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Freiwirtschaft & Basic Income in Tanzania

A short overview is given of the major problems of the current financial and economic system and their solution in form of Freiwirtschaft (German for “free economy”, proposed by the German merchant and theoretical economist Silvio Gesell: “The Natural Economic Order”, 1916) and basic income and the resulting economic, social, ecological, cultural and individual benefits.

 

Problem of current financial and economic system

Money

money

Money is an invention which facilitates the exchange of products between working/producing members of a society. It is hereby much more efficient than barter trade and enables the high degree of division of labour that we see in modern societies. Division of labour is desired as it enables a more efficient economy where goods are produced with less labour than in an economy with no or less division of labour. Thus either more goods can be produced with equal labour (more/better food, buildings, infrastructure, health system, education...) or the same amount can be produced with less labour (more free/recreational time).

Unearned income

In a society with division of labour each member is forced to sell his labour/goods sooner or later for money. He is forced to sell as soon as possible because in general the value of his goods (the price he is able to get at the market) will decrease with time (food goes bad, electronics get outdated, metal rusts...). He needs to sell it for money as he needs the money in order to exchange it for (essential) goods he does not produce himself. Additional money (loans) are needed to increase the productivity of the economy.

The money owner on the other hand is not forced to spend or invest his money as long as his needs are met. He will therefore only give away his money in form of investments or loans if he can expect that it will be repaid to him with additional profits (or interests). These profits/interests represent an unearned income for the money owner.

Redistribution of wealth from the poor to the rich

This unearned income of the money owner leads to a redistribution of wealth from the poor (consuming and working members of society) to the rich (money owners). This effect becomes obvious when we realize that the profits/interests for the money owner is not generated out of thin air but is paid by the loan taker and thus by the working and consuming members of the society.

If you finance the building of your house by a loan you may easily pay double or more the normal cash buying price because of the interests you have to pay.

But even if you are not directly indebted you will still (indirectly) pay for the unearned income of the money owner. The private sector is highly indebted. The cost for the interests that have to be paid for the loans are included in the prices and are thus paid by the end consumer. The average percentage of the interests costs on the end consumer prices is estimated to be approx. 30% and can reach up to 60-70% for houses and apartments. These percentages represent the amount of unearned income of the money holders and thus the redistribution to the rich.

Growth imperative

(Compounded) interest leads to the wealth redistribution as described above and thus the economy has to continuously grow in order for the loan takers and thus the majority of the population not to fall below the poverty line. The costs for the society, state and individuals induced by this compounded interest grow exponentially.

Additional growth imperative is caused by the coupling of work and income. Advances in division of labor and technology lead to a decreasing demand of labor. In order to prevent more and more people of becoming unemployed and thus lacking an income the economy has to grow.

exponentiel growth

Exponential economic growth cannot be sustained for a prolonged time inevitably leading to reoccurring financial and economic crises like the one the western world is experiencing currently.

Underpaid work & bad working conditions

One major problem in the current economic system is that the vast majority of people are forced to take up an employment in order to be able to cover their living expenses. Employers on the other hand have generally the choice to employ or not to employ a specific person. The employer has the choice of either employing another person (large number of unemployed, job searching people) or to employ nobody (increased labour efficiency: longer working hours for current employees, substituting human labour with machine labour).

This power imbalance between employee and employer leads to the employer being able to enforce bad working conditions and too little wages.

 

Freigeld

Freigeld (German for “free money”) aims to do away with unearned income due to possession of money or property. This will strongly reduce the living expenses of the majority of the population and making a more stable and sustainable economy possible.

Simply prohibiting making profits from investments or taking interest will not work. Without having any financial incentive the money owner will not lend his money and the loan based economy will collapse.

Instead, a fee on holding (cash) money is introduced. This fee will be 10 % of the money value annually. If somebody keeps money that he is neither spending nor investing (lending) he will have to pay the fee.

