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A
Market Economy without Capitalism
An overview of the basic concept, its
historical origins and present state of development;
Information about organisations promoting
"Free Economy" and suggestions for further reading on the topic.
Published
in: American Journal of Economics and Sociology Vol. 59, No. 4
(October,
2000), p. 609 – 622.
Money:
From the Ruler of Markets ...
In 1891 Silvio Gesell (1862-1930) a
German-born entrepreneur living in Buenos Aires published a short booklet
entitled Die Reformation im Münzwesen als
Brücke zum sozialen Staat (Currency Reform as a Bridge to the Social State), the first of a
series of pamphlets presenting a critical examination of the monetary system.
It laid the foundation for an extensive body of writing inquiring into the
causes of social problems and suggesting practical reform measures. His
experiences during an economic crisis at that time in Argentina led Gesell to a
viewpoint substantially at odds with the Marxist analysis of the social
question: the exploitation of human labour does not have its origins in the
private ownership of the means of production, but rather occurs primarily in
the sphere of distribution due to structural defects in the monetary system.
Like the ancient Greek philosopher Aristoteles, Gesell recognised money's
contradictory dual role as a medium of exchange for facilitating economic
activity on the one hand and as an instrument of power capable of dominating
the market on the other hand. The
starting point for Gesell's investigations was the following question: How could money's characteristics as a
usurious instrument of power be overcome, without eliminating its positive
qualities as a neutral medium of exchange ?
He attributed this market-dominating
power to two fundamental characteristics of conventional money:
Firstly, money as a medium of demand is
capable of being hoarded in contrast to human labor or goods and services on
the supply side of the economic equation. It can be temporarily withheld from
the market for speculative purposes without its holder being exposed to
significant losses.
Secondly, money enjoys the advantage of
superior liquidity to goods and services. In other words, it can be put into
use at almost any time or place and so enjoys a flexibility of deployment
similar to that of a joker in a card game.
These two characteristics of money give
its holders a privileged position over the suppliers of goods and services.
This is especially true for those who hold or control large amounts of money.
They can disrupt the dynamic flow of
economic activity, of purchases and sales, savings and investment. This power
enables the holders of money to demand the payment of interest as a reward for
agreeing to refrain from speculative hoarding thereby allowing money to
circulate in the economy.
This intrinsic power of money is not
dependent on its actual hoarding, but rather on its potential to disrupt economic activity which enables it to extract a tribute
in the form of interest in return for allowing the "metabolic
exchange" of goods and services in the "social organism". The
"return on capital" is accorded priority over broader economic
considerations and production becomes attuned more to the monetary interest
rate than to the real needs of human beings. Long-term positive interest rates
of interest disturb the balance of profit and loss necessary for the
decentralized self-regulation of markets. Gesell was of the opinion that this
led to a dysfunction of the social system exhibiting very complex symptoms: the
non-neutrality of interest-bearing money results in an inequitable distribution
of income which no longer reflects actual differences in productivity. This in
turn leads to a concentration of monetary as well as of non-monetary capital
and therefore to the predominance of monopolistic structures in the economy.
Since it is the holders of money who
ultimately decide whether it circulates or stands still, money can't flow
"automatically" like blood in the human body. The circulation and the
correct dosage of the monetary supply can't be brought under effective public
control; deflationary and inflationary fluctuations of the general price level
are inevitable. In the course of the business cycle when declining interest
rates cause large amounts of money to be withheld from the market until the
outlook for profitable investments improves, the result is economic stagnation
and unemployment.
...
to a Neutral Servant of Economic Activity
In order to deprive money of its power,
Gesell did not advocate recourse to measures aimed at outlawing the taking of
interest such as the canonical prohibition of medieval. On the contrary, he
envisaged structural changes in the monetary system involving the imposition of
carrying costs on the medium of exchange, thereby counteracting the tendency to
hoard and neutralising the liquidity advantage of conventional money. The
imposition of such carrying costs on liquid monetary assets - comparable to a
demurrage fee for freight containers in the field of transport economics -
would deprive money of its power to dominate the market while allowing it to
fulfil its designated function as a medium of exchange facilitating economic
activity. Counteracting disruptions in the circulation of the medium of
exchange due to speculative hoarding would allow the quantity and velocity of
the monetary supply to be periodically adjusted to match the volume of
production and the overall level of economic activity in such a way that the
purchasing power of the monetary unit could be made to possess the same
long-term stability as other weights and measures.
