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Chris is looking at a 21st century problem; he's trying to promote a 21st century solution.

No matter what system arises, history will not end.  The world will still cycle.  The best that we can do is try to find and to support the 'good'.

paul spencer

by paul spencer (spencerinthegorge AT yahoo DOT com) on Sat Feb 21st, 2009 at 10:54:40 AM EST
[ Parent ]
The great value of CC's "asset based" approach seems to be that it avoids the known danger of having to rely on exponential growth, thus insulating society from a known periodic shock.  Once epidemic disease has been dealt with it is easier to devote more effort to other ills.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Feb 21st, 2009 at 11:13:18 AM EST
[ Parent ]
But the requirement for continuous growth in the output of the industrial production is not a feature of the monetary system - it's a feature of the broader political economy. It is perfectly possible to construct a political economy using the current monetary system, which does not require continuous growth in the industrial production. Conversely, it is possible to device a new monetary system along the lines proposed here, without even touching the underlying problem that the way our political economy is organised requires continuous growth.

Because the underlying problem is in the way we distribute the work and the value added:

  • When we insist that everyone who is working should be working full-time, any productivity increase must translate into greater consumption, or result in un- or under-employment.

  • When we insist that those who do not work full-time should suffer deprivation (in some countries rather more so than others, but the principle is virtually universally enforced), unemployment causes loss of quality of life, political unrest and other Bad Things.

  • When we insist on not taxing negative externalities like pollution and consumption of non-renewable resources, we encourage increases in productivity (efficiency relative to man-hours) that are made at the loss of efficiency relative to other input variables.

Nothing whatsoever in this logic is addressed by rearranging the monetary system. It can only be addressed by changing the distribution of employment and value added.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Feb 22nd, 2009 at 06:08:57 AM EST
[ Parent ]
JakeS:
Nothing whatsoever in this logic is addressed by rearranging the monetary system. It can only be addressed by changing the distribution of employment and value added.

Great post, JakeS.

The growth of the deficit-based money supply drives growth, but it is not the means by which it occurs.

Addressing the monetary system is IMHO necessary but not sufficient: we have to address Capital, and the property rights and relationships which enable it.

We must therefore address what I call the "enterprise model" or legal and financial structure, and this is what I have been working on these last 8 years or so. This is where the subject of property rights generally, and the particular legal construct known as the "Joint Stock Limited Liability Company" comes in. Also the concept of double entry book-keeping and "profit and loss".

The reason (ie the anthropocentric assumption underpinning conventional economics) why only Labour is defined as "productive" is that this means that taxes on Capital can be excluded. So the rich get richer through untaxed "unearned" returns from Capital.

The route to taxing Capital is IMHO to address the privilege of private Property over Commons (such as land)  and the privilege of limitation of liability (which leads to externalisation of costs).

So a rational tax system would consist of levies on privilege applied inescapably at the clearing level.

In relation to profit and loss and double entry book-keeping my first point is that if inflation has principal "causes" then "profit" is one of them, virtually by definition. rentier "owners" will always increase prices ro maximise profit -if they can - if that is not a "cause" of price inflation, I don't know what is.

Be that as it may, I am observing that where transactions take place within a partnership framework then while there is exchange of value (by reference to a value standard), and creation of value, there is no "profit" and no "loss". The accounting within such a framework is not "double entry" but rather what I term a "shared transaction repository" and "shared title repository".

In other words, in a true "Peer to Peer" networked partnership economy, profit and loss (and rentiers) will be excluded from the system as simply unnecessary.

The cooperative movement talk about the "Cooperative Advantage" - ie the freedom from making returns to rentiers. However, there never has been, until now, a scalable enterprise model for Cooperatives.

I would take this further and say that conventional "For Profit" capitalism is about to be hoist by its own petard. "Profit" to rentiers is simply inefficient - an unnecessary cost, when necessary capital can and will come directly from stakeholders.

