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Henry George

How Basic Income Promotes Environmental Sustainability

December 8, 2019 by admin

Basic Income, Wages, Self-Provision and Full Employment

 

MAXSHOT-PL/Shutterstock.com

First, a recap on what I’ve discussed in a previous article, on how basic income can facilitate self-sufficiency thereby raising wages and promoting full employment, as this is crucially relevant to the positive environmental influence of basic income.

The ability of Basic Income to facilitate self-provision is much neglected in discourse on this subject.

At the most fundamental level, humans are rearrangers – reconfigurers. We cannot magically make things of value appear from nothing – out of a vacuum, so to speak – but we can rearrange things of low value and little use into assemblies of high value and greater use.

Every time the demand for a given object exceeds its supply, that object acquires a price. Human labour always has a price as the supply of it will tend to shrink to maintain its price – since people will not work for nothing. When it comes to nature, however, some naturally occurring, yet scarce, things such as mineral resources, fertile farmland and forests containing high quality timber, have a price, while other plentiful things, such as air, for which supply exceeds demand, are free.

In principle, penniless people can create value with their labour from nothing through reconfiguring plentiful resources that can be obtained for free into things of value. In practice, some natural resources yield more value per unit of human effort, put into reconfiguring them, than others. A given quantity of effort applied to fertile soil will produce more food than the same effort applied to sterile soil. A given quantity of effort put into mining a mineral seam close to the surface will yield more ore than the same effort applied to a mineral seam located deeper down. A given quantity of effort applied to a rich fishing ground will yield more fish than the same time and effort spent fishing poorer waters.

In general, since people tend to want to use their time as productively as possible, they will tend to prefer to access raw resources which yield a lot of value for given amount of effort applied compared to resources that yield a less value for the same effort. However, resources which can be reconfigured into things of high value, when a given quantity of labour is applied to them, are usually simultaneously somewhat scarce and also in high demand.

This means that favourable inputs for labour – that can be reconfigured into something of high value with a modest degree of effort – have a price associated with them in addition to the finished product.

Labour is therefore best described as a value, or capital, amplifier which, through some process of rearrangement, multiplies the value of inputs.

However, a given amount of effort spent on worthless plentiful inputs, generally leads to outputs of minimal value  – for if such inputs delivered more value, many people would want them and they would acquire a price…

…and since people need to constantly consume a given rate of value – in the form of nutrition and maintenance of shelter – to survive, it is entirely possible that the rate at which someone can produce value from plentiful resources in low demand may be less than the rate at which they must consume value to survive: in which case, people that lacks access to input capital would die.

In his book, Progress And Poverty, Henry George made the point that in a state of nature the condition of unemployment would be unthinkable as productive activities would always be available for people to occupy their time with, whether hunting, fishing, gathering berries, crafting shelter, tools, etc., etc. He then asks: “What is different to the lot of primitive man, who can always find productive activities with which to employ his labour, and a modern unemployed man who can find nothing useful to do?”

 

Henry George author of Progress and Poverty

Henry George writes:

 

“…what, in the conditions of freedom, will be the terms at which one man can hire others to work for him? Evidently, they will be fixed by what the men could make if labouring for themselves [on free land]. The principle which will prevent him from having to give anything above this, except what is necessary to induce the change, will also prevent them from taking anything less. Did they demand more, the competition from others would prevent them from getting employment. Did he offer less, none would accept the terms, as they could obtain greater results by working for themselves.”

 

 

 

 

His concluded that productive labour requires access to the resources and wealth of nature. In early times, this resource was once open and available to all; today, the institution of land ownership denies the penniless unemployed pauper access to the basic resources he requires to employ his time productively.

The solution: redistribute all land rents out as a per capita income. Then everyone will have equal access to the wealth associated with the raw materials of nature with which to occupy their time productively – essentially giving rise to conditions of full employment.

 

The most sensible way to think about employment (at least in the context of it being a social good) is having access to the ability to use your time productively. This could be access to paying customers who demand your time OR it can be access to capital that you can expend effort into rearranging into configurations of higher value.

 

The size of the Basic Income will likely be fairly modest. The magic happens when this modest incomes combines with low interest loans (and as explained later, basic income has the effect of reducing interest rates). £5,000 a year can service a £250,000 loan at 2% interest. So quite a modest income – when combined with a low interest loan – could facilitate access to a great deal of capital.

