the demand economy before government in those nations in the demand economy got funded, leaving those governments under funded. Alternatively, if the demand economy had a (large enough) net trade surplus, it would suck the life out of those nations that had a trade deficit with the nations in the demand economy, as that money would be captured by the monetary agency of the demand economy and could never circulate back to them, directly or indirectly. (It might be possible to rig some international monetary device for forestalling these effects, but I won't attempt that here.)
So, for now I'll assume that the demand economy is a closed system, but includes every nation in the world. If any nation within the system has a net trade deficit, the amount of money collected by its government is less than it would have been in the absence of exports/imports. At the same time, however, some other nation must have a trade surplus, its government thereby collecting more than it would have collected in the absence of exports/imports. The government of any nation which has suffered a trade deficit, and therefore collected less via the business transfer than it would have in the absence of exports/imports, receives a credit from the monetary agency to make up the difference. Nations within the system with a surplus of funds in the government’s account (compared to what that amount would be without exports/imports) automatically remit that money to the monetary agency, since “new money” is the amount of money entering the accounts of businesses in the domestic economy, excluding purchases of goods and services by government, which would include (positive) net exports. With the aforementioned credit in place, then, the system is kept in financial balance, and the governments of all nations in the system are fully funded.
While the actual process of implementing the demand economy is in a sense another topic, it’s worth noting here that the demand economy could be and, presumably would be, implemented incrementally. It would most likely be adopted first by the nations at the bottom of the economic heap. To the extent that occurred, it would be tested by people with nothing to lose. More to the point of the above discussion, it would not be necessary to close the demand economy to trade with nations outside the system for some time, as the global economy could absorb a good deal of money from the bottom without triggering global inflation. While it is true that allowing such trade would mean there would be less money available to the governments of those poor nations than would otherwise be the case in the demand economy, on the whole those peoples would still be vastly better off than they are at present. The people in those nations would immediately become viable consumers of the products of the more developed nations, and by the time such trade caused global inflation and the system had to be closed, it would have proved its viability. At that point there would be no valid reason for any nation to remain outside the system.
Now we can consider how much the capital employees should actually be paid. Given that this is (ultimately) a closed system; that capital employees' incomes form the money supply for the economy; that the money supply begins to circulate (beyond the accounts of individuals, keeping in mind that it can be diverted through singularly self-employed people, and individuals in limited business partnerships and contributory organizations) via purchases of goods and services from businesses; and that, once set, the amount paid capital employees would not change, if the amount of the incomes paid to them were the same for every nation in the system it could be set at literally any amount, and prices would adjust (eventually) accordingly. Capital employees could be paid a million dollars annually and a loaf of bread would be a hundred dollars or something, or they could be paid a few thousand dollars a year and a loaf of bread might cost a few pennies. In thinking about applying this economic model to the real world, however, other considerations must be taken into account.
Before I go any further, a word or two on the general topic of incentives is in order. The logic of the demand economy presumes that in the absence of monetary incentives other incentives would become all the more important to people. Especially, the social status associated with the various positions in the economic matrix would be heightened as a source of motivation. There would be positions available, such as sales, for those who really are motivated by money, and, again, there’s no limit on how much money anyone might make. Keep in mind, too, that one could own any number of businesses. Think about a chain of restaurants. Say one opened a restaurant with a new concept that went over really well, so one decided to expand it into a chain. One might offer people part of the owner's income to become managers of subsequent restaurants in the chain (so they would earn, say, one-and-a-half incomes.) In this example, for every 10 locations one opened in one's chain one would make five additional incomes (on top of the two one earned for being the owner/'manager' of the original place). Also, though some changes in the process of remuneration in the areas of art and entertainment would occur, they actually would be to the benefit of the artists/entertainers, so one could still get rich as a writer or performer. For the bulk of us, though, the equality of remuneration among capital employees would encourage us to seek employment at something we genuinely liked doing, something that offered rewards for us in the doing of it; in those circumstances there is less need for monetary motivation. Added incentive for doing a good job would inhere in the simple truth that increases in output per unit of (non-labor) input would lead to increases in the standard of living for everyone: The demand economy does not require altruism, but it does reward increases in efficiency. Throughout the economy there would be an incentive to press forward with robotics to perform tasks of unrelieved drudgery, as finding people to work such jobs in the demand economy would become more difficult over time. The option of allowing for the existence of full business partnerships would provide for more traditional incentives associated with undemocratic capitalism in the demand economy, but consideration of that option will have to wait a bit longer.