In the model I advocate - which is emerging as we speak, I'm just one of the only people looking out for it - Labour will work with not for Capital. In fact, as Marx theorised early on - Labour,and Property (as we know them) will be "abolished".

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

by ChrisCook (cojockathotmaildotcom) on Sun Feb 22nd, 2009 at 06:51:08 AM EST
[ Parent ]
I still don't see how it drives growth in the amount of funny-money, nevermind the real economic output. I don't understand the deterministic causal mechanism you postulate exists between interest-bearing debt and a requirement for ever-increasing industrial production. It seems to me that I can construct a toy steady-state economy by having the government exercises its power to issue and confiscate fiat currency appropriately.

Now, that's not to say that I don't think there is some merit in re-arranging the relationship between debtor and creditor so the creditor takes more of a haircut when the debtor goes bust. But that's a rather less sweeping reform than re-arranging the entire monetary system...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Feb 22nd, 2009 at 10:30:30 AM EST
[ Parent ]
JakeS:
I still don't see how it drives growth in the amount of funny-money, nevermind the real economic output. I don't understand the deterministic causal mechanism you postulate exists between interest-bearing debt and a requirement for ever-increasing industrial production.

Since our Money consists of interest-bearing debt - which few realise - then all else being equal, the money supply must increase more or less exponentially.

It cannot do so unless productive assets exist (or are expected to exist) over which credit institutions may make financial claims. ie growth in money supply requires economic growth which is denominated in this funny money.

JakeS:

It seems to me that I can construct a toy steady-state economy by having the government exercises its power to issue and confiscate fiat currency appropriately.

There are several ways which have been postulated for arriving at a steady state economy, all of them aimed at counterbalancing the malign and unsustainable effect of money created as interest-bearing debt.

Keynes' Bancor took the Gesellian approach of interest being charged on both credit and debit balances.

Social Credit postulates issuance of interest-free credit by State Treasuries.

State capitalism implies the government issuing credit to itself.

JakeS:

But that's a rather less sweeping reform than re-arranging the entire monetary system...

I have to say that moving from your toy-sized economy to an adult-sized one is every bit as sweeping a reform.

Besides, I am not proposing reforming or re-arranging anything - I see the system reforming and re-arranging itself by rapidly evolving from its current unsustainable centralised financial dinosaur architecture to a decentralised disintermediated furry mammal playground... ;-)

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

by ChrisCook (cojockathotmaildotcom) on Sun Feb 22nd, 2009 at 10:56:29 AM EST
[ Parent ]
Since our Money consists of interest-bearing debt - which few realise - then all else being equal, the money supply must increase more or less exponentially.

I'm not tracking here. I'm a farmer. I borrow money for my seed grain from the banker. This expands the money supply. I sell my produce to the banker. This also expands the money supply (because the banker can, as long as he has equity and meets reserve requirements, create money to cover his own debts - in fact, his debts are money). I repay the banker the loan plus interest. This contracts the money supply. The principal nets out by definition, and I can't see why the money destroyed in the interest payment can't equal the money created by the banker buying consumer goods (grain, in this case) on credit.

Even if it doesn't, for whatever reason, net out, the government can tax either of us and compensate the other so that money is, in the aggregate, neither created nor destroyed.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Feb 22nd, 2009 at 11:39:39 AM EST
[ Parent ]
JakeS:
I'm not tracking here. I'm a farmer. I borrow money for my seed grain from the banker. This expands the money supply.

Correct.

JakeS:

I sell my produce to the banker.

Bankers would not buy your produce, unless of course it's for onward trading to someone else, an end consumer.

But for the sake of argument let's say the Bank buys it, and you make a profit, after deducting your costs of production sufficient to pay the bank's interest.

JakeS:

I sell my produce to the banker. This also expands the money supply (because the banker can, as long as he has equity and meets reserve requirements, create money to cover his own debts - in fact, his debts are money).

Incorrect.