In his earliest works Gesell referred in
particular to "rusting bank notes" as a method for implementing an
"organic reform" of the monetary system. Money which had hitherto
been "dead foreign matter" with respect to both the social system and
the natural world, would thus be integrated into the eternal cycle of life and
death, becoming transitory and losing its characteristic of limitless
self-multiplication by means of simple and compound interest. Such a reform of
the monetary system would constitute a regulative holistic therapy; by removing
the cause of disruptions in monetary circulation Gesell envisaged that the
self-healing powers of the dysfunctional social "organism" would
gradually increase allowing it to recover from the diverse economic and
structural symptoms of crisis, ultimately reaching a state of equilibrium, in
harmony with the rest of the natural order.
In his main work, Die Natürliche Wirtschaftsordnung durch Freiland und Freigeld (The Natural Economic Order through Free and and Free Money),
published in Berlin and Bern in 1916, Gesell explained in detail how the supply
and demand of capital would be balanced in the case of uninterrupted currency
circulation so that a reduction of the real rate of interest below the
presently existing barrier of around 3-4% would become possible. Gesell used
the term "basic interest" (Urzins)
to denote this pure monetary interest rate of around 3-4% which is found to
vary little historically. It represents the tribute of the working people to
the power of money and gives rise to levels of unearned income far in excess of
that suggested by its magnitude. Gesell predicted that his proposed currency
reform would gradually cause the "basic interest" component to
disappear from the monetary loan rate leaving only a risk premium and an
administrative charge to allow lending institutions to cover their costs.
Fluctuations of the market rate of interest around a new equilibrium point
close to zero would allow a more effectively decentralised channeling of
savings into appropriate investments. Free Money (Freigeld), a medium of exchange liberated from the historical
tribute of "basic interest", would be neutral in its impact on
distribution and could no longer influence the nature and extent of production
to the disadvantage of producers and consumers. Gesell envisaged that access to
the complete proceeds of labour brought about by the elimination of "basic
interest" would enable large sections of the population to give up wage-
and salary-oriented employment and to work in a more autonomous manner in
private and cooperative business organisations.
Land:
A vital natural resource to be held in trust rather than as a tradeable
commodity and object of speculation.
Towards the end of the last century
Gesell extended his vision of socio-economic reform to include reform of the
system of land tenure. He derived inspiration in this respect from the work of
the North-American land reformer Henry George (1839-1897), author of Progress and Poverty, whose ideas about
a Single Tax on the rental value of land became known in Germany through the
activity of land reformers like Michael Flurscheim (1844-1912) and Adolf
Damaschke (1865-1935). In contrast to Damaschke, who only advocated taxing the
increase in values for the benefit of the community while retaining the
principle of private ownership of land, Gesell's reform proposals followed
those of Flurscheim who called for the transfer of land into public ownership,
compensating the former owners and thereafter leasing the land for private use
to the highest bidder. Gesell argued that as long as land remains a tradeable
commodity and an object of speculative profit, the organic connection of human
beings with the earth is disturbed. In contrast to the proponents of
nationalist or racially-oriented Blut und
Boden ideologies, Gesell rejected the association of "blood" with
"land". As a widely travelled citizen of the world he viewed the
whole earth as an integral organ of every individual. All people should be free
to travel over the surface of the earth without hinderance and settle anywhere
regardless of their place of birth, color or religion.
