Where Does Money Come From

 MS Copilot provides the answer, which is correct. This is not "Modern Monetary "THEORY". It's a factual description of how things work. MMT "theory" is like evolutionary "theory" - just a factual but perhaps counter-intuitive description of reality.

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**1. Central Banks and Money Creation:**

Central banks, like the Bank of Canada, play a crucial role in creating money. They do this primarily through two mechanisms:

   **a. Printing Currency:** Central banks print physical money (banknotes and coins), distributed through commercial banks. This is the most tangible form of money creation.

   **b. Digital Money Creation:** Central banks also create money digitally. They do this by purchasing government securities or other financial assets. When the central bank buys these assets, it credits the sellers' accounts with new money, increasing the money supply.

**2. Commercial Banks and Fractional Reserve Banking:**

Commercial banks create money through a process called fractional reserve banking. Here’s how it works:

   **a. Deposits:** When you deposit money into a bank, the bank is required to keep a fraction of it as reserves (let’s say 10%) and can lend out the remaining 90%.

   **b. Loans:** The money lent out is deposited into other bank accounts, which then become new deposits. These new deposits allow banks to create even more loans, and the cycle continues. This process multiplies the amount of money in the economy beyond the initial physical currency.

**3. Government Borrowing:**

Governments can also create money by borrowing from the central bank. When a government issues bonds, the central bank can buy these bonds, effectively creating new money that the government can then spend on public projects and services.

**4. Quantitative Easing:**

This is a more recent and unconventional method of money creation used by central banks during economic crises. The central bank buys financial assets from commercial banks and other institutions, injecting much money into the economy to stimulate economic activity.

In essence, money creation involves a combination of actions by central banks, commercial banks, and government policies. It's a complex process beyond just printing cash, involving digital transactions and financial instruments to ensure the economy has enough money to function and grow.

Reducing government spending by $1 trillion per year would have a significant impact on the economy. Here are some potential effects:

1. **Decrease in Aggregate Demand**: Government spending is a component of aggregate demand (AD). Reducing spending would likely lead to decreased AD, resulting in lower economic growth and potentially higher unemployment.

2. **Impact on GDP**: The immediate effect would likely be a reduction in GDP growth. The extent of this impact would depend on the state of the economy. If the economy is already weak, the reduction in spending could exacerbate the downturn.

3. **Inflation**: A decrease in government spending could lead to lower inflation rates, as less money would be circulating in the economy.

4. **Long-term Effects**: Over the long term, reducing government spending could help decrease the national debt and potentially lead to lower interest rates, which could stimulate private investment.

5. **Sector-Specific Impacts**: Certain sectors that rely heavily on government contracts and funding, such as defence and infrastructure, could be particularly hard hit.

Notes on "Capital and Ideology" - Thomas Piketty

 

This is a fantastic book. Highly recommended. What follows is just a home for my notes on the book.

Also, see Christine Desan, a commentator on money and the institutional structures that support it.

There is a connection with my AI deliberations. "Money" is in the eye of the beholder. Piketty points out that the social structures behind it are also in the eye of the beholder, such as class, property, and borders.

This leads to the observation that many see elements of capitalism, such as inequality, are real and not "subjective." Economic inequality tangibles to actual results. The human "economy" is built on top of a real environment. Money is imaginary until you have none. Wealth is in the eye of the beholder until you look at the physical destruction involved in our economic history (war, depression, climate change).

Since all aspects of the "economy" and the structures of society are subjective, it is not surprising to see wildly different visions of what is going on. "they tend to see things as going pretty well except for certain threats to their status. "Losers" see systemic evil. If articulated, this evil uses the "poor" as machinery to create wealth for the "rich."

Piketty is uniquely humble in many ways. He recognizes his limitations in ways you seldom see in this kind of writing.