This purchase creates no new money. Your account in the banks's books is credited, and the bank's asset account is debited. The bank replaces an obligation from you to them, with ownership of an asset - the produce you sold them.

The credit the bank created is repaid, and money is therefore extinguished.

But the bank's interest income remains, and bolsters the year's profit. You are essentially sharing the surplus value you create with the Bank.However, someone somewhere is also going to have to create more surplus value (economic growth again) in order to be able to afford to buy the produce from the bank at a price reflecting the bank's own trading profit - a purely speculative and financial profit.

You were able to pay the bank's interest charge out of your profit, but it may well have been the case that the price at which you sell - which would necessarily have to exceed your costs - would have been insufficient for the purpose.

JakeS:

Even if it doesn't, for whatever reason, net out, the government can tax either of us and compensate the other so that money is, in the aggregate, neither created nor destroyed.

The problem is that you are considering only the "working capital" of the economy ie the credit that oils the wheels of trade. You are assuming that money flows around in a closed loop. It doesn't. Gigantic amounts of credit are locked up in claims over productive assets: in excess of 60% of credit = money in the US and UK is tied up in land and real property.

New credit must constantly be created to compensate for this incorporation of credit into the national Capital stock, and to enable the "use value" of these productive assets to be paid for on a continuing basis.

Unsecured credit actually in circulation is de minimis compared to credit tied up in productive assets, whether private or public.

The national capital stock increases with economic growth, but our insane national accounting system does not incorporate any idea of a "National Equity", and the National Debt therefore increases, more or less exponentially.

By definition, investment can only be through a "Corporation", and "Equity" only in private hands of individual or corporate ownership.

I think it is time for a change. there is no reason at all why a National equity may not be created - it requires only the use of a different enterprise model, and this process of transation has already begun.

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

by ChrisCook (cojockathotmaildotcom) on Sun Feb 22nd, 2009 at 01:25:57 PM EST
[ Parent ]
Bankers would not buy your produce, unless of course it's for onward trading to someone else, an end consumer.

The banker needs to eat. I am the only guy in our toy economy who makes food. Ergo, the banker will buy my products. Banks are not computers that only have balance sheets - they have real-world expenses (their employees have to eat and sleep, and their shareholders need to eat and sleep too...).

This purchase creates no new money. Your account in the banks's books is credited, and the bank's asset account is debited. The bank replaces an obligation from you to them, with ownership of an asset - the produce you sold them.

I don't follow.

Scenario 1: I pay the bank interest of - say - € 100 on my debt. This destroys € 100. The bank then pays its employees and shareholders € 100 that they use to buy my produce. This creates no new money. Aggregate change in the money supply: - € 100.

Scenario 2: I cut a deal with the bank when I take out the loan, saying that don't pay any interest, but in return I have to give € 100's worth of my produce to the bank's employees and stockholders. Aggregate change in the money supply: € 0.

But these two scenarios are functionally identical! The same stuff gets moved around in the same way between the same people. The only difference is in the bookkeeping. I realise that fiat money is kinda sorta fictional, but surely it's fictional in a consistent fashion?

The problem is that you are considering only the "working capital" of the economy ie the credit that oils the wheels of trade. You are assuming that money flows around in a closed loop. It doesn't. Gigantic amounts of credit are locked up in claims over productive assets: in excess of 60% of credit = money in the US and UK is tied up in land and real property.

I fail to see how this changes the scenario. If I have a secured loan of € 1 million and operating credit of € 100 thousand, then it just means that the effective interest rate I'd pay on the € 100 thousand in the above example would be ten times as high. The question here is where the interest payments go, not what happens to the principal, because the principal always nets out to zero when it's repaid, in terms of money created and destroyed.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Feb 22nd, 2009 at 02:15:39 PM EST
[ Parent ]
JakeS:
The banker needs to eat. I am the only guy in our toy economy who makes food. Ergo, the banker will buy my products. Banks are not computers that only have balance sheets - they have real-world expenses (their employees have to eat and sleep, and their shareholders need to eat and sleep too...).