It would be possible to pay capital employees different salaries. Recall that a democratic distribution is one which is equally available to all, but for objective restrictions, universally applied. It might be theoretically possible to determine objectively what each position in the economy should be paid, based on the total income available and all the positions in the economy upon conversion to the demand economy, but that would be really difficult. There's a group of economists who have worked out the average pay for each position in the economy of the
The demand economy could be initialized by setting the capital employees' incomes for each nation that agreed to establish the system at the amount of the per capita income of working-age people (say, 18 and up) of each of those nations prior to conversion to the demand economy. That means the democratically distributed income would be different in different countries at the start. Based on that scenario, if we were to convert to the demand economy today the democratically distributed income in the
At any rate, the nation in the system with the highest per capita income would become the 'target' for the other nations within the system. Following a period of adjustment, the nations with a per capita income less than that for the system as a whole would raise their incomes to that level. This would have the effect of raising the per capita income for the system as a whole, so that, following a period of adjustment, those which then had a per capita income below that of the system as a whole would raise their capital employees' incomes to the new per capita figure. As this process continued, more and more nations in the system would be 'caught' and their capital employees' incomes lifted by the 'rising tide' until only the target nation had a higher per capita income than the other nations in the system. At that point all other nations in the system would raise their incomes to that level. By the time that process had worked itself out, other nations would presumably have joined the economic system. The same process would be used for every nation that joined, until, perhaps, every nation in the world had opted to join the system.
At this point the discussion has gotten well into the functioning of the demand economy. In continuing with that topic, I want to look at four areas: employment, prices, environmental sustainability, and capital formation. Other than incomes, those are perhaps the most important facets of the functioning of any economy.
By now I hope it is apparent why there would be no involuntary unemployment in the demand economy. Neither businesses nor government, as capital entities, with capital employees, would have a labor cost. Theoretically, then, one business could hire an infinite number of people. On the other hand, there would be no incentive for any business to hire more people than were needed. To do so could be fraudulent. At the same time, people could and presumably, from time to time, would get fired from their jobs. Still, government could serve as an employer of last resort, and a temporary refuge for anyone who did lose a job or for some other reason was in a period of transition. People could be hired to pick up trash on the side of the road, if nothing else. There could be a mandatory service corps to which every citizen would owe one or two years of service, to be served upon the completion of high school (or, perhaps, for those at least sixteen, upon quitting or being expelled from school)—though the very best and brightest students might be exempted from it. This service corps would provide a pool of labor for so-called dirty work, such as collecting garbage or serving in the military. (As a veteran I may put those next to each other.) Otherwise, following one's service, everyone would be perfectly free to pursue any career one might choose.
Whether there was a public service corps or not, the demand economy, like every economy, would require shift work, and some incentive must be provided for that. This could be accomplished by establishing shifts of nine hours (with two hours of break time), eight hours (with ninety minutes of break time), and seven hours (with one hour of break time) for the 'day' shift, 'swing' shift, and 'graveyard' shift, respectively. The 'regular' work week would be shortened to four days and the weekend shift would be three days. All of these positions would be considered working full time, and (among capital employees) anyone filling one of them would receive a full capital employee's income. The hours of the day shift would become the work week for all regular full-time employees, so that most people would work a four-day week. (By the way, if people working a regular work week were allowed to alternate, working Monday through Thursday one week and Tuesday through Friday the next, every other weekend would be a four-day weekend for them.)
The great danger to the demand economy would be inflation, as most people, as capital employees, would be on a fixed income. If inflation did occur and the amount of the democratically distributed income were raised to keep up with it, an unending inflationary spiral would be born. Fortunately, there is much in the demand economy that would work against inflation.
Simply put, there would be no one in the entire economy with the motive, means, and opportunity to raise prices (without full business partnerships in it—which I'll discuss yet). Even the owner of a business would gain nothing by raising output prices. Singularly self-employed people and limited business partnerships would be price-takers. That is, they would be powerless to influence the output prices of their goods and services, which would be set by the market. In effect, they would be in a situation of perfect competition. They would even be in competition, in some cases, at least, with businesses with no labor cost.
The absence of motive, means, and opportunity to raise prices, coupled with the truly exogenously determined money supply in the demand economy, would replace inflation with deflation, provided there were any increase at all in efficiency over time (with efficiency referring to output per unit of non-labor inputs). In the demand economy, with its guaranteed but fixed incomes for capital employees, that would be a good thing, escalating the purchasing power of those incomes over time. This would create a 'natural' interest rate for the economy that any money not spent in the present would accrue. (As it happens, all this takes us back to the debate in economics over 'neutral money' that reached its peak in the first third of the last century, prior to the Great Depression and the publication of John Maynard Keynes's famous book; an economy with a neutral money supply is one in which money serves to facilitate the production ands consumption of goods and services, but is not itself a commodity—more on all this in Chapter Six.)
