Gesell challenges Marx's view on surplus value, suggesting it can be eliminated through unrestricted labor, land ownership reforms, and money deterioration, without resorting to nationalization.

In Part 1 of "The Natural Economic Order," Silvio Gesell discusses the idea of establishing an economic system that doesn't rely on unearned income or surplus value. He explains that the goal of socialism is to eliminate unearned income, which is often referred to as interest and rent. While many believe this can only be achieved by nationalizing production, Gesell offers a different perspective. He suggests that surplus value doesn't stem from private ownership, but rather from flaws in the way land ownership and money operate. He challenges the view of Marx, who saw capital as purely material goods. Instead, Gesell, following Proudhon, sees capital as a condition of the market, influenced by supply and demand. He believes that surplus value isn't a necessary part of private enterprise and that by adjusting Marx's theory, we can get rid of surplus value without resorting to nationalization. This can be achieved through reforms that promote free competition. Gesell believes that if labor is allowed to operate without restrictions, it can change market conditions and eliminate surplus value within a decade or two. In this scenario, capital would be reduced to something akin to a child's piggy bank, gradually depleted by the owner. Private ownership would offer no additional benefits beyond this, and there would be no need for nationalization. Gesell further explains that Proudhon identified surplus value as a result of money being superior to goods. Proudhon attempted to level the playing field between them through exchange banks, but this was unsuccessful because money must remain superior for those who save. Instead, Gesell suggests making money deteriorate over time, just like goods, through a process called demurrage. This would end money's advantage over goods. In conclusion, Gesell challenges Marx's assertion that surplus value is an inevitable part of private enterprise. He believes that by removing obstacles in land ownership and reforming money through demurrage, market conditions can be altered by unrestricted labor to eliminate surplus value, without the need for nationalization. This would reduce the role of capital to that of a piggy bank and bring Proudhon's vision to life.

Silvio Gesell's "The Natural Economic Order" posits that rent absorbs the entire benefit of fertile land over free land, with social conditions, transport costs, and market dynamics influencing migration, wages, and ultimately, the power of landlords.

What is the concept of rent and how is it impacting the earnings from labor? According to Gesell, landowners have the power to charge rent for the use of their land instead of leaving it unused. The amount they can ask for as rent depends on the availability of uncultivated land. Imagine a scenario where all land is owned and heavily farmed. In such a case, the common people, like peasants, would be entirely reliant on the landlords, similar to the system of serfdom. The landlords could then demand the entire product of labor, leaving only enough for the peasants to survive. However, the reality is that there is plenty of uncultivated land available. The earnings from labor on this "free land" set a benchmark for what landlords can pay in wages or ask for in rent. Farmers won't settle for less than what they could earn from the free land, as they have the option to use it. Landlords are aware of this and thus, they charge rent up to the difference in earnings between their land and the free land. The cost of transporting goods to markets reduces the earnings from free land, which in turn influences the rents and wages. In addition to the material earnings, social conditions also play a role in influencing migration, and consequently, wages and rents. For instance, social events like festivals or public services in one's hometown can discourage people from moving away. This allows landlords to increase rents until the workers are indifferent between staying or leaving. Each such amenity is factored into the rent. Even feelings like homesickness can lead to higher rents. On the other hand, reports of hardships on free land can lead to lower rents. When the cost of transport decreases due to advancements in technology, the earnings from labor on free land increase, leading to higher wages. However, the prices of industrial goods also increase, offsetting some of the gains. Similarly, amenities can increase rent until they no longer influence decisions to emigrate. Landowners may also suppress positive news about free land. Any report of difficulties or dangers on free land, like snakebites, can boost their rents. To sum it up, rents take up the entire benefit of fertile land over free land. The cost of transporting goods to the market reduces the earnings from free land and is factored into the rent. Social conditions also have an impact on migration and wages, with each amenity being factored into the rent. Decreased transport costs can lead to higher wages but also higher prices for industrial goods. In the end, rent negates any advantage gained from production.

