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.
Werner Onken
[ Wersja polska
] |