Freiwirtschaft

Freiwirtschaft (German for free economy) is an economic idea founded by Silvio Gesell in 1916. He called it Natürliche Wirtschaftsordnung (natural economic order). His Idea has not been put into practice by any state since then.

Main differences to current economic systems:

• Freigeld (free money)
  • All money is issued for a limited period by constant value (neither inflation, nor deflation).
  • Long-time saving requires investment in bonds or stocks.
• Freiland (free land)
  • All land is owned by public institutions and can only be rented, not purchased (see also Henry George).

The (proposed) results include:

• More private spending for consumption and investment
• Consumers invest surplus money in expanding companies
• Full employment: Work for everyone who can work
• Rate of economic growth can be set by the society
• Interest rates drop to almost zero percent in the long run
  • Freiland prevents high real estate prices
• Tremendous social disparities will cease
• Less working hours per week for everyone in the long run

There seems to be an attempt to realize Freiwirtschaft in a small area in Canada, based on artificial money called Gogo that loses its value after one year.

Flaws of the money system

Freiwirtschaft claims that current monetary systems are flawed. According to Adam Smith, prices convey information. For example, dropping prices mean that there is less demand or more offer. This leads to a buyer buying more, or a seller starting to produce something else. As a reaction, the price rises again. So, the price, together with the market participants, builds up a feedback loop around a stable, "ideal" price. At this stable price, the market is ideal, no one pays too much or earns too little, and there are no tendencies from either party to change that price. The "wobbling" around that ideal price is called self-stablizing.

This is not the case on the finance market. Without the continuous increase of the amount of money in circulation by the central bank, the demand would continuously drop, since the circulation speed decreases. Dropping demand forces companies to lower their prices to make any money at all. When prices start dropping, potential customers put off their purchase as long as possible to get the lowest price, resulting in the demand decreasing even more. The feedback loop spirals down to a point where the company does not make any money at all. That, eventually, results in layoffs and even the bankruptcy of the company. Workers in other companies tend to be even more cautious in spending money, ultimately resulting in the breakdown of the economy.

The key error of the system is the ill-transported information in the price. Money is nothing but claim for goods and services from the economy that accepts the money. In a weak economy, money is worth less in goods. But instead of an inflation, the result is a deflation as described above, and less money can now buy the same goods. The market players do not realize that they are destroying the very economy that should ensure the value of the money. This feedback loop is self-destabilizing. According to Freiwirtschaft theory, this is the reason for the cycle of crisis in world economy.

Criticism

As the whole doctrine is based on Irving Fisher's quantity equation, theoretical discussion is linked with macroeconomic theory. Critics state that circulation speed does not decrease but remains stable. However, numbers show a decreasing circulation speed for the USA and Japan after 2001.

Critics following Karl Marx argue that measures of Freiwirtschaft just hit capitalist financial companies whereas capitalist manufacturing companies benefit from cheap credits and increase their profit. This bias is intended.

The most common arguments against Freiwirtschaft are:

• the periodical exchange of money causes administration costs
• Central bank must set the optimal money exchange charge which is as difficult to find as the optimal interest rate
• can only boost economic growth, but cannot resolve tradeoff between economic growth and inflation
• The system appears to require a sudden extreme change to completely implement, since bad money drives out good, and thus any transitional system operating two forms of currency would be unstable since one form would inevitably be preferred to the other.

External links

• For a theoretical example of Freiwirtschaft, see [1] (in German).
• For an English version of Silvio Gesell's major book on the issue see The Natural Economic Order
• http://geldreform.de (in German, partly English)
• http://www.inwo.de (in German, partly English)