Wages, rents, land prices, and land taxes are all interconnected, fundamentally rooted in the profits from free land and interest rates.

The income of an average worker is equivalent to the earnings of an average farmer working on free, unclaimed land. This means that wages are directly tied to the profits made from free land. If the profits from free land increase or decrease, wages will follow suit. Gesell dismisses the idea of a fixed minimum wage, stating that all wages, even the highest salaries, are rooted in the profits from free land. Next, he discusses rent, defining it as what's left of the agricultural produce after wages and interest have been deducted. Just like wages, rent is also dependent on the profits from free land. Interest, according to Gesell, is closely linked to rent. When interest rates are low, more free land can be reclaimed, cultivation can be intensified, and transport costs can be reduced. This makes foreign free land more competitive, which in turn benefits wages but reduces rents. Gesell also addresses the impact of technological progress on rent and wages. He suggests that whether technology benefits rent at the expense of wages depends on whether the innovations help farmers who work on free land extensively or intensively. He also discusses the role of land taxes, stating that they can either benefit or harm rents, depending on how the revenue is used. If the taxes are used to fund cultivation on free land, rents will decrease. Gesell also explains that land prices fluctuate based on several factors. They increase when the quality of the land and agricultural prices go up, and when wages and interest rates go down. Conversely, land prices decrease when the opposite happens. In conclusion, Gesell's theory suggests that average wages are equal to the profits from free land, and that all wages are dependent on these profits. Rent is what's left after wages and interest have been deducted from the agricultural produce, and it too depends on the profits from free land. Lower interest rates benefit wages over rents by allowing for more land to be cultivated. Therefore, wages, rents, land prices, and land taxes are all interconnected with the profits from free land and interest rates.

Wages are determined by quality and market demand, not production costs, and to maximize wages, workers must protect their wage fund from rent and interest through institutional reforms.

Silvio Gesell's theory of wages is based on the idea that the price of goods is determined not by their origin or production costs, but by their quality and market factors. This means that whether you're dealing with raw materials or finished products, the price is set by how good it is and how much demand there is for it in the market. For example, landowners who have raw materials on their property will charge rent that's equal to the cost of getting those same materials from the most distant free source, plus the cost of transportation. This way, they're able to capture any advantage they have in production costs. This concept also applies to urban ground rents. People are willing to pay high rents in cities because of the economic benefits they get in return, such as steady employment, the ability to share information, access to specialized skills, and proximity to customers. Landlords, in turn, take these advantages into account when setting their rents. As a result, products made in cities are sold at the same price as if they were produced in isolation in the countryside, without any of the benefits of urban living. In essence, the rents take away the gains that come from being organized. When it comes to wages, they are derived from whatever is left of the output after rent and interest have been deducted. If people are free to choose their occupation, their pay is determined by the supply and demand for their particular role. The absolute wages, on the other hand, depend on the total output. The more workers there are, the more output there is to be shared among them. Farm wages are equivalent to what farm workers could produce on free land, minus transport costs and interest. Wages for those working with raw materials are equal to the output from the most distant free source, minus interest. Urban wages are equivalent to isolated rural production without the benefits of urban living, minus interest. In all these cases, rent and interest are subtracted from the potential output. According to Gesell, if workers want to increase their wages, they must protect their wage fund from rent and interest. They can do this by ensuring access to free land and free money that doesn't accrue interest. These are the reforms that Gesell proposes, and they would ensure that the full product is distributed to the workers. In essence, Gesell's argument is that urban rents take away the benefits of economic agglomeration, just as agricultural rents take away the benefits of land quality. Both of these factors limit wages. Wages are dependent on hypothetical production on free land or remote material production without rents. To raise wages to their potential output, rent and interest must be eliminated. This would require institutional reforms.

The Free-Land system advocates for equal land distribution and public auctions to lease land, aiming to promote economic equality and social progress.

