"Capitalism is the only alternative to Socialism"

Margaret Thatcher once said: "there is no alternative", meaning no alternative to her own brand of Capitalist economics. Economics textbooks tend to give the same impression – they describe "free market" economics and little else – except an occasional comparison with Socialism/Communism.

This idea – that economics is limited to an either/or choice between Capitalism and Socialism – seems taken for granted by the media. But it's a false dichotomy.

Other alternatives

Adam Smith and Karl Marx don't have a monopoly on economic choice. Here are some alternatives generally not covered by the media:

Basic Income

A Basic Income is an income paid to all individuals, without work requirement or means test. People are free (but not obliged) to top it up with income from other sources, eg self-employment or jobs. Over the last two centuries this idea has been independently proposed under a variety of names – Citizen's Income, Universal Benefit, State Bonus, Social Credit and National Dividend – usually with the aim of remedying social problems such as poverty and unemployment.

Several ways have been suggested to fund a Basic Income. Nobel prize-winning economist James Meade proposed a social dividend funded from the return on publicly owned productive assets. An existing example of a Basic Income funded this way is Alaska's dividend scheme, which is funded from royalties on Alaska's vast oil fields. Some economists think that funding should come from redistributive income taxation or a tax on land. These ideas aren't new – as far back as 1796, Thomas Paine favoured a state-provided universal income to compensate for the inequitable division of land, which he saw as belonging to everyone. Of course, technology has led to vast increases in national wealth since Paine's era, making the idea of a universal income seem all the more affordable.

The Basic Income concept makes good bait to dangle in economic conversations. The uninitiated, taking the bait, will argue that it would remove the incentive to work, and nurture an idle underclass. In fact, compared to the existing welfare system, Basic Income provides a strong financial incentive for creative and productive activity. With Basic Income it's more financially rewarding to move from unemployment into a job – because you keep your Basic Income payments, whereas you would lose your dole. Many common types of work – eg low-paid casual, part-time or self-employed work – increase your disposable income under a Basic Income scheme, whereas the income from such work is subtracted from your dole under the current system. Many worthwhile activities – adult education, voluntary work, starting a business, etc – are penalised or even criminalised under the current welfare system, because they interfere with the condition of "continuous availability for work." Most wealth-creating activity begins modestly, perhaps not generating enough for a person to survive on at first. Basic Income nurtures such activity, whereas the welfare system aborts it.

Guaranteed Income

Guaranteed Income is sometimes confused with Basic Income, but the important difference is that it uses a means test. Every individual is guaranteed a minimum income (set above the poverty level) – if your income falls below this level, you automatically get a top-up from the government, but as your personal income increases, the amount of top-up decreases. Guaranteed Income, like Basic Income, is not conditional upon work.

Several variations of Guaranteed Income have been proposed, the most well known being Robert Theobald's 1964 scheme for "Basic Economic Security". Theobald was concerned about the effect of technology and increasing automation – he thought it was time to dissolve the traditional link between income and work, since most work would eventually be automated. Theobald's proposal's were taken quite seriously by the US administrations under Lyndon Johnson and Richard Nixon. In fact, Nixon adopted Guaranteed Income proposals as part of his "Family Assistance Plan" bill (which was unfortunately defeated in the Senate).

Negative Income Tax

One variation on Guaranteed Income is the Negative Income Tax, which would provide government top-ups, via the tax system, to those below a certain income level. It should be pointed out to those who see this as a "soft" leftist idea, that Negative Income Tax was proposed by Milton Friedman, whom many regard as being on the right of the economic spectrum. Friedman's intention was to create a system that costs less than the current welfare system, but which avoids the degrading nature of welfare.

Willingness to Work?

Many so-called "guaranteed minimum income" schemes restrict entitlement, among the unemployed, to those "willing to work" – a condition similar to that of current welfare systems. The Belgian political theorist Philippe Van Parijs argues that when we assess willingness-to-work, we should make the distinction between pointless, dead-end jobs and useful, fulfilling or "stepping stone" jobs – and that the best people to make this distinction are the ones doing the jobs. This is a different approach from most conventional economists, who tend to see all market-created jobs as "good" and "worthwhile".

