Hire-purchase: a few remarks

We are in favour of stimulating home-ownership through hire-purchase instead of mortgage loans. Simply states hire-purchase is a mixture of renting and buying.

If Alice owns a certain good, such as a house, which Bobs wants he could either sell or rent it from her. In case Bob buys Alice’s house, then he becomes its owner. Usually Bob will not have enough money pay the price in one time, so he has to loan the money.

Alternatively he could rent rather than buy Alice’s house. In this case she will remain the owner of the building, while he obtains the right to use it. Once Bob wants to leave he simply end its rental contract and returns his keys to Alice. And in certain circumstances Alice may end the contract as well, for instance if Bob does not pay the rent.

However, if Alice and Bob agree to a hire-purchase of her house, then the following is the case. Suppose the both agree on a price of 75,000 talents and that Bob will pay Alice 500 talents a month [this will take 12.5 years to pay off the total 75,000]. As long as Bob has not pay the entire 75,000, Alice will remain the legal owner. Ownership is only transferred [1] once the total price has been paid.

The fact that Alice remains the owner has several consequences. If Bob fails to fulfill his duties, such as failure to pay the monthly installments, the house acts as a security. That means that Alice can reclaim the house and dissolve the contract, though Bob might be entitled to some compensation. For Bob, however, is rest-debt will no more than the non-paid rent.

Example: Suppose that Bob has paid for 36 months his rent, than defaults on this duty for the next 6 months after which Alice ends the contract. In this case Bob’s outstanding debt would be 3,000 talents, but if he had a bank loan he would have a rest debt [after closure] of 57,000 talents. For Alice the benefit is that she can seek another hire-purchaser and has earned 18,000 talents.

Another consequence of Alice remaining the owner is that she could sell her property to a third party. It is clear that Bob is in need of some legal protection here, otherwise no one would dare to hire-purchase a house. Alice should be entitled sell the house hire-purchased by Bob, to Carol, provided that this sale does not affect the terms of the contract with Bob. In this case the only thing which would change for Bob is that now he has to pay Carol instead of Alice.

The possibility for home-owners to sell the hire-purchase contracts to third parties could be advantageous. In above example it will take Alice 12.5 years to get her 75,000, if she could her house to, for instance, a bank or a governmental institution, she will be able to receive [a large part of] this sum earlier.

Further the hire-purchaser should be protected by law against inappropriate dissolution of the contract by the hire-seller. We propose that only structural default by the purchaser should be reason the end the contract by the seller.

[1] Home ownership will be registered in a national register. Transfer of ownership means in this context that the data in this register will be updated.

Borrowing versus leasing

In our post A Cooperative Economy we briefly discussed the option of leasing as a method of funding worker cooperatives. The essence of a worker cooperative is that workers own, or at least control the means of production, or capital, instead of being employed by the owners of capital.

The fundamental problem is how can workers who are starting a cooperative, can acquire the means of production they need. Suppose that Alice and Bob are setting up a worker cooperative, but need 100,000 worth of equipment. Assuming that both have a monthly basic income of 1,200, it will be clear that they can’t raise the money on their own.

Of course, Alice and Bob can borrow 100,000 from the bank or some other financial institution. But this we leave both Alice and Bob indebted, which they have to pay off even in case their cooperative proves to be a failure. This is a prospect which might and will deter workers from forming worker cooperatives.

The issue at stake here, is the idea that a worker cooperative should own their means of production, which means that the cooperative has to purchase those. A large one time expense. There are, however, alternatives for outright ownership of the means of production.

Instead of buying, Alice and Bob could decide to lease the equipment they need. Suppose they could lease this equipment for, say, 10,000 a year, their cooperative only needs to raise 10,000 in order to start-up. When the cooperative is successful, they will be able to pay for the capital they use without incurring additional debts.

Alternatively Alice and Bob could hire-purchase the capital goods. The difference between lease and hire-purchase, is that in the latter case the goods will become the property of the lessees, while in the former cases these will return to the lessor at the end of the contract (or the lease contract maybe renewed). Both forms of credit have a big advantage from the perspective of the A&B Coop: in case it will default on its payments the lessor can only take back the leased goods, and refuse further use, but Alice and Bob cannot go bankrupt.

Because the lessor can reclaim his goods in case of default by the lessees, he takes less risks than in case of a monetary loan. Hence the costs of funding a business by lease or hire-purchase will be lower than the interests on a monetary loan.

This leaves us with the question who should supply the goods for lease. We propose that local governments to set up publicly owned lease companies which specialize in leasing capital goods to worker cooperatives. These lease companies can be funded either by the revenue raised by the lease of land or by borrowing the required funds. Money can be borrowed either from the Federal Credit Bank or from private investors. In the latter case interest rates can be kept low, since the government will guarantee the payment of debts.

Though in Mordan space settlements, a substantial portion of the means of production will be owned by the community, our system differs from Soviet-style communism. First, unlike in the USSR the private ownership of capital goods will be legal. Second worker cooperatives will operate in a free market rather than in a command economy, i.e. the state does provide capital to the cooperatives, but it does not determine what should be produced.

In the economic system we propose, labour will hire capital rather than be hired by capital. And hence capitalism is essentially reversed without resorting to Soviet communism.