Economic
Equality of Women and Men
Like the Single-Tax reformers of the
Henry George school, Gesell was of the opinion that the rental revenue from the
land would enable the state to finance itself without the necessity to impose
further taxes. In attempting to trace the rightful owners of these rental
revenues in accordance with the principle of causality, he was led to the
consideration that the amount of rental revenue depends on the population
density and therefore ultimately on the willingness of women to bear and raise
children. For this reason Gesell proposed to distribute the revenues from land
rent in the form of monthly payments to compensate mothers for the work of
rearing children in proportion to the number of their childen under the age of
majority. He advocated the extension of the scheme to include mothers of
children born out of wedlock and foreign mothers living in Germany because his
intention was that all mothers should
be released from economic dependence upon working fathers and that the
relationship between the sexes ought to be based on a love freed from
considerations of power and economic dependancy. In an essay entitled Der Aufstieg des Abendlandes (The Ascent of the West), written to challenge the cultural
pessimism of Oswald Spengler's Der Untergang des Abendlandes (The Decline
of the West),Gesell expressed the hope that the human race which had been
physically, mentally and spiritually degraded under capitalism would gradually
be able to regenerate itself under a reformed economic order and experience a
new cultural renaissance.
Other
Pioneers of a Market Economy without Capitalism
Gesell's theory of a Free Economy based
on land and monetary reform may be understood a reaction both to the laissez-faire principle of classical
liberalism as well as to Marxist visions of a centrally planned economy. It
should not be thought of as a third way between
capitalism or communism in the sense of subsequent "convergence
theories" or so-called "mixed economy" models, i.e. capitalist
market economies with global state supervision, but rather as an alternative beyond hitherto realized economic
systems. In political terms it may be characterised as "a market economy
without capitalism". In this sense as he later came to realise and
acknowledge, Gesell had independently developed and extended the critique of capitalism
formulated by Pierre Joseph Proudhon (1809- 1865), the French social reformer
and contemporary of Marx who in the mid-19th century had cited the private
appropriation of land and the power of interest-bearing money as being
primarily responsible for the fact that a more egalitarian society had failed
to evolve following the demise of feudal absolutism. Proudhon condemned
privately appropriated ground-rent as robbery and denounced interest on money
as cancerous usury. These forms of unearned income based on exploitation led to
the emergence of the haute bourgeoisie as a new ruling class, which
moulded the state and church into instruments of domination over the petit bourgeoisie and the working-class.
Gesell's alternative economic model is related to the liberal socialism of the
cultural philosopher Gustav Landauer (1870-1919) who was also influenced by
Proudhon and who for his part strongly influenced Martin Buber (1878-1965).
There are intellectual parallels to the liberal socialism of the physician and
sociologist Franz Oppenheimer (1861-1943) and to the social philosophy of
Rudolf Steiner (1861-1925), the founder of the anthroposophic movement.
Free
Economy Organisations in Germany and in Switzerland during the First World War
Gesell's first co-worker, Georg
Blumenthal (1879-1929), combined proposals for land and monetary reform with
the concept of a droit naturel or
natural social order, with which Francois Quesnay (1694-1774) and his
fellow-Physiocrats had opposed feudal absolutism at the time of the French
Enlightenment. In 1909 he founded the
Physiokratische Vereinigung (Physiocratic
Association) the first formal organisation of supporters of Gesell's Free
Economy theory which drew its members from the ranks of land reformers,
individual-anarchists and syndicalists in Berlin and Hamburg. As soon as the
association's journal, Der Physiokrat (The Physiocrat), fell victim to censorship during the First World
War, Gesell moved to Switzerland, where he found supporters among the local
land reformers, educational reformers and other progressive circles. They
organised themselves into the Schweizer
Freiland-Freigeld-Bund (Swiss Free Land - Free Money - Federation). In two lectures entitled Gold oder Frieden? (Gold or Peace?) and
Freiland die eherne Forderung des Friedens (Free Land - the Essential Condition of Peace), Gesell expounded in
detail on the significance of his reform proposals as a way to social justice
and peace among the nations.
Between
the two World Wars
After the end of the First World War and
the subsequent November Revolution in Germany, Gesell's connections with Gustav
Landauer led to his short-lived appointment as People's Commissioner for
Finance in the first Bavarian Räterepublik.