"Real" stuff (not fundamentally mental):

• Population - headcount;
• Life expectancy;
• Violence - varieties of murder from official to private;
• Actual inequality, such as access to "stuff";
• Pollution and other forms of "externalities";
• Consumption of real resources, especially energy;

"Mental" stuff - "in the mind of the behavior:

• Law;
• Class;
• Perceived inequality;
• Financial wealth;
• Liberty and restrictions to it;
• Happiness;

It is fair to note that Piketty moves back and forth between these types of "reality." The general thrust is to treat all types of "data" as part of the real world, like mountains and thunderstorms.

Is inequality socially theory. There seems to be evidence that a more egalitarian society is more productive. This is at the heart of the "top-down" economic approach.

Useful to compare all this to studies of the actual lifestyles of the world's population as a whole.

Note that tax breaks for the rich who "deserve it" also benefit those who don't. It's also worth noting that the paradigm examples (such as Bill Gates) owe much to the social structures, such as patent law and education - specifically the education of Bill Gates himself.

Excellent treatment of the emergence of the idea of property during and just before the French Revolution.

A case can be made that inequality before the French Revolution was less than it was in the "Belle Epoch" around 1910. You might say that the enlightenment project failed.

(My guess is that high return on investment prior to 1914 failed to factor in the risks that were exposed by WWI and the Russian revolution, which destroyed vast quantities of wealth).

"Inheritance from father to son should not be taxed since it's just continued enjoyment of the property."

(for some reason, the same logic is not applied to the income of a working father that is spent on food and rent for his family).

"Proprietarianism" - capital sacred right, no need to provide access to info - 18th century. Extend the forms of property without limit. The confrontation is between owners and workers difficult. Not sure about this. The sacred status of a "bond" is strongly related to this concept. Slavery exchanged for the "right" to assume debt. "Quasi-sacralized" property/debt.

When slaves were freed, owners were generally compensated, part of the logic of the sacred status of the property. This is similar to the compensation of landowners in France. Nobody, until recently, has talked about compensating slaves.

Shifting idea of whether or not Christianity condones slavery. Wasn't it slavery that allowed for the "tighter classes" to engage in the arts and sciences? There were arguments that the abolition of slavery would result in a lack of competitiveness. 

Slave rebellion and the fear of it played a key part in abolition. These lead to tens of thousands of execution.

Note that other forms of bondage were abolished at the same time slavery was abolished. This contrasts with public debt, which doesn't get forgiven.

There is a parallel logic between emancipation and what happened in Russia (chapter 6). As in Haiti, the idea is that the slave is expected to buy his freedom. This converts slavery into perpetual debt. The slave was worth 4-6 years of wages for a free worker. Proposed to deprive former slaves of property rights.

Replacements were "indentured" servants. In debt for the cost of their transportation - about 10 years. Not "identical" to slavery, but not much different. "Free" to assume debt. "Only revolutions confiscate without compensation."

"Coercive debt strategies"

1-1.5 million Mexicans were deported from California in the dirty thirties. Many were born in the USA.

The tie between the end of slavery (bondage) and the modern dependence - monetization - of debt is notable.

Interesting to note that Lincoln proposed compensation for slaveholders. Everyone probably knew this was not going to happen.

600,000 dead in Civil War. 

No compensation for slaveholders or slaves. What about the 40 acres of land and a mule? No law to this effect was ever passed.

In the USA, a slave was worth 10-12 years of free worker's wage. Compensation at public expense was not feasible. In 1860 value of slaves was 2x the annual GDP for the States. That would mean former slaveholders became bondholders. Debt resulting from the war itself was 30% of GDP.

Jefferson and Maddison did the math on compensating slaveholders. Jefferson saw no way to free the sales. He called it like holding a wolf by the ears (1820).

One argument was slaves were better off than the poor in "civilized" countries. Plausible argument.

Deportation of slaves relocated 13,000 - a tiny fraction. They worried about allowing free blacks to stick around. In Liberia, political power was in the hands of the "Americos" until 1980.

Interesting history of the evolution of the 2 party system.

