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Post-Modern Fiscal Theory

by ChrisCook Fri Feb 24th, 2012 at 11:22:44 AM EST

A Guest Post on the FT Alphaville site......


Post Modern Fiscal Theory

Following the recent upsurge in interest in Modern Monetary Theory (MMT) I was rash enough to make the comment that the central insight of MMT - that modern 'fiat' money is a credit instrument ultimately based upon the government's power to tax  - is muddied by disputes as to what the proper basis for taxation actually is, or indeed, whether there should be any taxation at all.

Alphaville invited me to contribute a post on the 'Modern Fiscal Theory' I suggested. But I decided to go further and document my view that in a world of direct connections a Treasury is no more necessary as a credit intermediary than is a Bank.

Post-Modern Fiscal Theory looks to the networked, de-centralised and dis-intermediated economy emerging rapidly from the post October 2008 wreckage.


Zen and the Art of Economics
What is Value anyway?  As J A Wheeler put it, "Reality is defined by the questions you put to it".

Value is in my view definable only in relative terms, by reference to a standard unit of measure for value or unit of account. This standard unit is akin to a metre as a standard unit of measure for length, and a kilogramme as a standard unit for weight.

What are the sources or bases of Value? My analysis is as follows:

Location - 3D Space - an immaterial; effectively finite and rivalrous resource;

Energy -  material and immaterial; static or dynamic - a mix of finite (non-renewable) and effectively infinite (renewable) rivalrous resources;

Intellect - (i) subjective - ie what is between our ears including knowledge, skills, experience, intuition, contacts, gumption and so on; and (ii) objective - energetic patterns or records; independent of location, and above all....infinite and non-rivalrous resource.

Location, Energy and objective Intellect are productive assets subject to rights of ownership and use.  Since slavery was abolished, productive individuals cannot be owned, but they can enter into obligations such as debt.

More to the point, they may contract the use of their Manpower (energy - or unqualified Labour) and the use value of the subjective Intellect (qualified Labour) with which they put their energy to best use.

Back to the Future
The financial instrument which will underpin what Gillian Tett calls a 'Flight to Simplicity' goes back many hundreds if not thousands of years.  Its very existence underpins the MMT case, and it has been airbrushed from economic history for over 100 years.

For some 500 years sovereigns financed their expenditure through issuing 'Stock' to suppliers and investors in exchange for value received.  This stock -which took the form of half of a wooden tally stick - was returnable to the Exchequer in settlement of tax obligations.  

It was not a receipt for (say) gold held in custody, or for value received: stock was and still is (gilt-edged stock is a dated credit instrument) an IOU or credit instrument.

The very phrase 'rate of return' derives from the rate at which stock may be returned to the issuer, and that rate depends upon the existence and rate of the value flow.  By creating a new generation of stock from the flows of value derived from productive people and from productive assets, such as rental value, or energy value, we may completely re-base credit and currency and enable direct 'Peer to Asset' investment and 'Peer to Peer' credit.

As Minsky said: "Any economic unit can emit currency. The serious problem is in getting it accepted."

Law is Code
A new generation of legal code is now emerging: or rather, ancient code is re-emerging in modern form. Prescriptive one-way agreements imposed under the Anglo Saxon 'Rule of Law' to manage conflicted relationships are replaced by simple consensual agreements to a common purpose.  This is normal practice East of Suez: the joke is that there are as many Sumo wrestlers in the US as there are attorneys in Japan.

The issue and acceptance of a new generation of Stock or currency requires such consensual agreements - frameworks of trust - within which the various stakeholders will interact.  One of the key outcomes is that intermediaries will transition to a new role as service providers.

For sceptics, I point out firstly, that dis-intermediation is already happening. One of the reasons for the current bubble in commodity prices is that banks no longer have the capital to intermediate market risk and have convinced risk averse investors to do so on a massive scale. Banks make juicy returns on minimal capital, demonstrating that dis-intermediation is actually in their financial interests.

Secondly, P & I Clubs based in London have long mutually insured and pooled risks which insurance intermediaries are unwilling or unable to take, and for 135 years a service provider, Thomas Miller, has managed these clubs and the risk.

