Concepts

• Purchase and investment (placement of funds) — ways of mutually beneficial collaboration.
• Money turnover in the economy. Trading economy simplified model. Turnover speed as the main factor of revenues.
• General fear to invest funds: money, time and other values – as crisis cause. Means are on hand but they don’t turnover. Simplified crisis model in natural economy. World building activity slowdown and destruction (entropy) as the result of investment fear.
• Possible ways out from the crisis. Trust instead of fear. Synergy.
• State investment stimulation: tax and other benefits for legal entities. Tax deductions for purchase of large property objects, for business investment/crediting.
• Trust formation. Associations of «building»companies. Association entry criteria, associations’ integration. Promotion programs for association companies’ at B2C markets and labor market.

Introduction

The given article is written in February 2009 in the heat of the world economic crisis. Most people in this time are puzzled how to overcome the crisis with the minimal losses. Some of the people arrive at the idea that due to the crisis it is possible not only to loose, but, on the contrary, to gain. Anyway, almost everybody is concerned about the question in what way should the crisis influence his own material wealth, his business, his nearest and dearest, and how long shall it last. So, what is a crisis? Is there a way out from it in the nearest time? This article offers the direction to overcome the crisis which hasn’t been discussed in public earlier.

Fundamental ways of mutually beneficial collaboration

First of all, let’s enlarge upon the fundamental concepts of economic system. What is the foundation of the economy? This is collaboration, namely, mutually beneficial one. If it would be more profitable for humans to exist independently from others, there would be no economy at all. There would be no modern market-economy, not even natural economy, where people would exchange goods and services, because it would be more profitable to produce goods and services for ones and to exchange something for the others.

Modern economy offers several ways of mutually beneficial collaboration between people and managed people groups (companies). They are: purchase/sale of values, values investment and so on. Values can be understood as goods, services, work time, money etc.

When two persons handle a purchase and sales transaction (which many handle tens times a day while shopping, visiting hairdressers, going by public vehicle and paying for petrol at a gas station), they both obtain a benefit. For the customer it is beneficial to buy a definite value, it means to him more than the sum of money which he is ready to part with for its purchase. And for the seller it is vice versa beneficial to get the money for that value which he is selling, because the revenue value from the transaction is bigger for him than the value of the good/service which he has sold. Both are happy.

In case of investment there is a similar situation. An investor deposits his money, time, goods or other values into a project to start it or to promote its development. In return the investor gets sales interest, capitalization — values which are more beneficial than that, he invested. The person, who receives these investments, also gets profit from this transaction: possibility to create or to develop a project and to get values owing to this.

What do revenues depend on? Simplified economic system model

What do the revenues of a definite person (legal or individual) depend on in the modern economy? Let’s have a look at the simplified modern economy model and define what influences the revenues of each system participant.

At the scheme there is a simplified economic system consisting of 2 companies each of which has 1 employee and one owner, of the state, which collects taxes from the companies and has got 1 employee — the official. Arrows show the main money flows. One can see that there is no such participant of the economic system on the scheme into which arrows come in but do not come out and vice versa. It shows that each participant of the economic system has got sources to get money and ways to place money (purchases/investments).

What does the income of each participant of the simplified scheme depend on?

• The revenues of the State depend on tax proceeds volume. Tax proceeds in many world states are proportional to the incomes of contributory individuals (or at least have positive correlation).
• Companies’ revenues depend on the amount of the sold products.
• Revenues of companies’ employees and officials depend on the revenues of the State and the companies.
• Revenues of the companies’ owners depend on the companies’ revenues.

If we take for the basis, that the money in this scheme do not stay on the companies’, state’s and individuals’ accounts and are spent in full, then we come to the conclusion that in the given simplified scheme the same amount of money is circulating all the time. Thus, under other equal conditions the revenues of each participant of the model become proportional to the money circulation (turnover), which we calculate as the volume of the invested means divided by the time necessary to return the investments. If the money turnover speed grows twofold what means that the employees and the officials will get the same wages but twice as often, if these individuals begin to spend money twice as faster, then the companies, their owners and the state will get twofold more revenues.