Practically this can be realized by having banknotes which are only valid for a period of one month. In order to prolong their validity, a stamp with 1% the banknote's value has to be bought from the state and placed on the banknote each month (e.g. 10 cent stamp for 10 Shilling note, 50 cent stamp for the 50 Shilling note, etc.). These stamps (similar to post stamps) will also function as small change instead of coins.

With increasing digitalization of the money system (e.g. Mpesa) collecting the fee gets easier. It will be continuously withdrawn from the bank accounts of the population.

To keep the circulating money and thus the average prices constant, the money will be re-emitted by the state. The fee has thus the side effect of being an income for the state.

Only the state is allowed to make and destroy money (in order to keep the average price level constant).

The money owner will try to avoid paying the fee. The main two possibilities he has are spending or investing/lending it. He cannot reasonably increase his spending indefinitely so he will invest/lend the surplus money. Even if the loan taker (the investment) only returns the money without interests, the money owner will have avoided paying the fee and thus has a financial benefit by lending/investing the money. This will lead to a decrease of the interest/profits demanded by the money owner.

The fee on (cash) money will be set at level (10-12% annually) at which the average unearned income due to possession of money (property), e.g. interests, profits from investments will be zero or lower.

This will result in the reduction of the average percentage of the interests costs on the end consumer prices to 0% resulting in largely reduced costs of living for the majority of the population.

At first glance saving money seems to be hindered by Freigeld. In fact, however, saving money becomes easier. It is true, that you won't normally get positive interests on your saved money (but rather zero or slightly negative interests). But as the cost of living will be largely decreased due to the absence of interest costs, the saver will have much more money to save than in the current system. This will outweigh the loss of interests on their saved money for the vast majority of the population.

Additionally the importance of money saving will be reduced as the cost for loans will be reduced to zero (on average).

An important side effect of Freigeld will be a cheaper, more stable and more secure food supply. Today people are buying food mainly for immediate consumption. Even if they have a monthly surplus of income they normally do not invest it in a food storage at home. They will either keep the money in order to be able to buy something with it later (liquidity) or they will put it in a savings account or invest it to earn interests and profits.

With Freigeld on the other hand having a larger food storage at home becomes a viable option to avoid paying the 10% annually fee on money. Food with long storage life (rice, beans, wheat flour, maze flour, pasta, sugar, potatoes, onions, food in tin cans...) will be bought at larger package sizes (resulting in cheaper prices) and stored at home. This will be done as long as storage costs (additional space, food going bad) are below 10% of the food price annually or better investment for the money is found.

Even people with a small or no personal food storage will benefit. When food prices go up (e.g. bad harvest) people will use more food from their storages, reducing food demand on the market and thus counteracting the price increase. Therefore the personal food storages will function as a decentralized buffer, stabilizing the food prices.

 

Freiland

Freigeld pushes the interest for money to zero (on average). But what about profits from investments (in production facilities, housing, etc.). Profits might exist temporarily. But in the long term these profits will also average out at zero. When loan costs (interests) are zero, more production facilities, housings, etc. will be built until the profits for these investments fall to zero, too.

Land property represents an exception from this rule. It is limited by nature, has no storage costs and there is a universal need for it. This has led to land being used as a subject for financial investment and speculating. As a result the price for land is high and rising – making it more and more difficult for the common citizen to obtain land for farming or living space. This effect would be increased further by the introduction of a fee on (cash) money as proposed by Freigeld.

To counter this and reduce the profits that can be made from land investments (to zero on average), Freiland (German for “free land”) is introduced. Similar to Freigeld a fee of 10 % of the buying price annually is set on land possession. In order to avoid paying this fee, the land owner will try to either sell or rent his land. Land investments and speculation will become unattractive. One will only buy/hold land if one needs it for production or living. This will lead to a constant low price on land, making it affordable for those who need it.