A fascinating account of the debate over war debt coming out of the civil war. Denial of the right to vote connected to both immigrants and blacks. The 14th amendment (right to vote) was never enforced. Similarly, the 15th was left to the States to enforce.

1877 end of reconstruction. Then segregation kicked in, resulting in a huge reduction of black participation in political or economic society. In the end, a gradual migration to the North. Numerically, this was not a big deal.

1884, Dems win the presidency. Birth of Social Nativist / Democratic ideology. Dems jettisoned this and switched to social justice in the 1960s.

-------------- BRAZIL -------------

Fascinating story. Slave revolts. Lots of racial "mixing." The idea that children born to slaves were "free" with strings attached. Abolition in 1888, then the fall of the regime in 1891. Slavery was abolished, but the poor were excluded from voting until the 1980s. 

--------------- RUSSIA -------------

Again, the issue of compensation to the "owner" of the serf. Serfs needed to buy their freedom. But the State was weak, with local enforcement and no justice system. No tax system. No way to compensate through public financing.

Experiment with the abolition of slavery is similar to the abolition of serfdom. A civil war in the US, and a revolution in Russia.

=============== Chapter 7: COLONIAL SYSTEMS OF INEQUALITY =======

Colonies developed for the benefit of the colonial power.

NOTE: Piketty's account of how property and debt arose parallels the usual story of how debt-based money replaced money based on species.

In the 19th century, slavery was replaced by modern serfdom and debt - a process that went on well into the 20th century.

The brutal treatment of indigenous people adds to the slavery story.

1520 Mexico 15 - 20 million to less than 2 million in 2 million with lots of interbreeding. 5-10 million to 1/2 million in Canada/US, but not much interbreeding.

2nd colonial era peaked in 1938. 450 million in the British empire.

Generally, he needs to get a head count of the "elite" in many different situations. Nobility in 1700, whites vs. backs in slave societies.

The Colonial system used the administrative structure to dominate the population.

Inequality is constrained by the "subsistence requirement." Useful to compare incomes in multiples of "subsistence" level.  Obviously, the richer society is, the higher this multiple can be.

Owning classes can own more than 100% of the wealth by putting the bottom tranche in debt.

Figure 7.6 is key to the underlying math. I have been looking for this. It undermines Reich's analysis.

% of wealth can go nuts in "neo-proprietarian" societies.

Multi-dimensional nature of poverty can't be measured in one number. The world moved from 3x to 30x subsistence. You need to look into the details of lifestyle.

Note the problem of the top guys persuading the bottom guys that the arrangement is just.

Note that competitiveness is still used to justify high profits and low wages.

Balanced budgets in the colonies meant taxes were paid by the poor for benefit of the colonizers. Such as regressive "head task." providing comfortable salaries for the colonizers. Health and education were for the colonizers. There is an echo of this in the modern USA.

All education then and now is elitist. "No country is in a position to give lessons on this subject."

Niggling transfers from the colonizers were to pay for the salaries of the elite and "keep order."

Bottom line, colocalization offered high returns at low cost. Fabulous profits that benefited the elite at home.

We have the suppression of the "poor whites" by the local aristocratic system.

Foreign "investment" was brutal at first, with extraction kinda literal. In the second wave, it was "return on investment" that became the neo-liberal regime in current times. The effect is clear in the case of Greece or other situations where the IMF "saves" countries from debt. Compensation to slaveholders stretches into the 20th century and many others. Opium wars. WWI debts imposed on Germany.

Morrocco great example - conquest leading to "rescue" and heavy debt and debt accounting for 1/2 of Morocco's revenue and so forth.

The "invisible hand" doesn't have much to say about the economy in the mid-1800s. The wealth of nations depended on slavery, compensation to slaveholders, and substantial returns on investment from colonial investments. Accumulation of wealth is not about the "invisible hand." It's about the emerging concept of property and replacing serfdom and slavery with debt.