The point of basic income is not to enable people to live well without working, rather, it is to enable people to live well without selling their work in the labour market.

 

And by combining basic income with low interest self-sufficiency loans, people could access sufficient capital to spend money today to save money tomorrow.

 

Productivity is about applying your labour to produce something of value for someone. Whether that someone is yourself, or someone else, is irrelevant to the amount of wealth that a given effort gives rise to.

And the great advantage of producing wealth for yourself, is you are guaranteed not to get fired or lose your customers.

The simplest thing we need is shelter, after that comes food. So, in this respect, a self-sufficiency loan would mainly be used for homesteading. Procuring the tools and raw materials which, once mixed with hard work, (in an activity such as house construction) will produce a shelter whose value is a multiple of the value of the inputs. Ditto with food production. In this case, a self-sufficiency loan would be used to procure materials and tools that enhance the productivity of the land (such as fertilizers, greenhouses, etc.,) while reducing the labour required to maintain it (gardening tools, tractors, other farm equipment etc.,) other examples of using labour and time, to provide a service that saves money, would be cycling rather than driving. It’s slower and involves more effort, but you expend less money for the same end result (getting from A to B).

All-in-all by industriously applying one’s labour to raw materials, purchased with a self-sufficiency loans, (whose yearly repayments are serviced with basic income ) to construct and maintain your own house and set up your own homestead. to produce all the high quality food you need, it should be possible, with the application of labour, to amplify the value one’s basic income many-fold. Basic Income should not be compared with a wage as at the end of the week, when the wage earner receives their salary, 40 hours of their time has been depleted. In the case of the basic income recipient, they still have 40 hours of their time left to amplify the value of their stock of capital with their labour. In that sense, while the money paid to a basic income recipient might be £5,000/year, the value they generate, through amplifying the value of the capital they purchase with their labour, (house construction, growing food, brewing beer etc.,) could easily be equivalent to a time-depleting salary of £20,000/year or more.

 

Iakov Filimonov/Shutterstock.com

Furthermore, self-sufficiency will also have the effect of propping up wages. For a homesteader, used to using his time productively to improve his life, every hour working for someone else is one less hour available to provide value for himself. Thus, he will only accept a wage that can purchase goods and services whose aggregate value is higher than the same value he could have generated working to supply his own needs.

The net effect of basic income will, therefore, be to stabilize wages at the level of the self-sufficient lifestyle. When wages rise above this threshold, due to scarcity of labour, homesteaders will start emerging from their homestead to work in the labour market. When wages fall below this level, homesteaders will return to their homestead and the supply of labour will go down (which in turn will maintain its price and hold up wages).

Furthermore, self-sufficient economic activities are key to maintaining a flexible, yet humane, labour market. One of the root anxieties surrounding “precarious” labour, is the concern that, if there are suddenly no jobs available, you have no outlet to productively apply your activities and efforts that will bring benefit to yourself. Yet an industrious self-sufficient population will have no fear of a flexible labour market. If a gig opens up where the money’s good, they can earn some extra cash; if there aren’t any jobs on offer that pay well, they can focus on the homestead instead. This situation works well for both employee and employer.

Furthermore, industrious self-sufficiency also eliminates the concern of many employers, that if someone has not worked for a long time, they get “out of the habit” of working. A self-sufficient population will retain the habit of working effectively, concentrating on the task at hand, and carefully planning their time and resources – whether or not they are working for someone else. As such, the activity of self-sufficiency will simultaneously create effective full employment while at the same time ensuring a guaranteed stock of competent labour for any business that needs it which is willing to pay decent wages that induce people to leave their homesteads.

Basic income and low interest loans promote the activity of self-provision, this will simultaneously promote full employment, raise wages and support a flexible labour market which benefits both employee and employer.

 

How Self-Sufficiency Promotes Environmental Sustainability

 

Basic Income facilitates the activity of self-provision, enabling people to withdraw their labour from the workforce. This inherently strongly motivates people to conserve the limited capital they acquire.

The goal of someone who provides for themselves will be to maximally inflate the value of any capital they import with their labour. If you only apply your efforts to provide for yourself, then you can think of whatever valuable material you can purchase with a loan (for which the interest payment is your basic income) as the only valuable material you have to work with. If too much of your capital breaks, you’re screwed. So self-providers will focus on using and reusing the same capital again and again and again and – in general – minimizing capital inputs. If giving plants a little tender loving care reduces the amount of pesticide or fertilizer you need, then, since pesticide and fertilizer cost money (which is irreplaceable for a homesteader who has taken out a large self-provision loan) that could be used for other things, self-providers will likely finds ways to minimize these inputs.