 

Basic income

Basic income is introduced in order to reduce and eliminate the problems of underpaid work and bad working conditions, population explosion, as well as poverty driven crimes and create more freedom for non productive/non remmunerated work (eduction/arts/archeology/care). The basic income will be paid to every Tanzanian citizen and permanent resident and will cover all expenses for a basic but humane life: food, shelter, health and liability insurance, education (as well asthe Freiland fees mentioned above for a basic home). The basic income for minors will be paid to the parents or guardians.

People can then not be forced to do work they don't want to do or work under conditions or with payment they don't find acceptable.

In order to prevent people from stopping to work all together and thus leading to a collapse of the economy, the basic income will only cover the basic but not all the financial needs of the population. Nobody will have to live in fear of lacking food, shelter or health care. But if somebody wants to have a bigger house, better/special clothing, a new smartphone, a flat screen TV, travel for holidays, etc. he will still need to work and earn the additional money.

Additionally not working might seem very attractive at the first glance. But being without occupation for a prolonged period of time becomes unattractive rather soon.

 

Taxation and Financing

Basic income and the general expenses of the state (education, infrastructure, running expenses) have to be financed.

Beside the 10% (or 12%) fee on money and land, following taxation should be considered:

Resource tax

Taxation on natural (non renewable) resources is justified because: (a) Natural resources are commons and mining them often generates rents/unearned income. The community should therefore have a share in those rents. (b) Natural resources are finite and their use is a problem of generational justice. (c) The mining for natural resources causes external costs, which should be included by a tax as good as possible.

resource tax

The resource tax leads to a more efficient resource usage and better sustainability. Additionally, when the resource tax is set relatively to the produced amount not the price of the resource it can cushion price fluctuations. The production as well as the consumption of natural resources is rather inflexible. Neither can be easily increased or decreased. Therefore, if an imbalance of production and consumption occurs this will lead to a bigger price change than for other goods. With a price independent cost-part introduced by the resource tax these fluctuations will be relatively smaller compared to the case without taxation. This can result in a better predictability and thus an economic advantage for the resource producing and consuming companies.

Financial Transaction Tax

To discourage and prevent financial speculation and ensure that the community has a share in the profits of the financial sector, a financial transaction tax is introduced. The tax rate will be in the order of 0.1-0.01% and will be automatically deducted during every electronic financial transaction.

Waste tax

Taxation on end consumer products will be introduced depending on specific toxic (environmental harmful) substances (list of xx specific substances). Companies have to pay for their waste disposal independently.

Incentive for recycling is already given by the resource tax.

No value added tax

Taxation influences the behavior of people. Is the taxation and thus the price of something increased its use is minimized and alternatives are increasingly utilized. With low taxation and price there is generally an increase in use.

division of labor

As already mentioned earlier division of labor is desirable in a society. It enables a much more productive economy. To make this effect clearer we can look at an example. The picture above illustrates that much fewer people have too cook if there is cook cooking for many people instead of everybody only cooking for himself. Additionally the quality of the food is generally higher. Or how many of us can cook Italian, Chinese or Indian dishes better than the specialized restaurants? The value added tax however punishes exactly this desirable behavior.

Value added tax together with associated employer outlays lead to the retardation of division of labor and an decreased productivity.

The general expenses of the state including basic income should mainly be covered by the resource and land tax. Resource and land use will be minimized. The simple and transparent taxation system will also reduce legal and illegal tax evasion, currently possible because of today's complex taxation system with many loop holes. It will create a framework for a stable and sustainable economy in which everybody has to work less.

 

Benefits

A system as described above will, when introduced, lead to a strong, stable, adaptable, fair and sustainable economic system.

Low capital costs (no interests) and low labour costs (basic income financed by the state) as well as the transparent and simple taxation system will lead to a surge of new foundations of enterprises and businesses (local and international) creating millions of new long term jobs.

Tanzania will become independent from foreign aid.

Workers' rights and working conditions will improve as workers cannot be forced to work under any conditions and pay due to the basic income.

Food supply will be stable due to private food storages at home incentivized by Freigeld.

Poverty as known today will be practically non-existent leading to a large decrease of the mortality rate and the elimination of poverty driven crimes. The rise in the average living standard as well as more equally distributed wealth will lead to long lasting stability and peace.