What happens if even several participants of the given model hold the money in their pockets? In fact, this leads to the decrease of the money amount «working» in the system. The turnover speed falls and all participants of the system earn less money.

The essence of the economic crisis

What is the modern economic crisis? Let’s note that in the modern world any large economic crisis is a world crisis, it influences the economy of almost each country. Countries already can’t exist as independent economic systems. In fact, under the conditions of globalization the crisis takes place in the world economic system being a combination of all countries’ economic systems.

What is the difference between the current condition of the world economy in comparison, for example, to 2006 and 2007? The money volume has not decreased, even considering the inflation the decrease of money volume makes up only a couple tens of percent for the last two years. The inflation has not increased; on the contrary in many countries it has decreased and at that time inflation had little influence on the world economy development. There is an opinion that the crisis is connected with considerable debts of the USA and other countries’ economies. Of course, it influences the economies of definite countries, but it is not so important within the world economy, since a debt does not reduce the money amount, it can even create money.

The only situation when the money amount in the economy can decrease is the situation when the credit money given by a bank of one country gets into another country and they need gold backing. In this case the gold reserve of the recourse country is decreasing and the money volume in the world economy is decreasing too (Murrey Rottrbard «Economic depressions: their reasons and cure methods»). For simplicity let’s continue the discussion having imagined that such situation hasn’t happen or that the level of the necessary gold backing of the foreign currency hasn’t exceeded the indexes before the crisis. Thus, the money volume in the world economy almost has not decreased but the money turnover has considerably sunk. What is the reason for it?

Let’s have a look at 2 demonstrative comparative examples. During the period before the crisis you could easily go to a shop and buy a TV-set/a car or another good being sure that the purchase is for you of a greater value than the sum of money you have spent. You just trusted. Now, in the heat of the crisis you are afraid to inefficiently spend money, namely the money invested into definite goods or services won’t return to you. Of course you don’t always pay in cash. Often you purchase on credit but you are also scared that the purchase won’t be of a greater value for you than those debt obligations which you are trapped by having taken an additional credit. Or the bank is afraid that it would be more profitable for it not to give the credit for your purchase, since you may have problems with its repayment.

The second example — before the crisis you could come to investors, show them your business-plan and receive investments for your new project. Investors trusted you. Now you will have to give very weighty arguments if you want them to invest your project. Investors are afraid that the investments won’t return.

Thus, the difference between the situation 2 years ago and the current situation consists in the presence of trust before the crisis and the fear of losing money during the crisis. The crisis — is the general fear to spend money and other values (purchases and investments), namely the fear of mutually beneficial collaboration. The crisis has leaded us to the condition when we try to hold everything that we own and to have less collaboration, since for the mutually beneficial collaboration we must invest values: to purchase and to invest. It is the reason which leads to turnover slowdown of money, the revenues of companies, people and states.

We could try to find out, where this common fear appears from and why it disappears with the time (as the current crisis — isn’t the first one, world economic crisis — is a repetitive phenomenon, you can learn more about it in the materials about waves by Kondratiev). But the given article doesn’t touch upon the issues of crisis fundamental reasons, though one can come to interesting conclusions concerning humanity fluctuations of fear-trust, isolation-collaboration, destruction-construction in different periods having read about it.

An interesting example concerning fear/trust correlation can be viewed on the basis of the model of ancient society and natural economy. Let’s have a look at the territory where two tribes are living.

The hunters’ tribe can perfectly hunt, gets meat which is one of the necessary whole foods for any person. The farmers’ tribe can cultivate land and grow crops, vegetables and other products necessary for everybody’s nutrition.

The tribes live side by side from the earliest times and collaborate exchanging their activities products: exchange meat for crops and vegetables. Thus, each tribe lives in wealth and health because it gets complete ration of healthy food. The hunters get more meat than they need to feed the tribe and the farmers grow more crops and vegetables than they need. It is beneficial for both tribes to exchange their surplus goods for the necessary ones. The tribes trust each other that the exchanged goods are of good quality.

