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.
Freiwirtschaft consists of three central aspects, usually summed up as The Three Fs:
The (proposed) results include:
There seems to be an attempt to realize Freiwirtschaft in a small area in Canada, based on artificial money called Gogo.
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The basic economic ideas of Freiwirtschaft already have been published in 1890 by the Hungarian-Austrian economist Theodor Hertzka in his novel Freiland - ein soziales Zukunftsbild[1] (Freeland - A Social Anticipation)[2].
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 supply. 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-stabilizing.
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.[3] 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.