28 Jul

Free Market Economics vs. Capitalism

Free market economics is about competition between businesses, and it operates under the assumptions of a closed system in which wealth can be redistributed, but the total wealth must remain constant. Capitalism is the contrary idea that the economy is an open system in which wealth can be infused, in order to create a net growth for the economy. The wealth infusion is carried out by the wealthy using a business model that is stripped of risks, and the lender is certain to gain wealth over time, making the rich get richer and the poor poorer. This post discusses how free markets are different from capitalism; in the former, wealth is constant although it can be redistributed by competition, but in the latter an illusion of growth through borrowing is perpetuated to surreptitiously take wealth from the borrower. The post also discusses the Vedic economic system and how it reconciles economic growth with altruism, contrary to the modern economic system.

The Nature of Closed Systems

Consider a predator-prey ecosystem comprised of lions and deer. If some lions develop a larger appetite but the deer do not change their rate of reproduction, then as the lions eat more, the jackals may have a problem finding enough food. The jackals might then eat many insects, which would then reduce the pollination in the plants, thus decreasing plant population, which then reduces the population of the herbivores, which then impacts the food supply for lions. Ultimately, as the food of the lions decreases, their population must also reduce.

Conversely, if the lions start eating less deer, then it will cause the deer population to increase, and jackals may suddenly find an abundant supply of deer which was previously not seen and they will now replace the lions as the primary carnivores. However, now we will find an increase in the insect population that the jackals were previously consuming, which then pollinates the plants more, thus increasing the food for the deer and thereby the deer population, and ultimately the quantity of food available for the lions, thereby increasing lion population.

The moral of the story is that if the lions eat less deer, then there can be more lions, keeping the total consumption and production constant. Conversely, if the lions eat more deer, then the total number of lions must reduce, while the total consumption and production remains constant. This is a peculiar property of closed systems in which the total energy remains constant, although the energy can be redistributed among the producers and the consumers differently.

The Stability of Markets

This stability is a fundamental premise underlying the study of market economics which supposes that the total production and consumption in a market remains stable, although it can be redistributed. On one hand, therefore, we can assume market determinism because the patterns of consumption and production are stable. On the other hand, we must always allow for an instability in the market as the production and consumption shift to different actors.

Assume for the moment that I’m addicted to alcohol consumption, but I make a successful attempt at quitting alcohol. My quitting alcohol, however, doesn’t stop the producers from continuing their alcohol production. Therefore, when I stop consuming, there is a small amount of surplus alcohol in the market, which makes it easier to obtain the alcohol.

Typically, as the alcohol inventory builds up, the providers or resellers will slash prices, prompting others who desire to drink alcohol to increase their consumption, which compensates for my quitting. As time passes, and the demand reaches its original levels, the prices go back to where they were before. In effect, after a short blip, the system returns to its original state such that the same amount of alcohol is produced, although consumed by one less person.

If a large number of people quit at once, the prices will drop suddenly but the production of alcohol would not change. In fact, in most cases, producers compensate for their lower margins by producing higher volumes and pushing more product into the market to crash the prices and gain market share. Thus, a competition arises and those who can produce more efficiently take the market share from those who are unable to produce the product as efficiently.

Owing to these factors, it is now standard practice to think that the market of demand and supply is stable, but the producers and consumers can be different. We are able to successfully “impersonalize” economics by removing the actors, while just studying the transactions. Thus, all industries “size” the market—the total consumption—before one starts production. The belief is that the market size is independent of the individual produces and consumers. Even if one person changes their habits, there is sufficient demand to shift from one consumer to another. Businesses relying on such market trends care little about individual consumers.

Competitive Dynamics in the Marketplace

Under the veneer of market stability is the instability arising from market competition in which actors try to grab a greater share of the production or consumption from other actors. If the production by one actor increases, it must cause one of the following three outcomes: (1) the existing producers retaliate by slashing prices, causing the new producer to go out of business, returning the system back to its original state, (2) the increased production causes a fall in prices, causing the smaller producers to go out of the production and dividing the share of the bigger producers, settling the system into a new state with realignment, or (3) an oscillation in the system is created where the share of production moves from one actor to another.

All these alternatives assume that the demand remains constant during this redistribution, although there could be similar reversals, realignments, or oscillations in the consumptions of different consumers too. So long as the demand is constant, and there is ability in the system to produce, the economic system remains stable as a whole, although within that system there can be continuous competitive activity to grab the share of production or consumption.

We commonly call this competitive activity ‘market driven economics’ in which producers and consumers are free to grab the share from each other keeping the total size of the market constant. Economists try to measure the size of the market and call it Gross Domestic Product or GDP, which signifies the total value of all the transactions that occur in a system.

