Freiwirtschaft (German for free economy) is an economic idea founded by Silvio Gesell in 1916. He called it Natürliche Wirtschaftsordnung (natural economic order). In 1932, a group of Swiss businessmen used his ideas to found WIR Bank (WIR).
Freiwirtschaft consists of three central aspects, usually summed up as The Three Fs:
- Freigeld (free money)
- Freiland (free land)
- All land is owned by public institutions and can only be rented, not purchased (see also Henry George).
- Freihandel (Free Trade)
- Free Trade has long been a mainstream position now, but the anti-globalization movement largely opposes it.
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
The basic economic ideas of Freiwirtschaft were published in 1890 by the Hungarian-Austrian economist Theodor Hertzka in his novel Freiland - ein soziales Zukunftsbild (Freeland - A Social Anticipation).
Flaws of the monetary system
Freiwirtschaft claims that current monetary systems are flawed. According to Adam Smith, prices convey information. For example, dropping prices on a product mean that there is less demand or more supply of that product. This leads to a buyer buying more, or a seller/producer starting to sell/produce something else, thereby reducing the supply of that product. As a reaction, assuming constant desirability, the price of the product 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-stabilizing.
This is not the case in the financial markets. Without the continuous increase of the amount of money in circulation by the central bank, the demand would continuously drop, since the velocity of money circulation 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 current system, according to Gesell, is the ill-transported information in the price. Money is nothing but claim for goods and services, usable in the economies that accept money in exchange for the former. 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 the "Freiwirtschaft" theory, this is the reason for the cycle of crisis in world economy.
- Theodor Hertzka: Freiland - ein soziales Zukunftsbild, Leipzig 1890 Summary on the website of the Otto-Lilienthal-Museum
- Theodor Hertzka: Freeland - A Social Anticipation, St. Loyes, Bedford, June, 1891. Book online at Project Gutenberg
- Norbert Rost: Eine experimentelle Überprüfung der Aussagen der Freiwirtschaftslehre (An experimental check of the statements of the Freiwirtschaft) (diploma thesis, Dresden, 2003) p. 25 seqq.
- Introduction to Freiwirtschaft
- Materialien zur Geld-, Zins- und Schuldenproblematik (in German, partly English)
- Fairconomy (in German, partly English)