Along with eliminating involuntary unemployment and poverty and establishing a fixed income that would slowly increase in value over time, the demand economy would provide hope, at least, for environmental sustainability. (Like the issue of prices, environmental sustainability would be less problematical without the presence of full business partnerships.) In large part sustainability is also attributable to the disconnect between businesses' profits and anyone's personal financial gain. For one thing, that would tend to discourage the hyper-consumerism that capitalism as it has evolved encourages, thus lessening demand for goods and services, and especially lessening the impetus toward disposability, 'planned obsolescence,' etc. Moreover, there would be no incentive to inhibit spending on environmental controls. Most importantly, while there would still be sufficient incentive for new techniques and new products for both consumers and producers, increases in the general economic well-being of a nation would not depend on increases gross output, as it does in undemocratic capitalism. Rather, like deflation, it would depend on increases in efficiency, as output per unit of non-labor inputs. Moreover, economic development as we know it, with its concomitant transformation of land from natural states or even agricultural usage to something paved or otherwise built on, would not be necessary for increasing economic well-being in presently less developed geographic areas, leaving more greeenspace in place. Along this line, it would be more feasible for people to live in more moderately sized communities as opposed to megalopolises, as incomes would be able to flow to people wherever they were living, rather than requiring people to move to where an income—or a larger income—can be had.
The last general topic in the functioning of the demand economy that I'll address is capital formation. There are two parts to capital formation, liquid capital and fixed capital, what economists call 'real investment,' that is, buildings and equipment. The latter requires the existence of the former. Liquid capital takes the form of savings, stocks, and bonds, the 'stocks' in the 'stocks and flows' of money. The concept of stocks and flows is replaced in the demand economy with a continuous flow of money which passes through the various entities within the economy like water through the gills of fish. Any purchase made by any economic entity, whether a consumer or a producer, from any other entity, which is not paid for in total at the time of purchase, is paid for over time, in installments—just like at present, except there are no purely financial entities to provide credit; rather it must be provided directly by the seller in all cases. Still, there would be huge 'stocks' of both liquid and fixed capital on hand upon conversion to the demand economy.
The liquid capital would be in the form of money. Stocks and bonds would be eliminated in the interest of keeping inflation out of the economy. The presence of stocks creates a motive to bid up the prices of commodities to increase profits and therefore the prices of stocks. The existence of bonds can create an upward pressure on the price of money itself. The elimination of stocks and bonds would be accomplished by liquidating them, exchanging them for cash, based on their value at some date as close to conversion to the demand economy as possible without the expectation of that event having affected the prices of those pieces of paper. According to Tom Walker (The Atlanta Journal-Constitution, July 3, 2003, p. F1), the total volume of bonds, public and private, in the
Borrowed money could be used for any purpose for which any other money could be used. One use for it would be to provide prospective new businesses with 'start-up' money. It could come from personal savings, personal loans, or loans from existing businesses (though the ban on having businesses' money get into the hands of individuals requires that such loans be extremely closely scrutinized). Personal loans must be repaid out of the incomes of the owner(s) of the business (which are, recall, the democratically distributed income). Loans from existing businesses are repaid out of the new business's revenues. A business's start-up fund is exempt from the business transfer (and can be established then added to over time, but any borrowed money must be used to start up a business or be returned to the lenders—it cannot be used for any other purpose under any circumstances).
One thing undemocratic capitalism must be given credit for is the rate of capital formation it achieved. Indeed, that is the very reason why the demand economy wouldn't need to sustain the rate of capital formation we have experienced in undemocratic capitalism: There is a huge stock of buildings and equipment already in place, and in the demand economy economic well-being doesn't depend on increasing it. Given the relatively lower need for fixed capital in the demand economy there would be more than sufficient resources in place for the accumulation of it.
One form of business enterprise which the demand economy could allow which I've alluded to but not yet discussed is the full business partnership. Consider that a democratic distribution of incomes at the microeconomic level, i.e. within individual business enterprises, would meet the structural requirements of democratic capitalism. We can consider an enterprise with such a distribution of incomes among all those who work in it a partnership. This means that all the members of the partnership would have to be allowed to have input as an equal regarding the distribution of remuneration within it. The two things that would have to be decided would be what proportion of the firm's revenues would be set aside for remuneration and what proportion of that would go to each position within the firm (implying every member of the partnership would have to be privy to all of the firm's financial information—which should be public knowledge in the demand economy anyway). It stands to reason that, to attract employees, the minimum income would have to be something very close to the democratically distributed income. In fact, the most likely scenario in the demand economy would be for every member of every partnership to be paid an amount equal to the democratically distributed income as a base salary, with periodic bonuses, which would presumably be larger for those higher up the 'food chain,' probably corresponding with the period of the business transfer. All of this implies that an agreement on such partnerships would have to cover, as well, the issues related to hiring, promotions, lay-offs, firing, etc. So far, all of this would apply to both limited business partnerships and full business partnerships.