Flaws in the Concept of Economic Growth

The GDP increases as the total value of the transactions grows, and every economic system tries to maximize their GDP—indicating an increase in production and consumption. As we have seen above, a closed system cannot grow by itself; it can only redistribute production and consumption among the actors. Then how can we ever think of growing the GDP?

This is where economics supposes that the economic system is not closed but rather open. While you can only redistribute energy in a closed system, you can infuse more energy into an open system. It is supposed that this infusion can be achieved if we inject capital into the system. The premise is that by injecting capital into the system we can increase the GDP.

One school of thought claims that if the producers had more capital at hand, then they will produce more, but the problem is that even if the producers do produce more, the consumers still don’t have the extra capital, and they cannot consume the production. Therefore, giving more capital to the producers does stimulate the production but it doesn’t increase the GDP because the consumers don’t have the money to buy the products. Giving more capital to the producers is called Supply-Side Economics because it tries to increase the GDP by stimulating the supply.

The opposite approach to the GDP increase says that instead of stimulating the supply, we must stimulate the demand, and this approach is therefore called Demand-Side Economics because it tries to dole out capital to the consumers, so that they can start spending, thereby raising the demand, hoping that the producers will then respond to the demand with greater production. Unfortunately, higher demand itself doesn’t mean higher GDP, because the producers don’t have the capital at hand to increase their production—e.g. more equipment and factories.

The Outcomes of Capital Infusion

The GDP can increase only when consumers and producers simultaneously have disposable capital which generally turns out to be false because typically only those who have the capital can obtain more capital since they have the capacity to return that capital. Those who lack capital generally have a harder time finding the capital because the capital infuser considers them a risky borrower and hence not a prudent investment.

Furthermore, even if both consumers and producers have disposable capital, there is no guarantee that both consumers and producers have an equal amount of spending and investment in the same commodity. For example, if a producer borrows capital to create new kinds of beds but the consumers want to spend their spare capital on curtains, then both demand and supply side of the equation would be frustrated. If the infused capital invigorates different commodities on supply and demand sides, the outcome of the infusion would be uncertain. Since there is no way to guarantee that the capital is invested by both consumers and producers in the same commodities the outcomes are always uncertain. When the curtain consumer wants to spend their capital but there isn’t additional supply of curtains (because the producers are investing in beds) it leads to price rise for curtains, which then appears as growth in GDP although no real growth is involved. Likewise, the bed producers lose their capital because the consumers don’t want beds. Ultimately we see a growth in GDP due to increased curtain prices and a loss in capital due to bed investment. It makes people think that there is growth in GDP although if we look at the economy holistically there is a net loss in capital due to the infusion and yet the curtain prices have gone up, which means you now require more capital to acquire curtains. Thus, on one hand, capital is being lost and on the other more capital is required.

Also, having more capital at hand doesn’t necessarily mean increased spending; people could just decide to save all the capital for the rainy day, keeping the GDP unchanged. Those who save the capital now obtain a lesser interest on their saving because there is abundant supply of capital which forces a drop in interest rates. On the whole, the return on the capital is lost, which means that ultimately some capital has been lost, because the return on the capital would be higher if it were invested in a genuine business.

Finally, as you infuse more capital, there may also be capital flight from one system to another. After all, the system is now open which means that capital can both enter and exit. Thus, as capital is being infused at one end, it could be leaking at the other end, entering a different system, where the same kinds of possibilities noted above apply.

The Pretentiousness of Economic Growth

Given the tremendous uncertainties and adverse consequences of capital infusion, it is surprising that lending and borrowing money has become the de facto process for stimulating growth. It is impossible to explain this trend except for recognizing that those who already have substantial capital encourage others to borrow by advertising the hope of economic prosperity. If the borrower is successful in returning the loan, the lender gains from the interest on the loan. If the borrower fails in returning the loan, the lender grabs the collateral assets backing the loan, extracting a bigger return on investment.

For example, in the housing bubble, some people successfully paid their loans with interest, giving profits to the banks. However, those who failed to repay the loans, lost their houses, after they had already paid a percentage of the loan. In such cases, the bank got back the house, along with the capital that the borrower had already paid to the bank. The housing crises created a problem because the banks could not sell the houses due to a massive oversupply of the houses. But, on a somewhat smaller scale, the banks would have been the net gainers—taking interest from the diligent borrowers, and the house plus interest from the defaulting borrower.