An Energy Standard
While we will in future see people-based credit and asset-based currencies, the question remains as to what standard unit of account should be used to price exchanges of value.  

A unit of energy is the only absolute, and in the same way that carpets are not measured in light years or angstrom units, the 'Energy Standard Unit' should be relevant to everyday experience, eg the energy equivalent of 10 Kilo Watt Hours.  Note that this unit of account is not the same as the varied units of energy-based currency which may evolve and be exchanged by reference to the standard.

I foresee two great parallel trends.

Firstly, resolution of unsustainable mortgage (land-based) debt into a new generation of stock based upon rental values in a debt/equity swap on a massive scale.

Secondly, transition to a sustainable economy through direct 'energy stock' investment and the Big Trade of the 21st Century will be the exchange of intellectual value for the value of energy saved: Nega Watts and Nega Barrels.

Adoption of an Energy Standard leads to a new calculus forming the basis of all economic decisions.  Dollar Economics becomes Energy Economics.

Display:
The massive change we are going through in the W*st is driven by our increasing interconnectedness, that is making hierarchical organizations costlier and non-linear organizations much cheaper.

The hierarchical organization can only function by putting boxes around itself and its contents - exactly what interconnectedness makes impossible. That's your irresolvable conflict right there - for management types.

You can't be me, I'm taken

by Sven Triloqvist on Fri Feb 24th, 2012 at 01:14:22 PM EST
Must be getting dyslexic, i read the title as Post Fiscal Monetary Theory.

Nice job, whatever nom d'plume this Chris Cook character uses.

"Life shrinks or expands in proportion to one's courage." - Ana´s Nin

by Crazy Horse on Fri Feb 24th, 2012 at 01:35:41 PM EST
theoretical goals and support your program. And I think that there are more peer-to-peer arrangements arising now than in the last 70 years in the U.S. Here in the rural Counties of southern Washington state and northern Oregon, there are some movements with real potential: Gorge Grown Food and related Co-ops, Friends of the Food Bank, RiverHOURS currency. However, I'm not seeing anything approaching some kind of threshold energy level for these projects in the wider context. Reenforce my hopes, please, and recount the real-world successes - or the incipient, but 'concrete' building blocks.

paul spencer
by paul spencer (spencerinthegorge AT yahoo DOT com) on Sat Feb 25th, 2012 at 02:33:35 PM EST
In the last year or so, I have made more progress with getting practical projects going than in the previous five.

Basically people are running out of conventional options, so it's a variation of Sherlock Holmes' dictum that if you eliminate the impossible, that leaves only the highly improbable.

In particular, I have got several excellent connections and opportunities/projects in the US, and am planning a trip (as yet unfunded) around a speaking engagement in Philadelphia at the end of April.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Feb 26th, 2012 at 01:38:52 PM EST
[ Parent ]
I might be able to set up airfare to Portland, OR and a couple of meetings. You can stay with us.

paul spencer
by paul spencer (spencerinthegorge AT yahoo DOT com) on Sun Feb 26th, 2012 at 01:43:39 PM EST
[ Parent ]
Portland is a regular hotbed of radicalism......

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Sun Feb 26th, 2012 at 03:03:13 PM EST
[ Parent ]
I feel very fortunate to know Mr Chris Cook, who has done more than (al)most (everybody) to improve my perceptions and inspire rethinking. And especially privileged to have observed the conceptual evolution of an understandable view of economic dynamics that points to possible solutions. An observation conducted over - what is it? - five years.

Your increasing traction is a source of great personal satisfaction ;-)

You can't be me, I'm taken

by Sven Triloqvist on Sun Feb 26th, 2012 at 03:25:31 PM EST
[ Parent ]
....and by the way, I think that the time is now ripe to re-activate the Mint............

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Sun Feb 26th, 2012 at 06:36:21 PM EST
[ Parent ]
Yes, developments since then make it even more interesting - though sadly I am snowed under, in more ways than one, for the next 3 months. Perhaps we could look at it again at the end of the summer?

You can't be me, I'm taken
by Sven Triloqvist on Mon Feb 27th, 2012 at 12:48:54 PM EST
[ Parent ]
Indeed.

I think I might be in a better position myself by then, as well.