There are two main concepts. Firstly, the idea of Free-Land, which is essentially the equal distribution of land ownership through nationalization. Gesell believes that the current system of private land ownership is the root cause of many societal issues, including inequality, restricted freedom of movement, and political conflicts. He suggests that by abolishing private property rights and making all land accessible to everyone within a country, we can eliminate class divisions and promote free trade and movement. This would also mean that the income from land rents could be redirected towards public services. Gesell's vision is that this policy would be adopted globally, giving every person equal access to the world's resources. Secondly, Gesell outlines how land would be managed under the Free-Land system. Agricultural land would be leased to the highest bidders in public auctions, with lease terms varying from 1 to 10 years. The money from these land rents would be put into the public treasury to fund services such as pensions and child allowances. Leaseholders would be encouraged to maintain the quality of the soil, as their lease would remain stable as long as they adhere to the terms of their contract. Urban land would also be leased for long periods, with the state reassessing the rent periodically. Gesell believes that these policies would remove the politics surrounding land ownership, stimulate both agriculture and industry, and promote prosperity for all. However, Gesell acknowledges that the Free-Land system has its limitations. It can't completely solve issues such as unemployment, economic instability, and wealth accumulation. These problems also need to be addressed through reforms in commerce and exchange. Simply distributing resources equally isn't enough. While Gesell admits that previous land reformers may have overstated the impact of nationalization, he still sees Free-Land as a crucial step towards achieving economic equality and social progress.

Money is a state creation, not tied to any commodity, and that economists should focus on its legal privileges and public utility, rather than the illusory concept of "value".

Silvio Gesell delves into the intriguing nature of money. He starts by distinguishing money from the material it's made from. To illustrate this, he brings up the case of the silver thaler coin in Prussia. Initially, this coin was seen as just a measure of silver. However, when silver was demonetized in 1872, it became clear that the thaler was actually a creation of the state, its value not tied to its metal content. This is also true for paper money, which continues to be used despite not having any inherent value as per traditional monetary theory. Moving on, Gesell highlights the crucial role money plays due to the division of labor. This division necessitates the exchange of goods, and money serves as the medium for this exchange. It's a must-have for trading goods, which creates a compulsory demand for it. But, Gesell argues, people don't really care about what material money is made from. They simply need a means to exchange goods, regardless of what that medium is made of. This suggests that money could, in theory, be made of paper. However, the prevalent theory of money's "intrinsic value" seems to contradict this idea. Gesell challenges this concept, arguing that value is nothing more than an illusion. There's no tangible substance called "value". The lack of a clear-cut theory of value in economics further exposes the flaws in this concept. Gesell views value theory as an abstract idea that's detached from reality. It's not possible to explain money and interest by attributing them to some mysterious "value" properties. To sum it up, Gesell's argument is that money is a creation of the state, not tied to any commodity. He believes that the monetary system can be improved if economists let go of the pseudo-scientific ideas of "value" and instead focus on the legal privileges and public utility of money. He asserts that enlightened monetary policy can't be achieved as long as we're under the influence of value theory. To truly understand paper money and to enable practical reforms, we need to move past the goldbug ideology.

The price of money, unlike other goods, is determined by the interplay of supply and demand, not its production cost, and is influenced by human behavior and the concept of 'free money'.

How is the price of paper money determined? Gesell begins by challenging the traditional notion of "value" when it comes to paper money. Unlike other goods, paper money doesn't require labor to produce. Therefore, its price isn't determined by the cost of production, but rather by the interplay of supply and demand in the market. To fully grasp the concept of demand for money, Gesell emphasizes the need to differentiate it from the simple desire for money. Demand for money is generated by those who produce goods and need to exchange them. This demand is represented by the stacks of unsold goods waiting to be traded. On the other hand, the desire for money, driven by motives such as speculation, doesn't influence demand. The supply of money, according to Gesell, is the amount that's available for exchange for goods. Those who have money are driven to trade it for goods they can use. The circulating money stock generates monetary demand. Therefore, the price of money is determined by the ratio of the flow of goods (supply) and the stock of money (demand). However, the supply of money isn't just a static number. It's influenced by human actions. People can adjust their offering of money based on their greed or the prevailing market conditions. Gesell introduces the concept of "free money," where the use of money is dictated by its design, eliminating the human element. However, in our current monetary system, the human factor is still very much at play. Gesell concludes by acknowledging that the exact forces that determine the price of today's forms of money are still somewhat of a mystery. More research is needed to understand how the price is set through the interaction of the fixed money stock and the variable human behavior involved in its exchange. Unlike commodities, the price of money doesn't automatically follow from its physical form. There are unique rules at play that need further exploration.