Capital depreciation is the enemy of all self-providers, whose stock of input capital is limited. Hence, self-providers have a strong incentive to work hard to preserve capital value, including natural capital, like soil quality, and are likely to practice agricultural techniques which preserve it.

Furthermore, in addition to self-providers producing as much value with their own labour as possible, with the minimum amount of capital, self-providers also consume value at the point at which they create it. If we think of a supply chain from:

raw material -> component -> more advanced component -> product

Aun Photographer/Shutterstock.com

In our current economy, many of the different factories which assemble input components into more advanced components, higher up the supply chain, are thousands of miles away from each other. So, for many products, between every step of their assembly journey there is often a lot of transport. And the final product can also be thousands of miles away from the customer. Also, the assembly process is usually very energy intensive these days.

Self-providers, will tend to purchase cheaper component lower down the supply chain, or simply second hand products in their local area, and then either apply their labour to move them up the supply chain, or perhaps repair products that are on sale for cheap that would otherwise be thrown away. By importing products lower down the supply chain and moving them up the assembly process with their own labour, rather than an energy intensive factory process, self-providers can dramatically reduce the energy input required to create a final product and deliver it to the customer.

The closer the point of value production is to the point of value consumption, the less energy is needed in transportation.

By producing value in the same location where they consume it, self-providers, who consume their own value save a huge amount on transport.

We can also think of the daily commute to work as a geographic separation between the point of value production from the point of value consumption, or even a trip to the shops – and one that contributes a great deal to CO2 emissions. Self-providers won’t commute: their day of work will consist of walking out the back door into their garden and tending some plants – or doing repairs on the house and the like.

In almost every respect, self-provision gears people towards capital conservation – including natural capital, along with the minimization of resource dissipation. This is inherently environmentally friendly and conducive to sustainable living.

Initially it is likely that less than 20% of people will be self-providers, but, as automation progresses, participation in the commercial economy will likely reduce to an ever shrinking pool of elite super-organizers of capital, who may compose less than 5% of the population with perhaps, 95% of the population living as self-providers who each manage their own heavily automated micro-production systems for food and house repair.

By facilitating self-provision rather than bullshit city jobs and global supply chains, Basic Income will result in a major reduction in CO2 emissions – especially as automation progresses.

 

How Low Interest Promotes a Long Term Outlook

 

In addition to facilitating a high quality self-provision lifestyle on a modest basic income, low interest loans can significantly reduce the production of pollution in other ways as well.

And basic income, combined with self-provision, will tend to create a low-interest environment.

As an initial simplification, the stock of consumer products is a reasonable approximation to people’s quality of life, while the rate of product manufacturing is a reasonable approximation to the rate of pollution.

This would suggest that the best way to optimize the ratio of public well-being to the production of pollution is to maximize the lifetime and energy efficiency of each product, and minimize the rate of material consumption required to maintain them.

All else being equal, products that don’t break, provide the same service to consumers for less energy, and require little in the way of maintenance and the replacement of parts are more desirable than products which don’t possess these characteristics.

The only problem is: designing products to never break, consume very little energy and last forever is really hard…and expensive!

For this reason, lower quality products that break quickly and consume more energy tend to be cheaper than high quality products which are more efficient and last longer.

So which product should you buy? The cheap product that is going to break and consumes more energy…or the way more expensive product that won’t break, requires less fuel and will last forever.

The answer is…it depends on the interest rate!

Let’s define the “running costs” of a particular product/item of capital as:

Running costs = Fuel Costs + Maintenance Costs + Replacement Costs + Breakdown Costs

(Where breakdown costs might be the cost of a piece of hardware that is essential to a production line and will stop the entire production line until it is fixed or replaced, or perhaps the costs of hiring a taxi rather than driving because the car broke down etc.,)

If

Running Costs > ( Purchase Cost Premium ) * (Interest Rate)

Then you should buy the more expensive product with the lower running costs.

If

Running Costs < ( Purchase Cost Premium ) * (Interest Rate)

You should buy the cheaper product with the higher running costs.

As a general rule, products with higher running costs, which need to be maintained and replaced regularly and consume more energy, are more polluting than products with lower running costs that are more energy efficient and require less maintenance and replacement.