Generic mobile payments and Nokia are key, I think.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Feb 27th, 2012 at 04:35:13 PM EST
[ Parent ]
The merchants on the Washington side have special incentives for P2P arrangements, notably the lack of sales tax in Oregon and the presence of the B&O tax in Washington.  Getting over these hurdles is a losing proposition if all you use are the tools on the table, which is why just about everyone uses P2P and other under-the-table tools to some extent.  And "under the table" is exactly how the taxing authorities (which can do something about it directly) and the banks (which can get others to do something about it) view these arrangements.  They aren't getting theirs, so the crushing must commence at once.  Which is what really has to be overcome to make this work.
by rifek on Sun Feb 26th, 2012 at 08:24:34 PM EST
[ Parent ]
The problem I see with this is that there are perfectly valid reasons to use both debt and intermediaries in a financial system.

A disintermediated economy can be visualised as a network in which most nodes connect to only a few other nodes. Each connection has three properties: A cash flow, an outstanding debt balance and an outstanding equity balance. Each node has five properties: Its aggregate cash flow, the equity it owes to other nodes, the debt it owes to other nodes, its real capital and its clear equity - the equity that does not appear as an asset for any other entity.

If some inauspicious event happens to a node, the holders of any equity owed to other nodes will suffer a loss. If you do not allow debt balances between nodes, then any and all inauspicious events will cause losses for every node in the network. These losses will be serially diluted, of course, but since the average node has a low number of outgoing connections, this dilution is relatively slow.

Debt, in this picture, functions much as a dike against such inauspicious events: As long as the inauspicious event is within tolerances (that is, as long as it does not wipe out the equity of the node principally involved), the loss is not transmitted to the wider system. But when it fails the failure is correspondingly spectacular, because the pool of equity in which the losses can be diluted is correspondingly smaller.

Banks serve as the second tier of dikes: By intermediating credit, it detaches the credit relationship from the cash flow relationship. Rather than node A doing business with node B and extending or obtaining credit from node B, it does business with node B and extends to or obtains credit from node C.

This has two advantages: The first is that it puts node B at one remove from node A's insolvency. Node A's insolvency will have to be bad enough to wipe out node C's equity as well before node B takes losses. The second advantage is that node C will accumulate a lot of connections, and a more connected node is, ceteris paribus, less affected by any individual default.

Both of these add value for every risk-averse node in the network. Which is very nearly all of them.

As always, there is a tradeoff between failing gracefully and failing rarely. By imposing a model that forces the system to fail gracefully, you are also mandating that it fails a little bit all the time.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Feb 26th, 2012 at 04:52:03 PM EST
If some inauspicious event happens to a node, the holders of any equity owed to other nodes will suffer a loss. If you do not allow debt balances between nodes, then any and all inauspicious events will cause losses for every node in the network. These losses will be serially diluted, of course, but since the average node has a low number of outgoing connections, this dilution is relatively slow.

This is only true if you believe in the conservation of money.

Which is to say, it's nonsense.

The concept of 'loss' is inherently misleading, and serves no useful purpose in a mature social economy.

Going back to an earlier conservation, money is a decision-making process, not a thing. It's one - extremely poor and rather stupid - way to decide how to steer policy and values.

With a mature social structure, neither 'loss' nor 'debt' have anything useful to contribute as policy concepts. You can certainly have 'mistakes' and 'things that didn't work for some reason' - but you'll always have those.

Critically the concept of loss does nothing to keep them from happening. You can use other metrics to avoid them, with equal - or more likely much greater - predictive power and effectiveness.

The only way in which loss may matter as a concept is if you're attempting to account for physical resources which can never be replaced.

Any other kind of loss is illusory and psychological - which is a bad foundation for useful policy, as we all know.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sun Feb 26th, 2012 at 05:55:33 PM EST
[ Parent ]
Excellent, TBG.

The point that Jake is missing is that in a networked P2P economy there will be no double-entry book keeping and there will be no Profit and Loss; there will be no dated debt and no possibility of default; there will be no (intermediary-issued) money paid for the use of money; and intermediaries will transition to service provision, thereby minimising the finance capital they need.