Following the overthrow of the Räterepublik
he was indicted for high treason but was acquitted of all charges. Afterwards
Gesell took up residence near Berlin from where he observed and commented on
the development of the Weimar Republic in numerous tracts and pamphlets, He
suggested that by means of a graduated wealth tax of up to 75% an appropriate
contribution to the economic consequences of the war should be extracted from the large landed estates and big
business interests. At the same time he proposed to initiate the domestic
accumulation of capital by means of his land and monetary reform program in
order to enable Germany to fulfill the reparation demands of the victorious
Allied powers. He criticised what he perceived to be the disasterous errors in
the economic policies of the rapid succession of unstable governments. These
errors included the effective expropriation of large sections of the lower and
middle classes by massive inflation instead of introducing effective currency
reform, protraction of reparation payments, making Germany dependent upon an
influx of foreign capital and abandoning the stable Rentenmark in favour of the
crisis-prone gold standard.
From his earliest writings onwards Gesell
distanced himself from racist ideologies, aiming to develop an objective
critique of structural defects in the economic order free from the subjective
racial prejudice of anti-Semitic demagogues whose diatribes against so-called
"Jewish" usurers he criticised as a "colossal injustice".
Like many of his contemporaries he was greatly influenced by Darwin's Theory of
Evolution and viewed his program of reform as a means for encouraging a more
healthy evolution of human society. However, Gesell should not be classified as
a "Social Darwinist" because he believed that extremes of wealth and
poverty reflect structural defects in the economic order rather than real
differences in aptitude and productivity. Opposed to ultra-nationalist
triumphalism he advocated the promotion of mutual understanding between Germany
and its eastern and western neighbours. He called for the abandonment of
expansionist politics and the formation of
a voluntary confederation of European states to promote international
cooperation. Gesell also drew up proposals for an international post-capitalist
monetary order, advocating an open world market without capitalist monopolies,
customs frontiers, trade protectionism and colonial conquest. In contrast to
subsequently established institutions such as the International Monetary Fund
and World Bank, which act on behalf of the powerful within the existing
framework of unjust structures, or the present preparations for European
Monetary Union, Gesell called for the establishment of an International Valuta
Association, which would issue and manage a neutral international monetary unit
freely convertible into the national currency units of the member states,
operating in such a way that equitable international economic relations could
be established on the basis of global free trade.
Although the precise degree of influence
cannot be established reliably, it is interesting to note that echoes of
Gesell's ideas concerning the International Valuta Association can be found in
J.M. Keynes' original Proposals for an
International Clearing Union submitted on behalf of the British delegation
but rejected by their American counterparts at the Bretton Woods conference.
The massive inflation of the early
post-war years led to a rapid growth of interest in and support for Gesell's
reform proposals, with the membership of Free Economy organisations reaching an
estimated 15 000 persons. In 1924 a split occurred among Gesell's followers
leading to the formation of the moderate liberal (Free Economy Federation)
and the more radical individualist-anarchistic and militant-sounding Fysiokratische Kampfbund (Physiocratic Task Force). The split was
caused in part by a heated controversy which had been sparked off by Gesell's
treatise Der Abgebaute Staat, a wide-ranging polemic in favour of the
"dismantled state". Internal power struggles weakened the Free
Economy movement which failed to transform itself into a mass movement, but
made continuous efforts to canvass support among the Social Democratic Party
and the Trade Union movement as well as among the various peace, youth and
female emancipation movements which flourished in the Weimar Republic. During
the Great Depression the Freiwirtschaftsbund
addressed memoranda to all parties represented in the parliament, warning of
the terrible consequences of the deflationary policy being adopted that time,
and submitting proposals for overcoming the crisis. These memoranda generated
little or no response. As soon as the success of practical experiments with
Free Money organised by the Fysiokratische
Kampfbund, such as the reopening of a disused mine at Schwanenkirchen, began to attract public attention they were
outlawed by the German Finance Ministry under the terms of the Emergency
Decrees of the Brüning government in 1931.
A Free Economy party contested the 1932
Reichstag elections without success. After the Nazi Party's seizure of power by
the in 1933 many Free Economy supporters suppressed their misgivings about the
true character of the Nazi ideology and succumbed to the illusory hope, that
Hitler might in fact act on the earlier rhetoric of Gottfried Feder concerning
"the smashing of interest-slavery". They tried to exert influence on
leading functionaries of the Nazi Party hierarchy in the hope of bringing about
a change of course on economic matters. Despite rather dubious tactical efforts
to conform to the requirements of the new order, in the spring of 1934 the
various Free Economy organisations and publications which had not already
voluntarily disbanded were finally outlawed.