Indeed. But we must distinguish between:

(a) the bank as a legal person;

(b) the bankers as professional employees; and

(c) the owners of the bank as rentier shareholders.

Sure, individuals need to eat, too. But you are talking about the bank buying the food. Banks only buy food to sell. Banks don't eat, bankers do, and rather well, at that.

JakeS:

I don't follow.

Scenario 1: I pay the bank interest of - say - € 100 on my debt. This destroys € 100.

Your payment in relation to interest destroys no money: only repayment of loan principal destroys money.

JakeS:

The bank then pays its employees and shareholders € 100 that they use to buy my produce. This creates no new money. Aggregate change in the money supply: - € 100.

It is very little known (even by people who think they understand the system) that when banks credit the accounts of employees and shareholders (ie pay them) they are creating credit aka new money in just the same way as they do when extending loans. The difference is that these payments are not interest-bearing loans.

Any profit they have made from the interest you paid the bank will extend its capital base and underpin more credit creation of new money, whether for loans or for expenses or dividends.

JakeS:

Scenario 2: I cut a deal with the bank when I take out the loan, saying that don't pay any interest, but in return I have to give € 100's worth of my produce to the bank's employees and stockholders. Aggregate change in the money supply: € 0.

Interesting scenario. The bank would credit your account, extinguishing money.  But they now have an additional €100 of assets instead of (say) an additional €100 on their account with the ECB. They also have commodity price risk.

JakeS:

But these two scenarios are functionally identical! The same stuff gets moved around in the same way between the same people. The only difference is in the bookkeeping. I realise that fiat money is kinda sorta fictional, but surely it's fictional in a consistent fashion?

They are not functionally similar but I can see why you thought so.

JakeS:

I fail to see how this changes the scenario. If I have a secured loan of € 1 million and operating credit of € 100 thousand, then it just means that the effective interest rate I'd pay on the € 100 thousand in the above example would be ten times as high. The question here is where the interest payments go, not what happens to the principal, because the principal always nets out to zero when it's repaid, in terms of money created and destroyed.

The point is that economic growth has to take place to enable both the principal and the interest tobe repaid.

What happened at the point of Peak Credit (about mid 2007, I reckon) is that the pyramid of financial claims - comprising both principal and interest repayments - outstripped the capacity of the productive economy to meet these claims.

One of the limiting factors was the supply of liquid fuels I think, which was the straw that broke the camel's back.

My solution is not to change the quantity of claims but rather their quality, by removing the debt obligation of a repayment date.


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

by ChrisCook (cojockathotmaildotcom) on Sun Feb 22nd, 2009 at 02:56:27 PM EST
[ Parent ]
The point is that economic growth has to take place to enable both the principal and the interest tobe repaid.

Why? If the interest rate is lower than the real return on investment in terms of consumables (that is, if the investment sustainably yields more - say - grain per year than is required to pay the interest), then no economic growth - that is, increase in the amount of stuff produced each year - appears to be needed.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Feb 22nd, 2009 at 03:17:23 PM EST
[ Parent ]
Now you are looking at economic growth in terms of real stuff. Unfortunately it's measured in funny money, not actual money's worth.

It is true that at a minimal interest rate which covers the costs of defaults and reasonable system operating costs (ie without insane banker salaries and perks), and with serious constraints on credit creation, then the system can actually burble along reasonably well for quite some time before strains would become apparent.

Unfortunately that's not what happens, because in a "For profit" system greed always gets the better of people, whether shareholders, managers, or both.

Greenspan's triumph was that he enabled the system to come crashing down many years to early by letting greed rip.

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

by ChrisCook (cojockathotmaildotcom) on Sun Feb 22nd, 2009 at 03:35:25 PM EST
[ Parent ]
Retail banks should not be run for profit. Retail banks are utilities and should be run by the government, like all other utilities. And their interaction with the rest of the financial system should be heavily regulated.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Feb 22nd, 2009 at 03:43:33 PM EST
[ Parent ]
JakeS:
Retail banks should not be run for profit.

