Organic Finance and the Servant State

The nation-state is a monster. That is why most Americans want “small government”. People resent the intrusive power of the state, but are overawed into submission. This acceptance is ridiculous, one indicator of cultural immaturity. Democracy has not provided the solution (as Egyptians have now discovered). But there is a fatal flaw in the constitution of the modern state. By exposing it, we can reconfigure the structure of power and turn the state into a servant of the people.

First, we need to realise that the nation-state is a weak creature. Its power is pathological, its deeds the daily testimony to failure.  Intrusions into people’s private lives are the direct result of weakness, not strength. What we need is a strong state. That notion will seem strange to people who place personal liberty at the heart of their philosophy. The paradox needs to be resolved.

To maximise personal freedom, citizens need the partnership of a strong state. Creating this cooperative relationship ought to be the primary goal of reform activists in civil society. The mechanism that delivers this cooperative spirit is buried in the secret of organic finance.

How the State was Captured

First, consider why the modern state is weak.

Politicians assume that, armed with the votes of the people, they have power. After all, they write laws, don’t they? And those laws are enforced by the police! And yet…that power is severely limited by financial realities. The majority of European governments today deploy policies that are dictated by what look to them as financial imperatives. The Austerity Assault on citizens, for example, is dictated by the logic of the credit-creating system.

Democracy is limited by the legacy of an obsolete financial culture that we have failed to bury.

Governments spend more than they receive in revenue. It’s called deficit financing. Much of the costs of the services that we consume are foisted on future generations. We enjoy the services today, our grandchildren pay for them tomorrow. Thus, nations are locked into a permanent state of indebtedness. In the private sector, this would be the route to bankruptcy. How does the state get away with this recklessness?

Long ago, the funding for public services was perverted by a class of people who worked out how to live off the labours of others. What would become the new financial model originated with a land grab: the feudal aristocracy converted the commons of the people into private property. It was not the land, per se, that they wanted. They wanted the rent that could be extracted from the people, as from those who are laughingly called the “free-born of England”. People were turned into tenants in the land of their birth. The rents were the community’s natural revenue to defray the costs of public services. In Europe, beginning in the 16th century, the power of the state became vulnerable to the predators that captured the source of its energy – the rents.

Governments were left with no choice but to tax the earned incomes of people who created the wealth of their nations. Those taxes that necessarily arbitrary in their application, but never sufficient to defray the costs of what evolved into the statecraft of greed. This meant that indebted governments were in a permanent state of dependency. They relied on creditors, notably the cash-rich merchants who provided the credit needed to fund the activities of the state. Merchants soon realised that this was a business model that could be converted into an institution. Thus was born the modern banking system. Thus, today, governments are subordinate to the will of creditors. The myth of sovereign power camouflages that reality. The power-brokers are those who underwrite the costs of what is an irresponsible form of governance. The rescue of banks in 2008 is a case study in political supplication.

Building a new power structure

Most of today’s crises stem from bad decisions that are made because governments are weak. Example: accommodating the fiscal demands of mobile investors. They hold governments to ransom: cut our tax rates or we take our money elsewhere. This degrades both the state’s finances and the culture of the community in general. Politicians do not control the affairs of state. The structure of power needs to be rebalanced. Here’s how.

Step 1: recognise that we need a financial architecture in which every person owns the costs he creates and pays for the benefits he enjoys. This is achieved by redrawing the boundaries between value that is created by the services provided by nature and society (rent), and the value created by people through their labour and their savings (capital).

Step 2: empower people to keep what they create, and yield what is not theirs. In public policy terms, this means we must abolish the bad taxes, and governments must fund public services out of the revenue that is generated by those services. This transforms the monetary system into organic finance. Rent is the organically created stream of value that is formed by the synthesis of the powers of nature and society. Privatising that value nourishes the culture of cheating. That culture manifests itself in 101 ways; not least, in the cannibalistic credit system that evolved into the modern banking sector.

Towards the Healthy Society

Reverting to the natural form of finance automatically alters the distribution of power.

  • Lawmakers would be free of creditors, as they routinely balanced their books: public services are self-financing. The “white elephant” projects, which are not self-financing, are testaments to the egos of infantile politicians and the greed of their paymasters (such as the land-banking construction companies). Organic finance liberates the political system. Policy would favour the common good.
  • Citizens, free of the arbitrary taxes that damage their wealth and health, would be relieved of the stress of working to keep rent-seekers in idle luxury.

Thus, a new relationship is established in which both the state and its citizens are strong. The state is free from the manipulation of rent seekers. And people are free to devote their time and money to enjoying the lifestyles of their choice.

How this financial mechanism conditions the state to exercise self-discipline, so that its strength complements the renewed vitality of citizens, is elaborated in Thesis ♯5.

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