The unique durability and hoardability of money disrupts traditional economic theories linking price, supply, and stock.

Let's talk about the laws of supply and demand, and how they work differently for money and commodities. When it comes to commodities, the supply is directly linked to the actual stock of goods. This is because commodities, like fruits or vegetables, deteriorate over time. If you have a hundred apples today, you can't still have a hundred fresh apples a month from now. They'll rot, and your supply will decrease. Now, let's compare this to money. The supply of money doesn't have the same direct relationship with the stock of money. Why? Because unlike apples, money doesn't rot. Materials like gold, which are often used to represent money, don't deteriorate. This means that money can be hoarded, kept out of circulation, based on the holder's judgement. You can keep a hundred gold coins for a year, and they'll still be a hundred gold coins. Next, let's look at why the crude quantity theory doesn't work well with money. This theory suggests that the price of a good is determined by its supply, which is in turn determined by the stock of that good. But as we've seen, the supply of money doesn't always match the stock. Large amounts of money can be hoarded and kept out of circulation, meaning the supply of money can fluctuate independently of the money stock. Both the crude quantity theory and the cost of production theory stumble when applied to money. The cost of production theory suggests that price is determined by production costs, which affect supply by influencing the quantity produced. But once again, the supply of money doesn't strictly follow the stock of money. Money can be hoarded without depreciating, unlike commodities. So, what's the takeaway here? Theories that apply to regular perishable commodities don't necessarily apply to money. This is due to the unique characteristics of money materials, especially their durability and the ability to hoard them. The supply of money fluctuates independently of the money stock, so simple economic theories linking price, supply, stock, and production costs don't neatly fit money.

"Free-Money", a depreciating currency system, aims to stabilize prices and prevent economic crises by discouraging hoarding and speculation, thus transforming money into a neutral medium of exchange.

The concept of "Free-Money" proposes a change in our monetary system. Imagine a type of paper currency that's designed to keep prices stable and ward off economic crises. Unlike the money we're used to, this currency loses value over time, dropping by 5% each year. This encourages people to spend it rather than stash it away, ensuring that the amount of money in circulation is just right. This idea challenges the status quo of traditional money. As it stands, money can be stored away and used for speculation, which gives an unfair advantage to those who have it. This power to withhold money from the market can be used to manipulate demand, putting sellers of perishable goods at a disadvantage. But with Free-Money, this power is stripped away. Money becomes just a means of exchange, not a tool for exploitation. So, how does Free-Money work? Well, to keep the full value of the currency notes, you'd need to attach stamps to them every week. This not only generates revenue for the authority that issues the money but also encourages people to keep the money moving. The amount of money in circulation is carefully controlled to keep prices stable. If prices start to drop, a sign that there's not enough money around, more is issued. If prices go up, there's no need to do anything because the extra money will lose value over time. One of the main benefits of this system is that the demand for money becomes a predictable, mechanical process, free from manipulation. You can't hoard Free-Money or choose the perfect moment to release it into the market. Money flows steadily, without being influenced by speculation. This keeps prices stable and helps to prevent economic crises. Private money reserves become a thing of the past, as there's no point in hoarding money that's going to lose value. This system, proponents argue, brings money into line with the realities of economic life, turning it into a neutral medium of exchange.

Free-Money, focusing on stable domestic prices, proves more effective for international monetary cooperation than the gold standard.