The successful borrowers think that they are able to buy a house with a loan, but they actually pay (over time) a price far greater than the value of the house—the difference being the bank’s profit. The borrowers who default on the payments lose not just the house but also their hard earned wealth given through previous repayments. If the economic system had no inflation—e.g. the house prices were not growing—there would be no economic incentive to buy the house given these extreme risks. The borrowing therefore has to be incentivized by inflation—created easily by infusing capital.

Capital infusion creates a self-perpetuating illusion of growth, that begins in price rise, which gives the impression of quick profit, which motivates borrowing with the idea that the borrower will gain from the loan, and the net result of this borrowing is that the borrower parts with greater value than the assets they procure. The lender loses only if there is massive default on returns, but even then it obtains disproportionate control over the borrower’s assets. If the lender can maintain its power over the economic system, there is simply no scenario in which their capital would not increase over time.

The Crimes Underlying Money Lending

Every business opportunity involves a finite amount of risk; we nominally suppose that the greater the opportunity, the greater must be the risk. Money lending, however, is a business without risks. If a borrower is successful in repaying his loans, then he has returned the capital with a profit. If he fails in returning the loan, he will lose the collateral which was used to guarantee the loan; the collateral is always assessed at rates lower than its true value, which means you lose more by failing to repay. The business model of lending is designed to pass all the risk to the borrower, while the lender always reaps the rewards. This cannot constitute a legitimate business because in this activity the lending party has no risks, and they are hence bound to continually grow over time.

People generally think that stealing is a crime, because their wealth is taken directly by someone who did not previously own it. They don’t realize how borrowing is wrongdoing by which their capital is taken. In the case of borrowing you seem to be receiving money rather than giving it away. How can you be a loser if you are receiving money? That’s the complicated illusion created by “economic growth” in which a person, organization, society, or country is enticed to borrow with the prospect of growth, and no matter what you do, you give back far more value than you borrowed. You think that you are growing, but actually the wealth is being redistributed—from the borrower to the lender.

Economy should be viewed as a closed rather than open system which never grows as a whole, although there can be wealth redistribution. Therefore, if you take more, someone else will have less. There is simply no scenario of net growth. When we understand that the system is closed, then we can see that the more you borrow, the more you lose control of your life to the lender. In fact, capital infusion is the primary reason for inflation which makes even those who are not borrowing poorer just because others are borrowing. Systemic borrowing is therefore  an unmitigated social disaster.

The premise of economic growth is an illusion perpetuated by the moneyed class by telling others to borrow money. The net effect of borrowing is not growth but redistribution of wealth. Effectively, the system behaves not as an open system in which wealth is infused from the outside, but as a closed system in which the wealth is redistributed by lending.

The Problem of Growing Debt

Capitalists have sold the idea of economic growth to the whole world. They tell people how their miseries can be solved if only they borrow money. Governments all over the world are busy finding ways to borrow, and banks all over the world are busy trying to lend money. The more you borrow, the more the lender profits. As time passes, and you keep borrowing, your debt mounts to a point where all your income will be used to repay the interest on the debt. That is the point at which you have been bought by the lender; you have no freedom of choice, and you have to do exactly what the lender tells you to.

It is amazing that this simple wisdom can be easily understood by a child, but it is overlooked by societies and governments who are busy accumulating debt, losing their autonomy to lenders, and becoming their slaves where they and their future generations will be forced to work simply to repay their debts to the lender and they cannot regain their autonomy until this debt is repaid. While some people seek conspiratorial reasons for this state of affairs, I would argue that the conspiracy is far deeper than imagined thus far: it is embedded in the very theory and practice of capitalism, which foregoes the questions of economic stability and propagates the illusion of economic growth.

The Question of Equal Opportunity

I’m sure many of you may be thinking—if I don’t have the capital, and I cannot borrow the capital, then how can I grow? The short answer is this: if you don’t have capital, then work hard, earn the capital, and save it so that you can invest your capital into your development.

If one looks into the past, there was a moneyed class but there was no lending. What can the moneyed class do with their money? They will obviously keep spending their money to lead a luxurious lifestyle which means that their wealth will decline over time. To retain their wealthy status, they have to create a business, employ other people, compete with the other businesses, by which their wealth distributes to the rest of the society.

The workers—who begin by not having any money—offer their services to the businesses created by the moneyed class and gradually accumulate wealth which they can now invest in creating their own business. This is their legitimate path of upward social mobility. This is a longer path—in fact, it may involve a few generations to yield substantial upward mobility—but it is a path of social stability. You receive from your employer a fair return on your work, or you work for another fair employer. The free market system ensures that you are free to work for an employer of your choice, the moneyed class is forced to invest their money into a business in order to maintain their wealth, and this investment then creates the employment for those who do not have the money to create a business.

