Daydreaming reform: basic income, money and work ethic

To say we face an economic crisis is hardly controversial but the crisis is so severe that the reforms needed make Karl Marx look a part of the establishment.   The changes needed are radical beyond the comprehension of many people as they require more than just tweaking what we already have.

The basic problem is that we have used up most of the easily accessible energy and mineral resources.  Those that are left require so much energy to extract that they are almost useless.  There have been other times in economic history when humans have had to cope with resource shortages but these were temporary as more resources were waiting to be discovered.  This time the problem is not knowing where the resources are located but the cost/energy required to extract them.

The three basic changes are a basic universal income, the way in which we create money and overcoming the work ethic.  To accomplish anything all three reforms will be needed at the same time.  As there are so many conflicting vested interests this will be an impossibility.  Prove me wrong.  While these appear to be radical ideas, this writer did a degree in conventional economics at the University of British Columbia and has a strong commitment to a market economy.   The radical comes from wanting a market economy when a major feature of the current economy is that competition is restricted by government legislation.

The basis for an income scheme is the agricultural surplus resulting from all the technology which has developed at least since a farmer discovered he could produce more by using a collar on a horse rather than a harness on an ox.  Through the centuries the elite have confiscated most of the surplus with the use of force. Since the industrial revolution psychological tactics such as legal restrictions on competition,patents, copyright and the work ethic have been less messy.  The need for labour to man the empires has allowed workers to claim a share of the surplus.  As robots replace workers it will be interesting to see what happens to the agricultural surplus – and workers.

This writer would like to see the agricultural surplus treated as an inheritance to be shared equally by all the people of the world.  The way to distribute this inheritance is with a basic income scheme.  Some ideas as to how to do this are in the free e-book, Funny Money: Adapting to a Down economy, available from this weblog.

One of the advantages of an income scheme is that individuals would be able to take action on social and environmental issues related to their employment.  Workers would no longer have to work for exploitive employers and people who disagreed with a firm’s social or environmental policies would not have to bite their tongues for the sake of a pay check.

There is an old saying that money is the root of all evil.  When I studied the economics of money and banking I decided it was the lack of money that is the root of all evil.  I now think the way in which we create money is the root of all evil.

In most of the world’s economies money is created when the banks  make loans and because banks are generally required to keep a fraction of their deposits on reserve most loans become additional deposits in the banking system.  This is called fractional reserve money.  It is a problem because loans that have to be written off reduce the amount of money available, with a multiplier, and because interest is charged on the loans.  A sudden reduction in the money supply is the most difficult of all economic crises.   If all the loans outstanding had to be repaid at the same time there would not be enough money to repay the principle and the interest.  We would recognize the problem as a financial crisis.  This is why I titled my book Funny Money.  I encourage you to get a free copy from Smashwords for an explanation of this problem.

Money is useful because it is a tool which facilitates the exchange of goods and services especially when a lot of our exchanges are with strangers.  We have traditionally used gold or other material items as a basis for money.  Some people still talk about the gold standard although fractional reserve money is based on faith rather than gold.

A few small groups around the world have established what they call Local Exchange Trading Systems.  These people base their exchanges on credits.  You get a credit when you sell a good or service to another member and use credits when you purchase something.  I like this system because the credits are a form of money without the problems of fractional reserve and interest.  In my book I propose we adopt a national exchange trading system and combine it with credits from a guaranteed income scheme.  This would be using money as a tool rather than a commodity.  See the book for more details.

Adopting this system would be revolutionary because it would be a transfer of decision making power from bankers to individuals.  Under fractional reserve bankers get to make decisions about what projects get funded and who gets to do them.  A National Exchange Trading System would allow individuals to make these decisions as they decided what to do with their share of the agricultural surplus.  Some of us would use our share to vote for zero economic growth and more leisure activities.

Many people feel guilty if they do not work continuously.  The work ethic and a distribution of the agricultural surplus via employment are the main motivators that keep our economy going. But the truth is that we do not need everyone to work full-time to provide foods, shelter and entertainment to everyone.  Most of the work people do is work for the sake of work and to maintain the empires of the one per cent.

The bushmen of the Kalahari desert in Africa are/were known for not being interested in material things and for not working hard.  But as hunters and gatherers they had no need to store food.  Any day of the year they could go out and collect the food they needed for that day.  When our ancestors moved to agricultural pursuits, they had to store food and this meant working at least at some times of the year.  We have now taken this need to an extreme.