Therefore, by encouraging the procurement of less polluting capital, lower interest rates encourage lower levels of long term pollution for a given quality of life.

The inverse of the interest rate is the time horizon for planning to minimize costs. A 10% interest rate is compatible with a 10 year planning horizon. At 10%, owners of money will purchase capital so that the combined purchasing and running costs are minimized over the course of 10 years. At 2% interest, the owners of capital will purchase capital to minimize the combined purchasing and running costs of that capital over 50 years.

The higher the interest rate, the less we care about the future, the lower the interest rate, the more we care about the future.

When central banks set the interest rate, they are telling industries all over the country how important the future is.

If central banks set interest rates at 10%, then they shouldn’t be surprised if, after 10 years time, cities get flooded, agricultural yields crash causing mass famine as a result of runaway soil erosion, natural resources that run energy guzzling equipment run out, causing that equipment to shut down, along with the civilization which depends on it, to collapse.

If central banks set interest rates at 10%, they shouldn’t be surprised if society collapses and everyone dies in 10 years time, because by setting interest rates at 10%, they just told the market it doesn’t matter what happens to society after 10 years!

 

While this view may be a slight simplification it is, broadly speaking, true. With very few (possibly no) exceptions, the deployment of environmentally friendly technologies is most favourable in a low interest rate environment.

Whether we are talking about installing wind turbines, solar panels, home insulation, heat pumps, purchasing a battery powered car to replace your existing petrol powered car practically all of these energy saving measures involve a heavy resource outlay today to save on future resource extraction costs – a strategy that uses more resources today, to save the aggregate amount of resources used in the long term.

This strategy only makes sense in a low interest rate environment.

Low interest rates promote environmentally friendly strategies for providing people with capital, to live high quality lives with minimal long term pollution and resource depletion, across the board.

 

Basic Income Reduces Real Interest Rates

 

When I talk about interest rates, I mean real interest rates which real businesses and private individuals can access to invest in projects that will save them energy and money over the long term. Today, even though central bank interest rates are low, private individuals and businesses can rarely obtain loans at anything like the interest rates advertised by central banks.

Basic Income, however, ensures that real interest rates, which individuals and businesses can access, will be as low as nominal interest rates.

The main thing which causes real interest rates to rise above baseline central bank interest rates is the risk of debt default.

The main thing that cause people to default on their debts is a cessation, or uncontrolled drastic reduction, in their wages/income.

Basic income will provide everyone with a reliable income both:

  • Directly – as it is itself a reliable income
  • Indirectly – through facilitating the activity of self-provision, Basic income will create a vacuum in the workforce that will both, prop up wages and ensure that anyone who wants a job that pays decent money (in order to meet their debt payments) will be able to readily find one as self-provision will ensure there is always demand on the part of employers for those willing to do an honest day’s work, and that such employers will always give them an honest day’s pay in exchange.

When we combine the effect that basic income will have on radically lowering the default rate, with its effect on lowering interest rates, it is clear that Basic Income will serve to drastically increase the sustainability of our society.

Finally, high levels of social capital essential for, long-lived stocks of material capital. There is little point in paying 3 times as much money to build houses, and other infrastructure, to last a thousand years in a community that’s filled with terrorists, arsonists and vandals. However, through reducing poverty and practically eliminating unemployment, basic income will create functional societies that are capable of responsibly maintaining their capital stocks and usher in a future that is both prosperous and environmentally sustainable.

 

John

Filed Under: Economics Tagged With: Automation, Basic Income, Economics, Henry George, Interest Rates, Interest rates and the environment, Self Sufficiency, Social Welfare, Sustainability

A Rights-Based Basic Income

November 30, 2018 by admin

howcolour/Shutterstock.com

When the topic of basic income arises, people often ask me: “Why should we pay people to do nothing?” We generally think that hard word generates income, and that workers rightfully own that income. The idea of taxing hardworking people to pay those who (might) do nothing seems unjust. Should workers slave for money that mostly gets confiscated and given to others?

Yet not all income is paid to labour. A portion of income is used to rent assets of value. An owner of valuable assets can receive rent from others who wish to use them. This will provide him with an income for little to no work – possibly indefinitely. Some of the value of rentable assets was produced by labour, however a portion, perhaps a third to a half, was not.