Now, let’s have a look at the situation when the tribes begin to distrust each other. Fore example one tribe suspects the other one of having spoiled or even poisoned the supplied products, or they have quarreled by some other reason. The products exchange has now slowed down or even stopped. Each tribe begins to pile up surplus products which get spoiled with the time. People receive less necessary nutrition ration, the health of both tribes becomes worse, the productivity falls, and the tribes produce less products and so on.

We can see, that even when in such small economic system its participants trust less and begin to fear, everybody is suffering from it, not to speak about the modern global economy and the crisis involved it.

As soon as the trust level between the participants of the economy becomes lower, the revenues of most participants, the labor capacity and other economic performance go down at ones. All this looks like closed-circuit the way out of which can only be found having increased the common trust level.

We can have a look at our world in the period of the economic growth and see that all people work actively and collaborate with others. In this period all together «build the world», namely do it better, more comfortable for living, where one can be more happy. If to have a look at the world during the economic crisis, we can see the frightened people sitting at home, less collaborating with each other. The building has stopped or slowed down, and we know that when we stop building, the world begins to destroy (for more detail see about the entropy).

Ways out of the crisis

So, the crisis has appeared because of the decrease of the trust level in the economy and the growth of the fear level. To make the economic situation better we must raise the level of our trust and stop being afraid. What are the ways to stimulate trust?

Before discussing the variants of the crisis overcome, let’s specify what trust exactly isn’t enough to make the world economic situation better?

As we could understand from the arguments above, the revenue of each economic system participant depends on money turnover. People have to trust each other in that meaning that all together will support turnover and won’t hold the money in their pockets, since the more money is held, the less money is in turnover. Thus, it is necessary to stimulate people to place money and other values (to purchase and to invest). If the general level of such investments into the economy grows, the mutually beneficial collaboration grows too and the economy turns to growth.

In case the money and other values investment (time, goods, and services) will be stimulated, people will start to collaborate more with each other. And it is known, that by the mutually beneficial collaboration appears the effect of synergy, allowing collaborating subjects to get larger revenues, than before the collaboration.

What are the ways to stimulate capital investment?

State investment stimulation — an outdated variant

It is known, that the considerable, not to say the main role in the economy historically the state plays, those laws, measures and influences, which it uses. Taxes, customs, programs on development of different economy branches, investment programs — all this considerably influences the economy and business.

According to the arguments above, to overcome the crisis and to get the incitement to economy development, capital investment stimulation is necessary (purchases, investments).

An obvious way of such stimulation is revision of state’s tax policy. The state can introduce a tax policy stimulating means expenses with the aim to invest them, and of course to get them back later but in greater amount due to the effect of synergy and mutually beneficial collaboration.

Let’s analyze concrete offers for tax policy stimulating mutually beneficial collaboration:

• For the legal entities a tax system is introduced where business tax falls down by the capital expense growth. The tax amount stays the same if enterprises keep the means expense (investment) at the same level, as in the current crisis situation, the taxes fall down considerably, if an enterprise starts to spend (invest more means).
• For the individuals tax deductions are introduced for major purchases (or not only major), for example: house, flat, car, country house, and what is of no small importance — for means placed as investments.

Beside the tax policy stimulating capital investment the similar scheme can be applied in other policies where the state collects monetary means from turnover of legal entities and individuals, for example, in custom policy.

By application of the tax policy described above the state risks to come to tax collections amount decrease, since the tax load on the enterprise decreases under the condition of the increase of means expense/investment. But as the result of money turnover increase in the state economy, even by reduction of tax interest indexes, tax collections can stay at the same level or even grow under the condition of a well-balanced and farsighted estimation of the changes in the tax police. Certainly all figures must be thoroughly verified, calculated and planed beforehand. Sensible planning allows to win to everybody: state, business and population.