There will instead be shared transaction and title registries; shared risk and shared surplus. The risk for an investor - as it is with any form of equity, is the absence of any return.....except that in the case of equity-as-undated-credit (as opposed to the sociopathic 'divine right of capital' equity in a Corporation) the word 'return' refers to redemption of credit against value received.

'Peer to Peer' credit will be cleared within a suitable framework agreement of trust.

'Peer to Asset' credit will be a 21st century form of the Stock which has been airbrushed from economic history for hundreds of years since sovereign credit was first privatised in 1694.

This dis-intermediation is already taking place because 'it works' for the banks who have suckered risk averse investors into commodity and equity markets.

Once these bubbles collapse, then I believe we will move to the adjacent possible - as above - and capitalism as we know it will devour itself and emerge in a non-toxic form.

This will happen is because it is simply inefficient to pay a return to someone for nothing if you do not have to.....and those businesses who do not pay rentiers will be at a competitive advantage to those who do.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Feb 26th, 2012 at 06:33:10 PM EST
[ Parent ]
ThatBritGuy:
conservation

freudian typo dept... ;)

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Sun Feb 26th, 2012 at 08:39:45 PM EST
[ Parent ]
This is only true if you believe in the conservation of money.

No, it is true as long as economic actors are averse to risk and uncertainty.

Going back to an earlier conservation, money is a decision-making process, not a thing. It's one - extremely poor and rather stupid - way to decide how to steer policy and values.

With a mature social structure, neither 'loss' nor 'debt' have anything useful to contribute as policy concepts. You can certainly have 'mistakes' and 'things that didn't work for some reason' - but you'll always have those.

That may be, but what Chris is proposing is not such a social structure. It's just a return to a more primitive form of money. We tried private money in the 19th century. It was abandoned for a number of unimpeachable reasons.

Critically the concept of loss does nothing to keep them from happening.

That is not the point of considering how losses propagate through the economy. The point of considering the propagation of losses is that people tend to want to protect themselves from losses. For, again, a variety of mostly unimpeachable reasons.

If you have an all-equity financial network, of the sort Chris proposes here, it becomes impossible to protect yourself from the fallout from other people's failures. People don't like eating the fallout from failures they had no part in making.

You may argue that this is a silly attitude, that people should realise that we're all in this game together and support rational collective planning. And that may be a perfectly sound idea. But people will none the less deploy considerable ingenuity towards protecting themselves from the negative consequences of what they perceive as other people's mistakes.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Feb 26th, 2012 at 09:19:31 PM EST
[ Parent ]
If some inauspicious event happens to a node...

This gets to the basic concept of underwriting. If the underwriting is properly done a project whose monetary purpose is to pay back with a return the money invested will only fail for unforeseeable and rare reasons, such as having a rock fall from the sky upon it. But, in the existing system, the critical function of underwriting has been seriously compromised by control fraud which now extends to the entire apparatus of government and banking. This leads to the question of which is easier: breaking the control fraud in the interest of saving the long term survival by sacrificing the short term interest of those running the fraud or abandoning ship in the hope of not going down with it or being destroyed while on board?

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Feb 27th, 2012 at 11:04:28 AM EST
[ Parent ]
What are the sources or bases of Value?

You've left out one critical factor, which is the single most important driver of economics today:

Value is used as a social/Darwinian game to define a pecking order and hierarchy.

In conventional economics the accumulation of this kind of 'value' becomes an end in itself - not because of any objective use-value, but as a social convention.

Put very simply, value is used as a store of 'face'. High-face individuals are exalted, low-face individuals are punished. Many business and political transactions are based on creating an appearance of face and 'value' where there's no objective reason for same.

Similarly high-value collectives - cities, corporations, nation states - are exalted, and low-value collectives are attacked and destroyed.

Current economic understanding has the scientific sophistication of a wolf pack. So much time, energy and effort goes into status plays that there's very little left over for useful activity.

No alternative economic system can work unless it deprecates this mental model and replaces it with something more objectively sophisticated.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sun Feb 26th, 2012 at 07:54:25 PM EST
ThatBritGuy:
deprecates this mental model

or depreci*a*tes it?

can one aprecate things? capital appreciates us as we accumulate it.

so deprecate money before it desecrates us...

sophisticated objectivism, eh? mature social  capitalism?

hmm

magisterially pithy comment, especially the phrase about the wolf pack.