I propose (as Henry George once did) that only the value created by labour can rightfully be privately owned. The only assets of value that can rightfully be purchased are assets created by labour, and if labour is only responsible for a portion of an asset’s value, then only that portion which labour produced should be owned privately.

There is no reason why one person should have a greater claim than another to value that is not produced by labour and, therefore, the rental income proceeding from the use of all natural value, by right, should be distributed evenly throughout society. The only way to own something is to produce it or purchase it from the rightful owner. This requires a voluntary exchange of ownership extending back to the original producers of the item of value. The purchaser of private ownership rights to natural value is like a buyer of stolen bicycles – as all private entitlements to natural value were originally stolen from the commons.

This article explores the revenues that a basic income based on equal rights, could generate. An income based on the principle that all people have:

  • An equal right to the unimproved value of land
  • An equal right to newly printed money
  • An equal right to inheritance
  • An equal right to benefit from bads whose quantity must be limited

 

The Portion of Land Value Not Produced By The Owner

 

Anything for which the demand at zero price exceeds the supply has monetary value. For some of these scarce, yet desirable, items (such as a piece of jewellery) the source of value  was the labour of a craftsman, in which case the value rightfully belongs to its creator. Yet in other cases, at least a portion of the value is naturally occurring (a lakeside view, for example). Usually, human labour must mix with natural value to produce the final item. However, some natural resources require less effort to extract value from than others. Consider two coal resources: one far below the surface branching into narrow seams, another deposited on the surface, extractable with open cast mining. The value of coal from both mines is equal, yet one requires far more labour to extract than the other. This will make the mineral rights of the easily mineable deposit more expensive than the rights for the deposit that requires more capital and labour to extract coal from. But when one mining company out bids the others and pays the higher sum for the right to mine these easily accessible deposits, to whom should the money be paid? Who was responsible for that coal deposit being closer to the surface? Who deserves to be paid for this service? No one! It is simply a fluke of nature. And if no one deserves the cash proceeds from selling the rights to this resource, then everyone is equally entitled to these proceeds.

Beyond that, there is value that arises from proximity to other people. It is valuable to live close to shops, restaurants, discos and workplaces from which to earn a living. Yet the land owner creates only a tiny portion of this value. If most people on a street paints their house, the location value of the street will rise even for those who don’t. If a shop or railway station opens up, nearby house prices will go up even if their inhabitants did not build the railway or work in the shop.

We can thus see that, while much of a location’s value does arise from human activity, the rental proceeds from location value are not paid to the creators of that value. Since it is impossible to identify who is responsible for each pound of increased location value, it is better to tax the rental value of location and distribute a per head payment to everyone.

How do we assess what portion of land value arises from its unimproved location value and what portion arises from improvements which the owner has made? The value of the improvements is the cost of producing the improvements. If a house in London costs £150,000 to build and sells for £750,000, then it’s unimproved land value is £600,000. The cash value of the yearly benefit that proceeds from the exclusive use of a location is the location rent (the site rent). The appropriate level to set land value tax (a sum payable to the government for the exclusive use of a location) in a neighbourhood, is therefore whatever level reduces the prices of houses traded in an area to the cost of producing all the improvements present at that location. Mark Wadsworth estimates that a tax on the full site rent of residential property in the U.K. would bring in around £200 billion. Existing business rates offer a conservative ballpark estimate for what a tax on the unimproved value of commercial land could raise – around £30 billion.

Natural resources and farm land would not significantly change these figures.

So an equal right to the rental proceeds arising from the unimproved value of land in the U.K. would split £230 billion per year among 50 million adults and yield a yearly basic income of £4,600 per person.

 

An Equal Right to Newly-Printed Money

 

Any civilization that permits usury must continually create new money to remain stable. The current way that central and private banks create and distribute new money is highly unjust. So who should receive the newly printed money? Newly created money is not produced by labour, we certainly don’t reward private individuals who labour to create money! Forgery, the production of money by private individuals, is a criminal offence. Money is an – albeit useful – artificial monopoly imposed by legal fiat. Because it is produced by legal fiat, rather than labour, all people have an equal claim to the value of newly printed money. In a previous article, I discussed the precise financial policy reforms required to stabilize our system. Suffice to say they involve paying £1,840 to every adult, every year.

 

An Equal Right To Inheritance

 

Imagine a think-tank asked you to summit a design proposal for an equitable welfare system that addresses poverty to a report they were writing. Imagine you proposed a system where the welfare each recipient received was proportional to the net worth of their parents at their time of death. The response of the editor would probably be: “That’s the dumbest, most arbitrary, welfare system I’ve ever heard! Come back when you have something better!”