Initial misjudgements concerning the
totalitarian regime had been encouraged not only by the painful memories of
rejection by the political parties of the Weimar era, but also by uncertainty
about the most appropriate way to realize land and monetary reform. Free
Economy associations in Austria (until 1938) and Switzerland continued their
work. English, French and Spanish translations of Gesell's main work were
published. Introductory brochures were produced in a wide range of languages
including Dutch, Portuguese, Czech, Romanian and Serbo-Croat as well as
Esperanto, reflecting the work of smaller groups in England, France, the
Netherlands, Belgium, Czechoslovakia, Romania and Yugoslavia. In North and
South America, Australia and New Zealand, Free Economy associations were established
by German emigrants.
After
1945: New Beginning, Neglect and Renewal of Interest Towards the End of the
1970s
Free Economy organisations were
reestablished throughout post-war Germany. In the Soviet occupation zone they
were outlawed in 1948; the Soviet authorities regarded Gesell either as
"an apologist of the monopoly bourgeoisie" or, in the same way that
Marx had dismissed Proudhon, as "a socialist of the petit
bourgeoisie" whose aims were incompatible with "scientific
socialism". In Western Germany the majority of the surviving followers of
Gesell voted to form their own political party to contest elections because of
their negative experiences with the established political parties of the Weimar
era. They founded the Radikalsoziale
Freiheitspartei (Radical Social
Liberal Party), which received just under 1 % of the votes at the first
election to the Lower House of the German Parliament in 1949. The party's name
was later changed to the Freisoziale
Union (Free Social Union) but its
support remained at a negligible level in subsequent elections. A
Silvio-Gesell-Haus was established as a meeting center between Wuppertal and
Neviges, where seminars and conferences on Free Economy and related topics are
still held on a regular basis.
In spite of the fact that prominent
economists like Irving Fisher and John Maynard Keynes had recognized the
significance of Gesell's work in the inter-war period, the West German economic
miracle of the 1950's and 60's largely extinguished public interest in
discussion of alternative economic models. It was only towards the end of the
1970's that mass unemployment, environmental destruction and the growing
international debt crisis led to a gradual revival interest in Gesell's ideas
which had suffered almost complete oblivion. In this way it became possible to
pass the insights of the Free Economy school onto a new generation.
In Switzerland, a significant collection
of Free Economy literature is to be found in the Free Economy Library of the
National Economic Archive in Basel. In Germany the Stiftung für Reform der Geld- und Bodenordnung, a foundation
promoting the reform of the monetary and land order began to establish a German
Free Economy Library in 1983. To provide a basis for academic research into
Gesell's life and work it also commissioned an 18-volume edition of his
collected works in 1988. In addition to this, a series of secondary literature
entitled Studien zur natürlichen
Wirtschaftsordnung (Studies on a
Natural Economic Order) is under development; the first two volumes
published were a centenary review of the history of the Free Economy movement
and an edition of selected writings by Karl Walker, Gesell's most important
student. The foundation also promotes other publications relating to land and
monetary reform and in collaboration with the Sozialwissenschaftliche Gesellschaft (Social Sciences Society) publishes a quarterly periodical, Zeitschrift für Sozialökonomie,
commenting on social and economic issues. It has awarded a Karl Walker Prize
for academic papers dealing with the problems arising from the increased decoupling
of financial markets from the real economy (1988) and with proposals for
overcoming unemployment (1995). The Seminar
für freiheitliche Ordnung (Seminar
for a Liberal Order) is responsible for the issue of a series of
publications entitled Fragen der Freiheit
(Questions of Liberty). The Initiative
für eine Natürliche Wirtschaftsordnung (Initiative
for a Natural Economic Order) endeavours to promote popular awareness of
Gesell's ideas in cooperation with associated organisations in Switzerland and
Austria. An association called Christen
für gerechte Wirtschaftsordnung (Christians
for a Just Economic Order) promotes the study of land and monetary reform
theories in the light of Jewish, Christian and Islamic religious doctrines
critical of land speculation and the taking of interest. Margrit Kennedy,
Helmut Creutz and other authors have examined the contemporary relevance of
Gesell's economic model and tried to bring his ideas up to date. Of particular
importance in this respect have been he various efforts to examine the
correlation between the exponential growth of financial assets and debts and
the environmentally-destructive "growth imperative" driving the real
economy along with suggestions for overcoming the growth imperative and efforts
to combine land and monetary reform ideas with proposals for an
ecologically-based tax system. The book entitled Gerechtes Geld - Gerechte Welt (Just
Money - Just World) offers a survey of the present state of theoretical
developments. It is a compilation of essays and discussion papers examining the
socio-economic implications of the monetary order presented at a congress
commemorating the centenary of Gesell's first monetary reform publications held
in 1991 in Konstanz under the title: 100
Jahre Gedanken zu einer natürlichen Wirtschaftsordnung - Auswege aus Wachstumszwang und Schuldenkatastrophe
(100 Years of Thought related to a
Natural Economic Order - Solutions to the Growth Imperative and Debt Crisis).