Free Market is Not Capitalism

We must realize that ‘free market economy’ has little to do with ‘capitalism’. The free market system only talks about redistributing the resources in a system through fair and honest competition. The capitalistic system on the other hand talks about infusing capital from a lender to a borrower in order to surreptitiously redistribute the borrower’s wealth to the lender. There can be free market economy even without capitalism. In fact, as capitalism grows, the market becomes less free because every borrower gradually loses their wealth to the lender, and the lenders become ever more powerful.

When the free market system is confused with capitalism, then the moneyed class invests not in legitimate businesses but in lending money. Whoever borrows their money falls into the illusory growth trap while the lender profits from everyone’s borrowing—whether they win or lose. By stopping borrowing, people can force the lenders to become businessmen and under the free market system their wealth will naturally distribute to the society.

Private Lenders Fuel Government Borrowing

The biggest lenders today lend to the governments who are obligated to return the borrowing by exerting taxes on the citizens. In other words, the government borrows, and the citizens pay on their government’s behalf. The citizens have no power to make the borrowing decision, but they are obligated to repay the debt acquired by the government through taxes. Unless the country and the government itself disappears, the lender is guaranteed his profitable return through taxes applied on the citizens.

Normally when citizens take a loan, they invest it into useful activities—e.g. a house, education, healthcare, leisure, security, etc. But when nations borrow money, most of it is spent in worthless activities—e.g. waging wars, destabilizing other nations, and having the loan disbursed to a few rich contractors. Thus, the citizens seldom receive the benefits of the borrowed wealth, although they receive the full burden of the loan repayment. The lender gets back their money with profits, and the preferred contractors see a significant rise in their wealth as they receive the lion’s share of the money borrowed through a loan, which the poor now have to repay through taxes. National lending is therefore a scam by which the lender and a few rich contractors steal wealth from the poor.

Recycling Stolen Wealth as Loans

If you lend some wealth to others, you have a shorter supply of wealth, and your capacity for lending is reduced until the borrower repays their debt with interest. It means that in the normal scenario, a lender will have to pause their lending unless the borrower repays.

But this never happens for national borrowing because the money provided by the lender is passed (through the government) to the favored contractors who put the money back to the same lender from whom the wealth was originally disbursed as a loan. This completes the cycle of money rotation in which the lender gives a loan to the government, which passes the wealth to the contractor, which then puts it back into the kitty of the lender.

From the lender’s perspective, even though capital was disbursed—which is yet to be officially repaid by the government—the lender has already received all the wealth back through the contractors. Thus the lender never runs out of capital because whatever he lends comes back to his coffers, enabling him to lend even more, while the debt of the governments and citizens keeps piling. The preferred contractors are therefore an essential part of this cycle because they have to put the money back to the same lender to enable the lender to perpetuate the incessant cycle of government borrowing.

The preferred contractors after receiving the bulk of the government loan, invest it into the schemes that offer loans to the citizens. Obviously, the citizens are drained from the excessive taxes, and often need to borrow capital. Most of the capital in this personal lending comes from the huge wealth amassed by the private contractors through banking fronts. The process works like a thief who steals your money and then returns it back to you as a high-interest loan. In this process, the stealing is done by the government, and the loans are fueled by the wealthy contractors through banking fronts. The people only see the banks and the government while the original lender and the contractors who ultimately profit from the government borrowing remain hidden. Thus common people never understand the cyclic flow of money and how they are being cheated.

With every iteration, the poor work hard and part with large portions of their earnings either via taxes or interests on loans—both of which end up either with the government lender or the wealthy contractors. In this scheme, the government, the lenders, and the contractors have to only ensure that the common people have enough wealth to keep the cycle of taxation and interest going because through this cycle their coffers keep growing. All the hard work of the people is drained dry by taxation and interest.

Paper Money is Used to Fuel Borrowing

If the token of wealth exchange were minted in gold and silver, then the natural scarcity of gold and silver in nature would entail a naturally short supply of currency as well. That short supply would mean that currency will always maintain its value. Since you cannot magically create currency out of nowhere (e.g. by printing paper currency) there would be no inflation. When there is no inflation, the rate of interest on a borrowing would be near zero. When the rate of interest is so low, nobody will put their money in a bank because the banker cannot return a good rate of interest, and executing a business is far more profitable. If the banks cannot acquire people’s money, then they cannot lend.

The moneylender needs the ability to pump money into the economy, which means that money must be in abundant supply and it cannot be a scarce commodity like gold or silver. By pumping money, there is inflation. With that inflation the lender can charge a higher rate of interest from the borrower, and entice the people who have the money to deposit it with him for interest. As money is deposited, more money can be pumped. This creates a self-perpetuating cycle of money rotation through which the lender profits.