Inheritance is welfare. It’s unearned wealth some people receive in exchange for no work.

Some people accumulate a great deal of wealth over the course of their lives, which doesn’t go away when they die. So what to do with that value? Since no living person produced it, no living person has earned it. As such, everyone should have an equal claim to the wealth left behind by the dead.

So how much money would an equal right to inheritance bring in?

Let’s neglect land (whose value would already be taxed away) and just include financial assets. The HMRC estimates the total value of financial assets in the UK to be £1.6 trillion. If we take the gap between generations to be 33 years, as Richard Murphy does, this would yield a yearly revenue of £53 billion to be redistributed. Let’s assume, for the sake of being conservative that half of this is avoided or evaded. This would leave ~£25 billion a year, or £500 per person per year.

 

An Equal Right To Bads Whose Production Is Restricted

 

It is impossible to quantify with any accuracy, how much income this would bring in as the extent to which bads are restricted, and how they are restricted, is a political one. A slight modification of David Fleming’s proposal of Tradeable Energy Quotas ( TEQs ) would distribute rights, to purchase CO2 emitting fossil fuels, equally throughout the population. Every time you buy coal in the shop, you would have to surrender a portion of your quota. Companies would not be issued with any carbon ration but would have to purchase it from private individuals who could sell their carbon rations on the market to companies instead of burning it.

An alternative would be to charge a fixed price per unit bad emitted. There is a case for spending this price on clean-up costs rather than giving it to the population in general.

Beyond that, companies must often be approved for a license to engage in potentially harmful activity. The quantity of this activity could be reduced by increasing the cost of the license (whether selling liquor or gambling). The money raised should be distributed evenly throughout the population.

Conservatively, I will add £500 per person per year as the proceeds of the redistribution of fees, duties, rations, licenses, etc., etc.

 

Getting Real About Basic Income

 

Adding it all together, a rights-based basic income, which makes no claim on the proceeds of other people’s productive labour, would amount to about £7,440 per person. That this is far below the average wage should not be surprising for, as Piketty has mentioned, capital accounts for 30% of income (and some of that capital is justly earned), while wages account for 70% of income.

We need to be realistic about basic income. The purpose of basic income is not to enable people to live comfortably without working, rather it is to enable people to live without working in the labour market. If instead of using basic income as something to buy meals and pay rent, you think of it as money that enables you to purchase building materials, gardening and maintenance tools, and fertilizer to which you apply your labour to set up and run a homestead, then an unconditional payment of £7,440 a year could go a long way to enabling a sufficiently industrious person to establish quite a high quality of life for himself without selling his labour to others.

And since no customers or employers are required to give people permission to provide for their own needs, anyone could access this lifestyle. While not everyone would choose it, a universally accessible option of self-provision would greatly strengthen the negotiating position of workers with their employers and increase both wages and employment.

So a modest basic income could go a long way.

My article Basic Income, Self-Provision and Full Employment discussed the higher credit value of basic income as well as it effect on wages and employment in greater detail.

 

John

 

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John

Filed Under: Economics Tagged With: Basic Income, Benefits, Central Bank, Economics, Equal, Equal Rights, Finance, Henry George, Inheritance, John McCone, Libertarian, Philosophy, Pollution, Rights, Self Sufficiency, Social Welfare, TEQ, Wages

Let’s Stabilize The Business Cycle – Once And For All!

November 16, 2018 by admin

Victor Moussa/Shutterstock.com

Any civilization that permits usury must continually create new money to remain stable.   Since the industrial revolution, loans at interest have become an indispensable means of financing important infrastructure to greatly improve living standards. Yet there is a price pay for this practice: the economic busts that have plagued the 19th, 20th and 21st centuries are the bitter fruits of usury.

It is not a coincidence that the Bank of England, founded in 1694, arose before the industrial revolution got into full swing. Without it, economic busts would have destroyed finance and torn apart the embryonic industrial economy. Central banks enable our financial system to survive economic busts – devastating though they are. Ever since their founding, central banks have covertly created new money out of thin air and lent it to banks; sometimes a nominal store of gold (of far less value than the money issued) “backs it up”, other times money is simply created by legal fiat.

