A Danish newspaper Politiken wrote in an editorial on December 31. 2019, that Capitalism should be saved from itself. The paper asks if Karl Marx was right. Their answer is NO, but they do state that Capitalism is in a crisis and should be reformed.
I totally agree. But solutions put forward by the paper is very meager. I believe the solution to this reform is quite straightforward.
The first point of attack is to find our way back to the modern form of Capitalism, defined in the 1930’s to 50’s by the British economist John Maynard Keynes in his ”The General Theory of Employment, Interest and Money” from 1953. Traditional Capitalism focuses on supply, especially increasing the supply of jobs as a means to create economic growth. But any person capable of independent thought will come to realise that the effects of increasing the supply of jobs will be limited by especially two factors: The supply of qualified workforce (the demand for jobs) and consumption of products. An increased supply of jobs will not automatically result in increased growth, because workforce and spending power will always be limiting, especially if an economy that suffers from macro-economic imbalances.
Keynes turned the bucket back the right way: if an economy suffers from imbalances or downright recession, there is only one factor that can put this right. Public investments in fighting the imbalances must be used to kickstart the economy, especially in fighting unemployment, combined with fiscal and financial policies tailored at preventing the economy from overheating again. The Keynesian form of Capitalism proved its worth by helping the USA to rebuild its economy after the Great Depression. Keynes was also the driving force behind the IMF and The World Bank. Regretfully these institutions have reverted back to traditional Capitalism.
Tradional Capitalism died in the 1920’s and 30’s by an unpremeditated suicide, being the cause of the Great Depression, one of the greatest economic and social disaster in 200 years: Traditional Capitalism states that prolonged recession is impossible because the market mechanisms will solve the problems automatically by lowering salaries and prices. It didn’t happen – the recession was indeed very prolonged – because the theory is wrong. The corpse of traditional Capitalism was buried in plain view. But regretfully it was resurrected by neo-liberalism even though it is still smelling rotten – it has been the cause for several economic crises, including the one that started in 2007/8. It is also the cause for the monstrous socio-economic inequality in the world.
Why does traditional Capitalism cause recurring crises every 10 to 20 years? The answer lies in the dominance of the speculative economy The turnover of workfree profits supersedes the value of aggregate demand. A crisis typically results from workfree profits ruining the balance between the burden of debt in real estate and the actual market value, brought about by land- and property speculation and currency speculation. The buying power decreases and people lose their home and their job, an downward spiral. We saw exactly that in the 1920’s and again in the years following 2007, in both Europe and the USA.
The next point of attack is therefore self-evident: We need to undermine the dominance of the speculative economy, so that these debt-based imbalances cannot occur. The solution is in essence simple though not necessarily simple to implement: a tax on the capital gains obtained by land ownership and land speculation. These capital gains are workfree, and obtained either by owning land or especially by forcing future property owners to pay a great part of these capital gains to mortgage lenders, every time a given property is traded. This leads to an extreme accumulation of revenue in financial institutions. It is this accumulation of workfree wealth that constitute the foundation for the imbalances between debt and market value.
Taxing the workfree capital gains on land ownership must be implemented as a Land Value Tax. It should be implemented gradually over 20-30 years, starting with a revenue sufficient to prevent future increases in capital gains for a given property. In the coming years the revenue should increase gradually until the entire capitalized value of a given property has been revoked. After the full implementation the tax will work as a rental value of a given property. This means that when that property is traded it is only the house and other manmade improvements and not the land, that is sold. The new owner simply takes over payment of the Land Value Rent. The building and the other improvements are not taxed.
This Land Value Tax should gradually replace all other forms of taxation. The principle is simple: Instead of taxing the economic processes creating aggregate wealth we should tax the foundation of these economic processes. Creating aggregate wealth improves conditions for economic activities, leading the a capitalization of the land on which these activities takes place. This increased land value is a result of the developing society and should therefore NOT be owned privately, but should be used as the only source of public expenditure and in the long run as a citizens salary.
This societal model has its origin in Adam Smith (source), the father of modern economics. It was thoroughly formulated by Henry George (source) and is supported by several present economists, including Joseph Stiglitz (source).
Read much more detail in my book.