Retail banks are unnecessary - and in fact moribund - intermediaries. Retail banking - ie credit creation and clearing - is a necessary utility function.

JakeS:

Retail banks are utilities and should be run by the government, like all other utilities.

I do not believe Government should run utilities.  I think that an optimal enterprise model for utilities is a cooperative of service providers in partnership with a cooperative of service users, within parameters set by government.

I believe that such a "Not for Loss" utility model is both possible and necessary.

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

by ChrisCook (cojockathotmaildotcom) on Sun Feb 22nd, 2009 at 04:50:02 PM EST
[ Parent ]
I wasn't trying to give precise prescriptions for the fine details of the architecture.

In a well-run society, it is not clear that it is trivial to distinguish between "government" and "non-government" - witness the role of labour unions as a kind of quasi-government in 20th century Scandinavia. So what I meant to say was "should be run by an entity that's more state and/or collective than private and/or individual." Your model would certainly qualify as that. Although I'm not convinced that it's necessarily the optimal model for things like water and railroads (and to some degree electricity) which are by their very nature large, integrated systems that must be micromanaged to a considerable extent by a central hub.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Feb 23rd, 2009 at 02:40:41 PM EST
[ Parent ]
JakeS:
Your model would certainly qualify as that. Although I'm not convinced that it's necessarily the optimal model for things like water and railroads (and to some degree electricity) which are by their very nature large, integrated systems that must be micromanaged to a considerable extent by a central hub.

Ummm...good point, but a strong management core need not necessarily mean hierarchy,just a much more significant node on the network.

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

by ChrisCook (cojockathotmaildotcom) on Mon Feb 23rd, 2009 at 03:19:51 PM EST
[ Parent ]
More and less significant nodes are a hierarchy.
by Colman (colman at eurotrib.com) on Mon Feb 23rd, 2009 at 03:26:46 PM EST
[ Parent ]
I don't think so, any more than more or less significant people connected directly are a hierarchy.

It's about direct routing of information, disintermediation, and flat, rather than multi-level structures.

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

by ChrisCook (cojockathotmaildotcom) on Mon Feb 23rd, 2009 at 05:20:06 PM EST
[ Parent ]
Railways are fundamentally a different kind of network that the internet. The internet is scale-free, railroads are not. So an organisational structure that's adapted to internet reality has a high probability of not being viable when applied to railroads, and vice versa.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Feb 23rd, 2009 at 04:40:02 PM EST
[ Parent ]
hmmm running the railways as the internet. Packet switching individual carriages? Passengers allowed to debark when the train is re-assembled at the far end?

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Mon Feb 23rd, 2009 at 05:07:21 PM EST
[ Parent ]
My point is that direct - instantaneous "network presence" - connection is leading to an entirely different architecture of generic application.

The enterprise model - legal XML, if you like - is only just beginning to adapt to this.

For physical networks, different rules apply.

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

by ChrisCook (cojockathotmaildotcom) on Mon Feb 23rd, 2009 at 05:16:10 PM EST
[ Parent ]
Because the underlying problem is in the way we distribute the work and the value added:
  • When we insist that everyone who is working should be working full-time, any productivity increase must translate into greater consumption, or result in un- or under-employment.
  • When we insist that those who do not work full-time should suffer deprivation (in some countries rather more so than others, but the principle is virtually universally enforced), unemployment causes loss of quality of life, political unrest and other Bad Things.
  • When we insist on not taxing negative externalities like pollution and consumption of non-renewable resources, we encourage increases in productivity (efficiency relative to man-hours) that are made at the loss of efficiency relative to other input variables.
This comment and the ensuing thread should be a diary...

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Sun Mar 15th, 2009 at 06:49:56 AM EST
[ Parent ]

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