One of the reasons work is so important is that most of us get our self-identity from our employment.  To save our resource base and to preserve the environment we will have to get our self-identity from other activities.  How about a leisure ethic which encourages people to perform operas, write poetry, write economic weblogs or many other useless things.

This blogger keeps by his computer a little statue of the Laughing Buddha to remind him not to take life too seriously.  Most of the time it works but when thinking about the current economic outlook it is hard to laugh.  Most of us think and act in our own short-term interests as opposed to the long-term in interests of our selves or our communities.  So long as that holds true the outlook is for a lot of human suffering.  But  what does it matter.  To quote a famous economist, in the long term we will all be dead.

 

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A Chicago plan for reforming banks

This week I came across a couple of articles about the Chicago  Plan for reforming banks and I like it because it proposes changing the way in which we create money and gets rid of the evils of fractional reserve money.

This plan was proposed in the 1930s by some economists from  Chicago and suggests banks be reorganized into two separate identities.  One type of bank would only accept deposits which would be kept 100 per cent with a central bank.  This type of bank would probably have to charge fees for looking after the deposits but they would be safe (except from inflation which would probably be less of a problem – or haircuts.)  No more fear of bank runs.

bankThe second type of bank would be a financial intermediary in that it would make loans based on 100 per cent equity deposits of its customers.  As all deposits would be equity, customers would know there are risks of a loan not being repaid.

As most, if not all,  bankers would see immediately, this would be the end of outrageous Wall Street profits.  Under the current system bankers make huge profits by taking for themselves  the premiums from risky loans but when the risk becomes reality somebody else takes the losses because the money creation feature of banks makes them too important to fail.  People putting money into a loan making business would know the risks and expect the returns to compensate.  The end of fractional reserve money creation would also do away with the leverage which allows bankers the profits from creating money on which they charge interest.

According to the Chicago Plan governments would create the money supply at zero interest.  This would be good in that interest charges would not be built into money creation thereby  reducing the potential for inflation.       My concern is that governments make decisions for political rather than economic reasons.  To me a national LETS (local exchange trading system)  would be preferable way to create money because the amount of money in use would depend upon the collective decisions of individuals.  For the sake of price  stability it is essential that the money supply should be flexible up and down.

When I wrote my essay “LETS go to market: Dealing with the economic crisis” I didn’t put a lot of thought into how to organize banking with a national LETS money system.  I didn’t know it then but the creators of the Chicago plan had already done that.

It takes a crisis to encourage a new way of creating money

Local Exchange Trading Systems have been around for some time but it appears it takes a financial crisis to bring them into their own.

Here are some links to news reports about the TEM currency being used in parts of Greece to replace the Euro. One,   two,   three.

So far as I can see the TEM is a LETS under a different name, maybe because of the different language.

I very much like the concept because it is a different way to create money.  It does not involve banks and loans and interest rates all of which are problems with the way our economy currently creates money.

It is sad that it takes a large-scale crisis to encourage this type of money system.  It is also sad in that the local scale limits it use and restricts the exchange of goods and services to just people in a local district.  To be really useful it needs to be expanded to a national level.

The development of the TEM illustrates that while a financial crisis can cause a lot of human suffering it is not the end of the world.  Recovery is possible.  I wish we could say the same about the other aspect of the current crisis – the depletion of the most easily accessible energy and mineral resources.

 

If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

The Ponzi scheme of creating money

The first time I used “Ponzi scheme” to describe the fractional reserve process of creating money I feared I was skating on thin ice. It’s a rather strong term with which to describe a process which most of the people who don’t understand how it works (and those who do) consider to be motherhood.  However, it has in the past (the depression of the 1930s)and almost certainly will in the future cause a great deal of human suffering.

Therefore it was with some relief that I discovered that Richard Heinberg says the same thing in his book The End of Growth: Adapting to Our New Economic Reality (P. 33)

I like his way of explaining the problem.  because all of our money is created by the making of loans, if all the outstanding debt were to be paid off at one time there would not be enough money to repay it all because of the interest.  The charging of interest on the debt/money means there is never enough money available to repay all outstanding debt.