What distinguishes a full business partnership from a limited business partnership is that the former would be allowed to sell their goods and services to businesses and government. Allowing these full business partnerships to exist would provide a means of making democratic capitalism look and feel much more like undemocratic capitalism. The more revenue the firm earned, the more every person working there would make, and there could be rather large differences in the incomes of those with the smallest and those with the largest bonuses, both within individual partnerships and from one to another of them.
Allowing these partnerships to sell to businesses and government would, however, break the seal between the incomes of individuals and the revenues of businesses. It would therefore require that everyone who was employed in a full business partnership pay the business transfer. In fact, they would have to pay a business transfer of 100% of the money left in their accounts at the end of the relevant period (or, perhaps, any amount in excess of, say, 10% of the annual salary for a capital employee). Remember, though, that the business transfer only applies to money in the account when the transfer is due: The object, once again, is to keep the money circulating.
The existence of full business partnerships raises questions regarding the other categories of employment in the demand economy. Such questions arise because money is able to 'leak' from the business sector into the accounts of all other individuals through the members of full business partnerships. For starters, the rationale for restricting singularly self-employed people and members of limited business partnerships from selling to businesses and government would be eliminated. Hence, limited business partnerships would be eliminated altogether, and singularly self-employed individuals would be free to sell to businesses and government.
Breaking the seal between businesses and government, on the one hand, and other economic entities on the other suggests, further, that everyone would have to pay the business transfer. Regarding singularly self-employed people, who are not assured of a regular income, this poses a particular problem. Their incomes would be too inconsistent for them to live on if they had to transfer 100%—or even 90%—of all money in their accounts at the end of each quarter. Perhaps the limit on transfer-exempt money in the accounts of singularly self-employed people could be set higher—say, at a full year's income for a capital employee.
All government employees would still earn the democratically distributed income. Also, there undoubtedly would still be businesses with all employees earning the democratically distributed income (as not all businesses would be able to generate sufficient revenue to pay employees enough to be full business partnerships—the retail and food service sectors come to mind). Moreover, retirees and incapacitated people would still receive the democratically distributed income, and the home-employment option would still be possible. (The total of their incomes would still be the money supply for the economy.) Given the certainty of their incomes, all these people would pay a 100% business transfer on all money in their accounts at the end of the relevant period.
Finally, the existence of full business partnerships could mean eliminating the ban on contributory organizations' receiving contributions from businesses (though I would definitely vote against that; it would create way too much temptation for fraud).
Someone who read this chapter chastised me for clouding the issue with the option of full business partnerships. I am compelled to include it, however, because this is a book about justice first of all, and the demand economy with full business partnerships would be a just economy. Such an economy would still have an absence of involuntary unemployment and poverty, but inflation would be more of a threat in the demand economy with full business partnerships than it would be in the demand economy without them. It would come down to a question of whether the democratically distributed income as the money supply would still create deflation with the incentive for raising prices that the existence of full business partnerships would create. In the end, the critical factor would be how much of the production of goods and services would be undertaken in them. For me, the uncertainty the existence of full business partnerships would create would be sufficient reason to eschew them.
With that, my presentation of the basic model of the demand economy is completed. The same as the emergence of political democracy in the Modern era represented an attempt to organize, rationally, the political process in order to achieve particular ends for the community, centering on the issue of justice, I have presented here the basic structure and some of the most obvious functioning of an economy organized on the basis of the democratic principle. As an integrated global economy already exists, the community that a democratically organized economy must (eventually) entail would seem to be the community of all human beings on the planet (though nations would always be free to join or leave the system). Among the ends that this economic system would accomplish for its member nations (however extensive it might be at any time) would be the elimination of involuntary unemployment, due to the absence of labor costs facing government and capital businesses, and (therefore) poverty, and a chance, at least, for environmental sustainability, as increases in economic well-being would depend on increases in efficiency in the of employment of non-labor inputs, not on increases in gross output. At the same time, there would be no limit on how much money anyone could make and no taxes whatsoever. All of this would increase personal liberty and enhance political democracy, without threatening private property. No one would have taken from them anything they had acquired previously. While I haven't addressed any of the immense technical challenges that organizing the economy on the basis of the democratic principle would obviously entail, the demand economy certainly offers tremendous possibilities for a world very much in need of a new way of looking at some old problems. The fact that we have only recently acquired the technical (computer) prowess to be able to take this approach to the economy illustrates all the more strongly, to my mind, how it represents the path of progress for humanity. As far as I'm concerned, though, it is the justness of the demand economy, as a democratically capitalistic economic system, that is most compelling. Therefore I'll turn my attention to the issue of justice for the next several chapters, then come back to economics, to expand on some of the issues raised in presenting this sketch of this economic model.