If introduced in the whole East African Community (e.g. Free East African Shilling) it will prevent possible problems due to economic differences of the member states (e.g. stark increase of land prices in Tanzania due to Kenyan investors). Fear of those is one of the factors hindering the full implementation of the East African Community road map.

 

Challenges & Questions

Some challenges and questions remain, which should be addressed.

For the implementation of basic income, a complete population register has to be created and maintained. On the receiving side, fraud seems the major possible problem. Fake identities might be created in order to receive additional basic income. Deaths of relatives might not be reported in order to continue receiving their basic income. Fraud should be a social taboo and taught as such in school and at homes. Additionally a high fine should be set. The population register has to be kept up to date and counter checked on regular intervals. A census could be conducted together with each presidential election. Conducting the census together with the elections will greatly reduce the costs and effort for the census. Counter checking of the register for minors might also be done during school enrollment.

At the side of the administration corruption is one of the major possible problems. The system should be designed in such a way as to minimize the possibility of corruption. The conduction of the census during elections under observation of independent organizations will hereby be beneficial.

Basic income should only cover the basic needs in order to still guarantee a financial incentive to work. Several people, however, may live in one household and still receive the same basic income each. Because of the reduced cost of living per person this will mean that their basic income will cover more than their basic needs. Will they still work? They might not as they are content with their income. But most would probably continue to work. They would want to have more income in order to being able to afford more (luxury) expenditures. Additionally the work they would do would be work that they would generally like and/or earns them a lot of money instead of work they don't like and is underpaid as is often the case today.

While basic income might introduce some bureaucracy it does much less so than usual social security systems (e.g. in Germany).

What will be the effect on emigration and immigration? Because of the basic income, the stronger economy and better working conditions emigration would be reduced. Legal immigration would increase for the same reason. For illegal immigration two causes have to be considered. (a) The immigrant has no fake Tanzanian ID. In this case he will not get basic income but only income from work which might be less than in his home country. This type of immigration will be discouraged. (b) The immigrant has a fake Tanzanian ID. If he managed to get himself registered in the population register he will receive basic income. But this falls in the fraud case already mentioned above. Its impact has to be reduced by thorough maintenance and control of the population register.

Will capital flight pose a problem? People might try to avoid paying the money fee by exchanging their free money for non-free money (e.g. US $). Only the state can create or destroy money. This means that the amount of circulating money in Tanzania will be unchanged by the currency exchange. The person who gave the US $ had to take the Shillings and thus has now to pay the fee or keep spending/investing the Shillings.

What will be the effect on export and import? The anticipated lower exchange rate compared to foreign currencies will lead to decrease of imports and an increase of exports.

Members of the small but powerful part of the (world) population who are profiting from the current financial system, might try to prevent the introduction of Freiwirtschaft and basic income by all means possible (economic sanctions, war, etc.). The new system will deprive them of the privilege of generating more wealth from their current wealth without working. Still, even they can benefit from the new system. The absence of poverty driven crimes and the generally increased stability means that they don't have to fear for their lives and property as they do now. Additionally they will benefit from the generally improved economic situation, better infrastructure and the better health system.

 

More Information

Freiwirtschaft:

http://en.wikipedia.org/wiki/Freiwirtschaft

The Natural Economic Order (Gesell, 1916)

https://www.youtube.com/watch?v=lwUxEzkLnnM (short video explaining Freigeld)

Basic income:

http://en.wikipedia.org/wiki/Basic_income

Financial Transaction Tax:

http://en.wikipedia.org/wiki/Financial_transaction_tax

Resource Tax:

http://www.foes.de/pdf/2012-08-Diskussionspapier-Ressourcensteuern.pdf (German) and http://www.forumue.de/fileadmin/userupload/AG_Weitere_Themen/Rio_20/GE_Kongress/Eike_Meyer_Policy_Instruments_Resource_Conservation_Korrektur.pdf (English)

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