Employers can currently exploit the willingness-to-work condition by providing what Van Parijs calls "lousy jobs", which people are forced to accept. On the other hand, how, without the willingness-to-work condition, do you get people to take jobs which are essentially decent but low-paid? Under a Guaranteed Income scheme there is little financial incentive to take low-paid work, hence the condition. Van Parijs concludes that the best solution would be a Basic Income scheme with no willingness-to-work condition. This would remove the coercion of taking "lousy" jobs, but retain the incentive to take decent low-paid jobs, since even the lowest paid jobs significantly increase one's disposable income under a Basic Income scheme.

Zero-interest Currency

A different type of non-coercive redistribution of wealth comes from the old Individualist (as opposed to Collectivist) Anarchist approach of allowing free trade to drive down the cost of "borrowing" money. This idea originated with early anarchists such as Pierre-Joseph Proudhon, Josiah Warren and Benjamin Tucker.

Free trade is supposed to drive down prices through open competition, but according to Proudhon, Warren and Tucker there is a fundamental flaw in the existing system: a lack of competition in the issuance of currency. The current legally enforced money-issuing monopoly (eg the Bank of England or the Federal Reserve) keeps interest at an artificially high level – if free competition was allowed in the creation and distribution of alternative currencies, the cost of credit could in theory fall to a rate well below 1% (the cost of administering the credit; true interest would be zero). As Benjamin Tucker explains:

"If a thousand men engaged in different lines of business unite to form a bank of issue; and if this bank of issue unites with other similar banks for clearing purposes; and if said bank lends its naturally well-known circulating credit… do these loans of the bank's credit cost the bank anything beyond the salaries of manager and assistants, rent of building, expenditure for paper and printing, losses by depreciation of securities, and sundry incidentals? Do not statisticians and economists agree that a discount of one-half of one percent covers the expenses referred to?"

When asked why business people would be motivated to issue their own currency at a cost not exceeding running expenses and incidental losses, Tucker responds that in forming a network of such banks, the business people would establish a collective credit with circulating power, enabling them to borrow money at less than one per cent – which, he assures us, would be sufficient motivation.

The beauty of this idea is that it follows "free market" theory to logical conclusions. It's a good argument to use on "leave it to the market" types. Get them to acknowledge that a currency monopoly is at odds with free market philosophy, then point out that a genuinely free market, without any monopoly, is the economic recipe for an Individualist Anarchist utopia. With zero-interest credit, housing rent would effectively disappear, because nobody would give money away to landlords if purchasing was cheaper. In fact, the anarchists claim that zero-interest currency would eventually remove all forms of usury, including "profit", from economic transactions. Adam Smith's principle of "labour being the true measure of price" would thus come into effect through free competition driving out all usurious components of price. Workers would be fully compensated for their work at last, and not a Marxist or Collectivist in sight.

Alternative Currencies

Although it's normally illegal, there have been hundreds of attempts to issue alternative currencies. The British government suppressed an attempt to distribute low-interest currency in the American colonies (prior to the revolution) and quashed a similar attempt by Scottish banks – in order to preserve the monopoly of the Bank of England. There are published records of experiments in issuing private currencies by the American Individualist Anarchists (eg True Civilization by Josiah Warren and Mutual Banking by William Greene), and of course there are experiments that we don't know about because of their secrecy. During the 1930s depression in America, hundreds of alternative local currencies were issued. The government mostly turned a blind eye unless currencies threatened to cross state lines, in which case they put a stop to it. It will be interesting to see how governments react to alternative electronic currencies springing up in cyberspace.

Stamp Scrip

In 1891 an Argentinian businessman and economist named Silvio Gesell went one step further than the Individualist Anarchists by proposing a system of negative interest currency. The most well-known form of this currency was "stamp scrip", which required a stamp to be affixed to the back of a money note each month, to revalidate it.