Another risk is that the means expense stimulation increases the risk of inefficient investments. What is inefficient capital investment? This is a purchase and an investment breaking the principle of mutually beneficial collaboration, namely, means are invested into defective goods or unprofitable business. As you know, there are some economic indicators characterizing economy efficiency, such as inflation level and unemployment level. Economic efficiency is the factors of the economic crisis from the point of view of the Marxist theory which is disproved by the latest theories considering that the main reason of the crisis is in the world state Central Banks’ activities (Murrey Rottrbard «Economic depressions: their reasons and cure methods»).

So we can conclude that the proposed state tax policy and other policies stimulating capital investment will track to the economy development, but...

1. If tax and other policies stimulating capital expense will be introduced only in several states, this will lead to the money and other values redistribution — at first money will «spin» in those countries where such policies will be introduced and then they will «fly away» to the countries without capital expense stimulations. Thus, tax policies must be introduced by largest world states, not to say by almost all states, to make the effect of such measures global and steady.
2. In discussions above we made an assumption, that foreign currency volume which needs gold backing does not exceed the level before the crisis. Here is a considerable risk that the proposed measures might not work. To control the distribution of Central Banks’ gold holdings and namely the amount of the money in the world economy, a centralized authority is necessary managing Central Banks of all states.

Thus, we meet two very serious political and bureaucratic obstacles to implement state capital investment stimulation at the global level. One can ask how fast can these measures be introduced, and come to the conclusion, that the time necessary for their implementation considering the absence of a centralized international organization managing the world economy will be longer than the time necessary for the crisis to end. Nevertheless, if the governments of the world key states choose the proposed directions: correction of the economic policy in each country and creation of centralized authorities managing the world economy including the world Central Bank, then we can hope for considerable improvement of the economic situation.

And now let’s discuss that constructive offer which was the main reason to write the given article. As for the author, the given offer has got all advantages of the state approach to capital investment stimulating mentioned above, but has no political and bureaucratic disadvantages.

Global association of the world economy companies-builders

So, to overcome the crisis it is necessary to stimulate capital investment in the world economy and to achieve the trust between the companies, the trust like before the crisis.

The offer means the creation of an association consisting of the companies all over the world, in the perspective — considerable part of the world companies, which undertake support of the money turnover level due to the definite guaranties on the level of means placement (purchase/investment).

After the entry into the association each company reports on the amount of effectively invested (by means of purchases and investments) funds. An effective funds placement is the placement into other companies included into the association. If the level of effectively invested means is lower than the specified level determined by association rules (taking into account the size, the business specific, the companies’ turnover), then the company will be excluded from the association and the investment to it from the side of the association companies will be significantly reduced, this will motivate the companies to stay in the association and to invest money in its development. In fact, there is a means turnover increase within the association. When the association grows enough it will include companies of any business spheres and it will be profitable for them to turnover the money only within the association, not outside it.

Companies are motivated to join the association, since it will increase the investments into them from the side of the association companies and will not decrease — from the side of other companies and individuals.

The association can provide its own instruments for the efficient money accumulation for major purchases and investments (there is a central bank in the association which is also its member, the association bank system can be more developed and can include the banks of different world countries an to have agreements with the different countries’ Central Banks allowing to effectively manage the capital investment), or capital accumulation can be fully replaced by crediting.

The association can actively promote in the B2C markets, so that consumers will realize that if they want to achieve the prosperity of the world economy and a better sufficiency of life, they must invest their own money (purchase and invest) into the companies included into the association.

How to create an association? At first, on the basis of the principles above there can appear great number of associations, geographically spread all over the world as hotbeds in large cities, then these hotbeds can merge and envelope whole countries, in the end they integrate into the united international companies association, which effectively struggle against the crisis joining efforts and investing all means into development and prosperity.

At the time of the article’s writing idea of associations is on the stage of details examination, but the given articles’ publication aim is the survey of the economics and business experts’ view — how realistic is in your opinion the implementation of the given offer and what are the perspectives, the potential effect of such new approach to the world economy stimulation?