What impact can Free-Money have on international trade and exchanges? The traditional gold standard, contrary to popular belief, didn't do much to facilitate foreign trade. Why? Because fluctuating exchange rates were still a reality, and many major trading partners were using paper currencies anyway. Moreover, calculating prices in a common gold currency didn't make much sense, as the real purchasing power of money is tied to local commodity prices, not a universal gold standard. Now, when it comes to trade, stable domestic prices hold more weight than stable exchanges. This was evident with the implementation of Free-Money. Initially, the currency office prioritized stabilizing domestic prices. However, this led to fluctuating exchange rates as prices in gold standard countries varied. Then, the focus shifted to stabilizing exchange rates, which in turn caused domestic prices to fluctuate. This cycle demonstrated that the gold standard couldn't deliver both stable exchanges and stable prices simultaneously. Moving forward, the solution could lie in the international adoption of managed paper currencies. With national Free-Money systems in place, each country could focus on stabilizing its domestic prices. This collective effort would naturally lead to stabilized exchanges. Plus, there would be no need to export currency reserves, simplifying the process. It's important to note that fluctuations in foreign currency should not impact domestic prices. In conclusion, Free-Money appears to be a more effective tool for facilitating international monetary cooperation than the gold standard. It offers a more flexible and practical approach to managing currency and trade, making it a promising option for the future.

An international currency union using managed paper currencies could mitigate exchange rate volatility, protecting trade while allowing national economic control.

Imagine two countries, each with their own unique paper currency, engaging in trade. They import and export goods from each other, and at the end of the day, they settle their trade balances using their respective currencies and bills of exchange. Now, the value of these currencies isn't fixed - it fluctuates based on various factors. These changing exchange rates can automatically balance out any trade surpluses or deficits between the countries. But what if we could make this process even smoother? What if we could stabilize these exchange rates to prevent any sudden or drastic changes? This is where the idea of international cooperation comes in. Countries could come together to create a common international currency unit, along with shared principles for stabilizing domestic prices. This international currency reserve would then be issued to member states, helping to automatically settle trade balances and stabilize exchange rates. Each country would still have control over its domestic money supply, adjusting it as needed to maintain parity with the international currency. This system would help protect international trade from the impact of large exchange rate fluctuations. It would take the unpredictability of currency exchange out of the equation, while still giving countries control over their domestic money supplies. This is a much better solution than the gold standard, which may have stabilized rates but also allowed domestic price levels to fluctuate wildly. With cooperation on exchange rates, paper currencies could facilitate international trade just as well, if not better, than the inflexible gold standards. So, the main takeaway here is that the volatility of exchange rates can harm trade, but this can be mitigated through an international currency union using managed paper currencies. This system would allow for national economic control while also ensuring stable cross-border exchange. It's a significant step forward from the restrictions of the gold standard.

Silvio Gesell's theory posits that interest is a product of money's non-decaying nature, not capital goods, and this understanding can help address economic issues like poverty.

Interest is a product of money itself, not from capital goods such as land, houses, or factories. To illustrate this, imagine Robinson Crusoe lending commodities like clothes or wheat without interest. This would be beneficial for Crusoe as it saves him the costs of storage and maintenance. However, lending money is a different scenario. Unlike physical goods, money does not decay over time. This allows money lenders to charge interest by threatening to withhold money, thereby disrupting economic exchange. Gesell refers to the interest charged by money as "basic interest". This is kept in check by competition from other forms of exchange like barter or bills of exchange, and by a switch to more primitive forms of production. Despite these factors, basic interest remains stable over long periods. This basic interest is then transferred to capital goods like houses. To attract investment, these goods must be able to earn the same rate of interest as money. Thus, capital goods bear interest only because of their connection to money. Theories of interest by Marx and others have fallen short because they equate money and commodities, overlooking the power of money to extort basic interest. Gesell argues that this oversight has led to widespread poverty and has given money-capitalists immense power. To counter this, he suggests reforms like Free-Money and Free-Land to free labor and capital from the burden of basic interest. However, eliminating interest is not a quick fix. It requires sustained effort over a long period, as the scarcity of capital is deeply rooted in history. It's not something that can be instantly solved by simply printing Free-Money. In Gesell's view, his theory of interest offers a formula to understand economics and address major issues like war and poverty. By understanding the role of money in generating interest, we can begin to tackle these problems more effectively.