Paper currencies are used to fuel lending, which leads to price rise, which enables a higher rate of interest, which entices people with money to deposit it with the lender, which then enables the lender to fuel more lending, thus resulting in cyclical price rise, higher interests, more depositing, and then more lending, by which the lender profits.

The Vedic Economic System

In the Vedic social system, there are four classes—the intellectuals, the rulers, the businessmen, and the workers. The businessmen are wealthy; they invest their wealth into a legitimate enterprise, compete with the other businessmen under the free market system, and employ the workers, thereby passing some of their wealth to others. There is simply no concept of lending money to the worker so that he can start his own business, while the lender earns interest without doing any actual work or taking any risk. 

In the Vedic system, only the businessmen pay taxes, because they are the wealthy class. There is no concept of “income tax” levied on the intellectuals, rulers, and workers. In other words, the wealthy bear the cost of government and its functions. That is all the more reason for them to not simply preserve their wealth and enjoy it, but actually invest into legitimate businesses. If they did nothing, they will gradually fall into the worker class.

Social organization therefore exerts a pressure on the wealthy too: if you want to maintain your status, you have to run a business and employ other workers, and you are required to pay taxes to the government (as opposed to others who are not). In return you receive a peaceful environment where you can compete on fair grounds. You can never reach a state of self-perpetuating wealth because as you get wealthier, you have to share a bigger burden of the state taxes, to maintain your wealth you have to employ a greater number of people, and bear the burden of running a much larger business. There are natural checks and balances in being rich that encourage you to be prosperous and yet prevent you from gaining an inordinate amount of control over society or its individuals.

The central difference in the Vedic system is the complete lack of a banking system which is used to collect other’s wealth, and then use that wealth to lend to others. The Vedic system also relies on using a scarce commodity—e.g. gold or silver—to create currency, which acts as a natural deterrent against banking the money with someone else. The government controls the economy in two ways—(1) maintaining a scarce currency to keep inflation to zero which means lending is not incentivized, and (2) exerting taxes on the wealthy so that they are incentivized into investing their wealth into a business, rather than lending.

Morality and Economic Growth

The Vedic system doesn’t mean everyone is wealthy, but it means those who are wealthy will pay for the running of the state, and they will redistribute their wealth by investing into legitimate businesses or risk decline over time. When you are wealthy, you can afford to let go of some of your wealth—and by letting go of this wealth, the rich contribute to the society and thereby accumulate good karma by which they become wealthier. In other words, the recipe for richness is not accumulating money, but giving it away.

Karma operates on value rather than money. The value of money for a poor person is high, and the value for the same money for the rich person is low. Therefore, when a rich person gives away wealth, he parts with little value, but creates greater value for the poor. This is called good karma. The return for this karma is also through value, which means that the rich person will obtain as much value as they created for the others. Since the value of wealth for a rich person is relatively lesser, a lot more money is required to attain the same value. In short, you give little money to the most needy in order to create greater value, then you receive the same value, which means far greater money for you. 

Thus, the law of karma entails that by giving away money, you grow your money, because as you create value for others, the value returns back as greater money. For a small investment, you obtain greater returns, and this entails continual growth. The Vedic model of economic growth is hinged on charity rather than accumulating wealth. In this model, we don’t measure physical assets—e.g. money—but the relative value of that asset to the person involved in the transaction. We normally call that relative value meaning of something. For a poor person, a small amount of money means a lot (relative to a richer person), and karma operates on that meaning rather than the physical asset itself. 

Economics and Moral Altruism

Since modern economy is based on materialism, where people look at the money rather than the value, it has condoned the accumulation of wealth. There is, however, a different kind of materialism in the Vedic system based on the relative value of money rather than money itself. The foundations of this economic system lie in seeing meaning as reality and the laws of nature are therefore described in relation to meanings rather than things.

The system therefore encourages charity instead of lending. It tells people that the money that you give away is not money lost, but by giving away wealth to the most needy you create a lot more wealth for yourself. Wealth therefore naturally flows from the rich to the poor, and this process is itself the method for economic growth. Thus, in the Vedic system, there is no lending; the rich will either voluntarily give away their wealth, or at the very least offer interest free loans to the most needy. There is a conflict between modern economics and altruism because economics advocates profit over charity, but in the Vedic system even the most selfish rise in society by performing the greatest charities. By understanding this system we can not only correct the evils of money lending, but also lay a firmer foundation for the idea of economic growth based on meanings.