As time has gone by, central banks have been getting better at using newly printed money to stabilize the finance system. The 2008 recession was pretty bad, but it was nothing like the  1930’s. However, the policies which central banks currently deploy to stabilize finance are causing inequality to skyrocket.

Central banks don’t give out newly printed money. They lend it. All money was originally loaned into existence. If all loans were paid back, all money would disappear. To stop this, central and private banks constantly lend out new money so new loans can be used to repay old loans. Thus, the total amount of money loaned out exponentially increases, yet if this exponential is sufficiently gentle, it can, in principle, sustain a steady, moderate rate of inflation indefinitely.

Since the loaned out money can never be repaid without societal collapse, the exponential increase in loans, that the central bank supports, is really just a money printing operation.

 

Fiscal Policy and Skyrocketing Inequality

 

So who gets all this newly printed money?

The answer: People who can raise credit at low interest rates. The activity of continually printing new money inflates asset prices. If you can raise a loan with newly printed money at an interest rate below inflation and use it to purchase assets, then the value of your asset portfolio, purchased from money loaned to you out of thin air, will almost certainly go up – at least with inflation  – leading to yearly capital gains that exceed the interest originally used to buy that capital.

Such people, using low interest loans to make capital gains, essentially receive newly printed money for free.

This effect is exponential: as the assets purchased with new loans appreciate at the inflation rate, our investor’s net worth will increase yearly roughly by the inflation rate minus any interest owed on his loans. This increase in net worth can serve as leverage for yet more loans which can purchase yet more assets whose value in turn appreciates.

The problem is that not everyone can access credit at interest rates below inflation. People who already have valuable assets can leverage up at very low interest (some brokerages charge less than 1% interest on money loaned out to buy stocks) but people with insecure jobs and no assets, cannot get 1% interest and usually pay over 10% on their loans.

This interest rate apartheid, between people whose net worth is positive and those whose net worth is negative, divides the population into 2 distinct groups: Those in the black who – if they are financially savvy – receive free newly printed money from central and private banks and those in the red (and less savvy ones in the black) who get no newly printed money.

The current policy of the world’s central banks is effectively to continually print new money and hand it out to rich people for free (through facilitating leverage to inflate financial assets). Theoretically this can put off another sudden, disastrous crash for quite some time (which is why, despite many cries of wolf, there has been no “next great recession”) – although a change in fiscal policy (such as Ending The Fed or raising interest rates) could cause a sudden catastrophic collapse. However, this strategy can only stave off collapse by continually increasing the relative share of the world that the wealthy own. So although central banks can stave off the next crash by handing free money out to rich people (assuming no revolution), since the super rich cannot own more than 100% of the world’s total wealth, this policy cannot continue forever.

Yet if we don’t continually release new money into the system – it will collapse!

 

Stabilizing Finance Without Increasing Inequality

 

The question is…if we are going to print money out of thin air, which we have to unless we intend to ban usury (and it’s a little late in the game to ban usury!)…who should we give this new money to?

The answer is simple: since no one has earned the newly printed money, everyone has an equal claim to it. Newly printed money should be divided evenly among the population.

How much money should be printed every year?

If we look at the formula for price:

MV = PT

Where

M = Money supply

V = Money Velocity

P = Price

and

T is the number of goods transacted

Then making P the subject of the formula yields:

P=(M/T)V

If we assume a real economic growth rate of 2%, a constant money velocity and an inflation target of 2%, then that would imply that the money supply should be increased by 4% per year. Taking the UK’s M2 money supply of 2.3 trillion as M would imply that, in order to achieve a target inflation rate of 2%, £92 billion pounds of new money should be distributed evenly throughout the population per year, which would give each U.K. adult  £1,840 of newly printed money per year.

This is only a ballpark figure, and may be an overestimate, since the velocity of money in the hands of poorer people is faster than its velocity in the hands of the super rich, so the payment might be somewhat less. Furthermore, it would oscillate to correct for changes in the money velocity.

But the important point is that such a payment of newly printed money to everyone could simultaneously stabilize our financial system and prevent the super-rich from acquiring an ever larger share of the world’s wealth.

 

Growth and Inflation

 

Rawpixel.com/Shutterstock.com

You may have noticed that the amount of new money required to stabilize the system  roughly equals the inflation target plus real economic growth.