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Sun Feb 26th, 2012 at 10:12:20 PM EST
[ Parent ]
Depricate - from Wiki:
In mainstream English, the infinitive "to deprecate" means, simply, "to strongly disapprove of (something)". It derives from the Latin verb deprecare, meaning "to ward off (a disaster) by prayer"

It is economic models with the sophistication of a wolf pack that we need to deprecate. But this usage is invidious to wolf packs, which actually exhibit long term survival capability in the environment in which they evolved and we cannot say that about 'mainstream economics.
'.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Feb 27th, 2012 at 08:51:14 PM EST
[ Parent ]
Iza Kaminska of FT Alphaville has been talking to Sean Park, who talks a good game :

FT Alphaville

Park says that 2008 has marked only the beginning of a much deeper and more structural paradigm shift in finance. A shift connected to many of the old system's practices becoming outdated and technological advancements opening the door to a completely new way of banking and exchange. He uses the word `paradigm' to explain this transition, a lot. (Note - his personal blog is called The Park Paradigm.)

Understandably, with Anthemis, Park is now steering investments into start-ups which complement this broader vision.

That includes the notion that in the future there will likely be more currencies not less. "Perhaps even billions of currencies," he says, sketching out a world where every individual and every human network boasts its own unit of exchange. He believes that city-states will become more relevant than nations. And that communities and networks will take control over their own units of account. Virtual currencies such as BitCoin or Facebook credits or others not yet invented, meanwhile, could well start to rival established state-issued money both in private exchange and international trade. And community-led Peer2Peer networks will run alongside more established currency systems.



It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II
by eurogreen on Wed Feb 29th, 2012 at 09:18:12 AM EST
Actually I've never met him, but I (obviously) agree with a lot he says - but not everything.

My response when I read that post this morning (thanks to following Izzy on Twitter) was....


I think there will be billions of credit/IOU issuers - within suitable 'framework of trust' agreements - whose credit is based upon their capacity to provide goods and services.

But this people-based credit does not mean exactly mean each issuer creating a separate currency. What is needed is a unit of account by reference to which such exchanges are priced, and a framework within which these people-based credit units may be cleared and settled.

At the moment we use completely abstract (base-less/worthless) units such as £, € or $. In my view we will exchange our credit/IOUs by reference to a unit of energy.

And we will not just exchange our 'money's worth' units of credit for each other's units of credit, but will also be able to exchange them for units redeemable in payment for different types of energy, and above all for units redeemable in payment for property rentals.

A standard unit of account is not the same thing as a unit of currency. One can no more run out of units of account than one can run out of metres or kilogrammes. But one can certainly run out of currency/IOUs based upon finite resources.



"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Wed Feb 29th, 2012 at 11:39:25 AM EST
[ Parent ]
about his discourse is the idea of new technologies which enable us to render the existing financial "infrastructure providers" irrelevant.

What militates against a rapid changeover is the huge amount of inertia in the system. There are certainly much better alternatives available for personal banking, business banking etc, but the existing market-share holders will continue to extract rents from us, colluding between themselves, and with the authorities, as necessary.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Wed Feb 29th, 2012 at 11:58:23 AM EST
[ Parent ]
Well, I've been saying as much here for years, initially to showers of brickbats.

Clearly great minds think alike ;-)

The dynamic which is changing things is the fact that dis-intermediation to a role of service provision is actually in the interests of the intermediaries themselves - because minimal capital is necessary - and that is why they are already doing it and fucking up organised markets by selling passive 'inflation hedging' investment to muppets while they are at it.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Feb 29th, 2012 at 12:06:41 PM EST
[ Parent ]
What militates against a rapid changeover is the huge amount of inertia in the system.

Once inertia seems to be on the way to being overcome expect copious quantities of 'strategic damage' or sabotage to be inflicted by existing financial incumbents, the worst of it through governments which they control and their legal systems. Only when that has been overcome can we truly have a paradigm shift. But favoring the shift might be some incumbents betting on making the shift themselves as early adopters and using their incumbent power to confuse and confound the existing system.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Feb 29th, 2012 at 12:56:15 PM EST
[ Parent ]


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