The system works only so long as there is continued economic growth and a continuously increasing supply of money which means more and more debt.  The problems come when economic growth slows or stops and some of that debt has to be reduced.  As there is not enough money to repay it the purchasing power of the debt is reduced  by  the failure of financial institutions or the drop in prices of assets such as housing.  (The purchasing power of money can also be lost to inflation.)

Heinberg sees a need for a new way to create money and directs our attention to  local currencies such as a Local Exchange Trading System. (LETS).  That too made me feel good as my own proposal for money is to expand the LETS into a National Exchange Trading System.  For more on this and an explanation of fractional reserve banking see my essay “LETS go to market: Dealing with the Economic Crisis” on this web log.

A different way of creating money – a federal credit card

Here’s another proposal for stimulating the economy but this one is different in that it proposes a different way of creating money.  In fact it’s close to the LETS (Local Exchange Trading System) suggested in my essay LETS go to market;  Dealing with the economic crisis.

The proposal is for each adult to be given a $2,000 federal credit card at a very low interest rate and it comes from Miles Kimball, an economics professor at the University of Michigan,

Here is a link to an article about his proposal and here is a link to his blog posting.

This would allow each person to borrow $2,000 at a low interest rate to be repaid after the economy has fully recovered.

What makes this proposal interesting is that rather than the federal government borrowing money for the program it would be financed directly by the federal reserve and show up on its balance sheet.  This would be creating new money and new purchasing power but it would be different in that it would bypass the banking system.  Therefore the fractional reserve process would be avoided as would commercial interest rates.  I figure interest rates combined with fractional reserves are the cause of inflation and financial instability.

I also like this approach because it gives decision-making powers to individuals rather than politicians and bureaucrats.

But will it work?

The purpose of stimulus programs is to increase the quantity of goods and services produced and consumed and the hope is to jump-start the economy so that it would return to growth.

Certainly it would provide a one-shot stimulus the same as a government works program and it would do so without adding to government debt loads.

So far as returning to economic growth there have already been a number of attempts by increasing the amount of money available (quantitative easing) and there is no evidence they have worked.  It  may be that as well as a financial crisis we are also up against problems with the resource base.

Even though I am skeptical about the effectiveness of Professor Kimball’s proposal I like it because it introduces a new way of creating money.   The next step would be to make it a monthly thing and stop all other government handouts to either consumers or producers.

 

 If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

LETS go to market: Dealing with the economic crisis

A 4000-word essay titled “LETS go to market: Dealing with the economic crisis”  has been added as a page to this web log.  Some of the ideas in this essay have not (yet) been presented in the web log.

The ideas in this article are outside mainstream economic analysis but I believed they are mostly based on the economics I learned as a student at the University of British Columbia.

We look at the formula from the quantity theory of money which I prefer to call the connectivity       formula  because it shows how the real part of the economy connects with  the financial.   There have been many ups and downs in the Q part of this formula.  These changes have impacted previous economic crisis.  The underlying cause of the current crisis is probably the unsustainable use of resources.

Three ways of creating money are considered  (gold, fractional  reserve and Local Exchange trading system [LETS]) and the advantages and disadvantages of each. If there is anything that should be considered funny money it is fractional reserve money.  Therefore I suggest we expand LETS into  a National Exchange Trading System.(NETS)

Such a radical change in our financial organization would be an opportune time to make other changes on our economic organization.  I would like to see the perfect competition model  used as a guideline.

I believe subsidies should be given to consumers rather than producers therefore I propose that transfer payments and subsidies should be replaced with a universal subsistence program.

You can read the essay here.

If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

Temporary money for a bailout

Here’s n interesting little story about money.

A tourist in a small depressed Irish town leaves a hundred pound note with the hotel keeper while he inspects the rooms.

While the inspection is happening the money is used to by a series of business people to pay off their debts to each other and lands back with the innkeeper just as the tourist returns to collect his money and leave..

The story ends with these lines:

“No one produced anything. No one earned anything. However, the whole town is now out of debt and looking forward to a brighter future.

And that, gentle reader, is how a successful bailout works.”

This town was using debt as money which is the case in our own economies.  However, this “bailout” was only able to work because there was no interest charged on any of the debts.  It could be that we would be much better off if we were to create our own money supply without interest charges to make things more complicated.

The people of this town would probably be better off if they were to use playing cards or candies as money or better still adopt a LETS (local exchange trading system).

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