Gesell believed that money is fine as a medium of exchange, but that it tends to be used as an instrument of power, capable of dominating and distorting the market. For example, money can be hoarded – temporarily withheld from the market for speculative purposes – without exposing its holder to losses. Real material goods, on the other hand, can't be hoarded without significant costs – either in the natural deterioration of the goods, or in the cost of storage.

In order to encourage the natural circulation of wealth instead of speculative hoarding, Gesell proposed "rusting bank notes" (a metaphor for negative-interest money), to bring about an "organic reform" of the monetary system. With money behaving more like real material wealth, the distortions in the system caused by hoarding and other forms of usury would be removed. This, he argued, would result in people receiving the full proceeds of their own labour, and would enable large sections of the population to quit wage slavery and work in an autonomous manner in private and co-operative enterprises.

A successful experiment with Gesell's theories took place in the Austrian town of Wörgl in 1932, during the depression. Wörgl effectively ran out of money, so the mayor of the town printed his own. The resulting currency, Wörgl stamp scrip, was designed to automatically earn negative interest. Each month its holders had to pay a stamp fee of 1% of the value of the note, so people spent the money as fast as possible. This resulted in a huge increase in "real wealth" – new houses, a new water system, repaved streets, a new bridge, a ski jump, etc. But when hundreds of other Austrian towns came up with plans to copy the successful Wörgl scheme, the central bank panicked because of the threat to its monopoly, and it soon became illegal to issue alternative currency in Austria.

The Digital Economy

Apart from the possibility of alternative electronic currencies, the "digital economy" hasn't delivered much of revolutionary economic impact. In most cases, "digital economy" propaganda is standard Reaganite or Thatcherite economics disguised by techno-gibberish.

A few historical facts and figures will help to justify this cynicism towards the digital economy. The first electronic money-trading system was opened by Reuters in 1973, shortly after the dismantling of the gold standard and the Bretton Woods system (which regulated international currencies). From earliest records up until then, 90% of capital transactions had involved the "real economy", ie trade and investment, with only 10% being speculation. By 1995 a staggering reversal had taken place – trade and investment accounted for only 5% of capital transfers, with 95% being short-term speculation.

Electronic trading networks have developed a virtual economy in which most of the money is made not through actual investment, but through transacting in a sort of abstract wealth. For example, huge profits can be made from a rumour about an indirect effect of a future transaction – but the future transaction doesn't necessarily have to happen for the profits to be made. By far the biggest profits come from currency speculation, conjured up by supercomputers which transact fast enough to exploit microfluctuations in exchange rates.

Very little of this virtual-economy profiteering produces anything of value in the sense of "real wealth" – ie things of real value to human lives. Short-term financial speculation tends to create economies of high profit, low investment, low growth and low wages – in other words, it's detrimental to the lives of most people. We have some strange notions about the respectability of certain types of income. When poor people receive modest welfare payments without producing anything of value, they're labelled as "spongers", but when speculators bleed vast sums from the digital economy, without producing anything of value, we congratulate them on their skill.

The Tobin Tax

James Tobin, a Nobel laureate economist, foresaw the detrimental effects of escalating currency speculation during the 1970s. He proposed a small tax on foreign currency transactions that would put "sand in the wheels" of international speculative finance, and thus help to prevent instability in the global financial system.

One big advantage of the Tobin Tax is the amount of revenue it would generate. Currency speculators trade over $1.8 trillion dollars each day across borders. With the tax set at the very low proposed rate of 0.1 to 0.25 percent, an estimated $100 – $300 billion per year would be generated, depending on the formula used. Supporters of the Tobin Tax say this revenue should be used to tackle world social and environmental problems. And it's interesting to note that the UN and World Bank estimated in 1997 that the cost of removing the worst forms of poverty and providing basic environmental protection would be about $225 billion per year.