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The Natural Economic Order - Book Summary (2024)

Silvio Gesell

"The Natural Economic Order" by Silvio Gesell is a comprehensive exploration of economic theory, proposing solutions to economic problems through the application of the concepts of Free-Land and Free-Money. The book argues for an economic system that is adapted to human nature, respects the laws of natural selection, and promotes a fair exchange of goods and services.

Key Ideas

Silvio Gesell's work, "The Natural Economic Order," presents an economic system that aligns with human nature, rather than one that arises spontaneously. Gesell believes that an economic system in which humanity flourishes will also be technically superior. He bases this natural economic order on self-interest, not religious principles, as the primary goal of economic life should be to meet physical needs. This system allows those who are successful to voluntarily support others.

Gesell's natural economic order shares similarities with the Manchester liberal free market system. However, he points out that Manchester economists incorrectly assumed that the existing conditions promoted free competition. The truth is, privileges related to land ownership and money skew competition. Gesell suggests that reforms such as free access to land and free money can create the right conditions for free competition, thereby realizing the ideals of the Manchester system.

In this natural order, the most capable individuals are favored through competition that is not hindered by privilege. This, Gesell believes, will lead to the advancement of the human race. He also suggests that land rent should be distributed to mothers to support child-rearing, thereby ending financial dependence for women. This would restore natural selection among individuals. In contrast, state control of the economy would hinder evolutionary progress.

Gesell asserts that the instinct for self-preservation is a better motivator for effort and productivity than altruistic ideals. He believes that communism fails to motivate people. The natural order, on the other hand, promises greater prosperity by fully unleashing self-interest. It represents progress beyond both early communism and recent flawed capitalism, moving towards individual sovereignty.

Gesell believes that the events of the First World War and its aftermath validate his theories. He argues that current ideologies lack robust economic programs and that reforms based on the natural order are urgently needed to prevent disaster. Nationalization, he contends, leads to official interference that is incompatible with individual freedom. The choices, according to Gesell, are to complete the transition to the natural order or revert to communism.

In his 1920 preface, Gesell reemphasizes that real-world events have proven his theories correct. The natural order allows for full individual development and eliminates the need for state intervention. He argues that communism is a reflection of primitive economics and reactionary control, while the natural order promises ongoing social progress through freedom.

"The Natural Economic Order" by Silvio Gesell is a comprehensive exploration of economic systems and theories. Gesell argues that the economic order should be natural, meaning it should be adapted to the nature of man and not imposed externally. He proposes two main solutions to economic problems: Free-Land and Free-Money. Free-Land refers to the abolition of unearned income from land ownership, while Free-Money refers to a monetary system that loses value over time, encouraging spending and circulation. Gesell's theories challenge both capitalism and Marxian socialism, offering a new perspective on economic structures.

10 Actions to Implement Learnings:

Understand the concept of Free-Land: Educate yourself about the economic implications of land ownership and how it can lead to unearned income.
Explore the idea of Free-Money: Learn about the potential benefits of a monetary system that encourages spending and circulation.
Question traditional economic systems: Don't accept capitalism or socialism as the only options. Consider alternative economic structures.
Promote economic equality: Advocate for systems that reduce wealth gaps and promote equal opportunities.
Support transparency in economic systems: Encourage systems that allow individuals to act according to their nature without fear of hardship or injury.
Challenge the concept of interest: Understand Gesell's critique of interest and consider its implications.
Advocate for economic freedom: Support economic systems that allow for individual freedom and self-determination.
Educate others: Share Gesell's theories with others to promote discussion and understanding of alternative economic systems.
Apply Gesell's theories to your own economic decisions: Consider how you might apply the principles of Free-Land and Free-Money in your own life.
Stay open to new economic ideas: Keep an open mind and continue to explore new economic theories and systems.

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