The collapse of state socialism in
Central and Eastern Europe has led to the temporary triumph of Western
capitalism in the ideological struggle between competing economic models.
However, as long as the disparity between rich and poor continues to increase,
as long as exponential economic growth continues to cause accelerating
environmental destruction and as long as the "developed" nations of
the Northern hemisphere continue to ruthlessly exploit their
"undeveloped" Southern neighbours, it remains necessary to search for
alternatives to the prevailing economic order. Under these circumstances Silvio
Gesell's Free Economy model retains its relevance and may yet begin to receive
the wider recognition which it deserves.
Suggestions
for further reading
Silvio
Gesell, The Natural Economic Order (translation
by Philip Pye). London: Peter Owen Ltd., 1958.
Irving
Fisher, Stamp Scrip, New York: Adelphi Company,
1933.
John
Maynard Keynes, The General Theory of Employment,
Interest and Money. London: Macmillan & Co. Ltd., 1935, Chap. 16, 23 and
24.
Dudley
Dillard, Proudhon, Gesell and Keynes - An
Investigation of some „Anti-Marxian-Socialist“ Antecedents of Keynes’ General
Theory, University of California: Dr.-Thesis, 1949. Hackbarth Verlag St.Georgen/Germany 1997. ISBN
3-929741-14-8.
Dudley
Dillard, Gesells Monetary Theory of Social
Reform, in: American Economic Review (AER) Vol. 32 (1942), Nr. 2, p. 348 - 352.
Roy
Harrod, Towards a Dynamic Economics - Some
Recent Developments of Economic Theory and their Application to Policy. London:
Macmillan & Co., 1948, Chap. „Is Interest out of Date?“
Leonard
Wise, Great Money Reformers - Silvio Gesell,
Arthur Kitson, Frederic Soddy. London: Holborn Publishing, 1949.
Lawrence
Klein, The Keynesian Revolution. London:
Macmillan Press Ltd., 1966 and 1980, Chap. 5, p. 124 - 152.
International
Association for a Natural Economic Order,
The Future of Economy – A Memoir for Economists. Lütjenburg: Fachverlag für Sozialökonomie, 1984/1989. (P.O. Box 1320,
D-24319 Lütjenburg)
Dieter
Suhr, The Capitalistic Cost-Benefit Structure
of Money, New York and Berlin: Springer Verlag, 1989.
Margrit
Kennedy, Interest and Inflation Free Money -
Creating an Exchange Medium That Works for Everybody and Protects the Earth.
Okemos/Michigan, 1995.
William
Darity jr., Keynes’ Political Philosophy: The Gesell
Connection, in: Eastern Economic Journal Vol. 21, No. 1, Winter 1995, p. 27 -
41.
Mario
Seccareccia, Early Twentieth-Century Heterodox
Monetary Thought and the Law of Entropy, in: A. Cohen, H. Hagemann and J.
Smithin, Money, Financial Institutions and Macroeconomics. Boston: Kluwer
Academic Publishers, 1997.
Marvin
Goodfriend, Overcoming the Zero Bound Interest Rate
Policy, in: Journal of Money, Credit, and Banking Vol. 32, No. 4 (November
2000, Part 2), p. 1007 – 1035.