Economists often say we need real economic growth to stop systemic collapse. This is not true. Nominal economic growth plus steady inflation, arising from new money, is adequate to stabilize the system. What is true is that real economic growth allows central banks to pass free money under the table to rich people without anyone else noticing. Our financial system is rigged to ensure the rich get the lion’s share of all newly created wealth but, since everyone ends up with more, no one complains too much.

Distributing an appropriate amount of newly-printed money to everyone would let capitalism exist in steady-state with modest inflation. Don’t believe anyone who says otherwise. It’s just the rich couldn’t get richer without genuine innovation that outperforms the market.

 

National Central Banks Should Hold All Deposits

 

At the moment, private banks create most (97%) new money. This must stop if central banks are to hand everyone new money. Otherwise the fractional reserve system would multiply the new money – perhaps 30 fold – and cause hyperinflation.

Stopping this is relatively straightforward. All that is needed is for central banks to hold all deposits. The national central bank would then manage all ATM machines and give everyone a central bank debit card for cash transactions. In other words, the central bank would provide personal banking services to everyone. Since the central bank can, in principle, print an infinite amount of currency out of thin air, there would be no fear of runs on the bank as it could always print enough cash to pay depositors.

The central bank would then loan money to private banks at low interest who would then loan the money out to people and firms at a higher interest rate – the spread in interest being the private banks’ source of profit.

In our current system, when private banks lend out money, they credit the money to a deposit account held in the same private bank which can then be used as collateral for yet more loans, leading to uncontrolled money creation.

In the system I propose, when private banks lend money out to customers, they credit the customers’ central bank deposits. This enables the central bank to tightly control the amount of new money and credit created. And every personal account held by the central bank would, from time to time, be credited with basic income that roughly annualizes to £1,840 – more if the economy grew faster than 2% per annum.

Financial crises happen when too many borrowers fail to pay back their loans and cause depositors to lose their money. If these depositors either have loans themselves, or pay wages to people with loans, then this loss of deposits causes more debt defaults which wipe out yet more deposits…and on…and on… and on, in a disastrous cascade.

Securely protecting deposits could make financial contagion and crises a thing of the past. And if the central bank held all deposits, they would be fully protected, as any entity that can infinitely print money can pay all depositors in cash – even simultaneously. Thus, if the central bank held all deposits, there would be no more financial crises.

If the central bank held all deposits, no private bank would be too big to fail. There would be no difference between a large bank and large car company going bust.

A central bank holding all deposits is consistent with the libertarian ideal of the nightwatchmen state that solely protects private property. After all, your deposit account is your property, so should the state not protect it from irresponsible lending institutions?

It would be fairly simple to transition to this system without an economic collapse. The central bank could offer depositors convenient personal banking services along with a central bank debit card (an perhaps a sign up bonus). Then, whenever someone transfers a deposit out of a private bank and into the central bank, the central bank would lend the private bank a sum exactly equal to the deposit that was transferred out. This way, the central bank could transition to holding all private deposits without drying up the supply of loans.

Simple!

The recent announcement by the Chinese central bank that they will launch a digital currency may be the first step to a future where individuals and businesses can access the affordability and convenience of a current account without running the risk that the private bank holding the account might go bankrupt. If China can properly implement such a system, it will make its economy completely immune to recession. If the rest of the world’s central banks fail to catch up, digitize their currencies and recession-proof their economies, then, in the wake of the next recession, we may all end up using Chinese digital Yuan.

 

A Land-Backed Currency

 

Without gold, what is the real basis of a currency’s value? A currency backed by genuine value inspires more confidence than one whose value floats on thin air and good will, yet backing up a currency with real value is a straightforward matter and can be accomplished with the stroke of a pen.

A tax on the site rent of all the nation’s land, payable only in national currency would – at the stroke of a pen – create a land-backed currency. Such a land value tax would effectively use the total asset value of the nation’s territory to back its currency.

Since:

  • Total global land value far exceeds total global gold value
  • Land cannot be covertly stolen
  • Land is the natural asset of every nation
  • Land is of far greater use than gold

It is far more sensible back up a currency’s value with land rather than gold.

By adopting all of these measures, we can end the devastation that financial instability causes once and for all and transition to a stable, secure and prosperous future!

 

John

 

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Filed Under: Economics Tagged With: Banking, Basic Income, Chinese digital currency, Credit, Economics, Finance, Financial Stability, Henry George, Inequality, Libertarian, Nationalize Checking Accounts, Nationalize Deposits, Nationalize Money

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