"Fairy tales" in economic textbooks. Property relationships are always tense and are enforced by law.

Chapter 7 - a side trip on the issue of racism and mixed-race marriages, and women as property.

In South Africa, again, we see a reluctance to redistribute property. Property rights are sacred no matter how violently they were obtained.

============ Chapter 8 - India ===============

The clergy was a prototype for the corporation, which is an organization that has income and wealth distinct from its members. Celibacy requirements specifically supported this.

Anti-Muslim motives were key to the alliance between Europeans and Hindus. A shadow crusade continued into the 19th century. 1492 was when the Moors were kicked out of Spain. There were echoes of this in the Gulf War.

======== Chapter 9  =========

"night watchman" functions need tax income > 1% of GDP ... a weak state

enforcement of property rights requires a "night watchman" function ... more tax revenue

this transforms the State into an ownership State

the arms race between states of Europe lead to strong states

in 1550 moguls and European capacity about equal. By 1780 150,000 to 450,000 plus others

organization and tech plays a role too

Adam Smith's ideas bear little resemblance to 18th-century reality-China more like it.

The amazing history of the Opium wars.  Added book on the subject to Kindle.

The military force behind the "modernization" of japan could not be more explicit.

Japan became a colonizer.  

"Pre-modern inequality regime" - Japan is an example of a very quick transition to a modern regime.

1856 slavery of "Roma" abolished 

----- China---

Confucianism is a civic theory rather than a religion. Respect for the property is important.

Official influence from the 2nd century to 1911. Part of the state rather than apart from it like the European Papacy. Contributes to the fragmentation of Europe. Communism is also a "State Religion."

In the early 2010's Confucius returned to a place of honor.

China was too weak to be despotic. Never more than 1% tax in the 17th century. 0.02% in civil service and military. Lacked the means to ban opium import. Early Spanish state similar ...

Lack of data caused by the weakness of the State. 1742 attempt to reduce the warrior class. Proprietary micro-societies. Exam system. Right to testify and others. You could actually BUY a certificate in the 19th century; for example, sons of the wealthy could be eligible. Passing the exam correlated with a high-status family. Somewhat similar to the admission system to top schools in USA Today. 1/2 of the posts are reserved for "bannermen" - warriors. Applied to only "federal" posts - 10%. 1911 Empire fell. The purchase of certificates went to general revenue. Tai Ping peasant rebellion 1853, noticed by Karl Marks. European powers took the side of gov't over property rights and debt. Boxer Rebellion - Europeans again backed the regime (10 European powers). 1911 government respected property rights and made redistribution impossible. 1912 Western Govts backed even more right-wing regimes.

IRAN

Related to the trifunctional nature of Islamic governments. Shias follow the Immam. Sunnis follow the Caliphs. Shias, therefore, denounce political leaders popular with the poor. Possible link with Zoroastrian ideas. High priesthood, Shiite clergy, is a class or caste. Echos of the opium wars with tobacco. In 1951, the privileges of the oil companies resulted in the ouster of the elected government. Specific recognition of religious orders in the constitution, Religious authority dominates the "secular" branch. This is unique in history.

His breakdown of Middle East politics is worth the price of the book.

Religious ideals have regularly ended in disillusionment. Religious messages of equality are coupled with rigidity and the general inability to underlie a religion and flexible enough to paradoxical support of things like slavery.

========= GENERAL =========

The modern world is the result of tripartite systems being replaced by proprietarian systems with legal (regalian powers) authorities gathered in the Nation State.

============ CHAPTER 10 ======

Interesting frame from the beginning of WWI to 9//11.

End of colonialism

1914 - 1945 huge transformation

private property vanished in USSR and China

Many ways that private property was challenged

• Progressive tax;
• Expropriation;
• Change of ideology and challenge to the sacred nature of the property and the marketplace

Classic ownership structure has been replaced by "neo-prioritarianism." He has a big issue with unequal access to career paths that leads to astronomical management salaries, especially education. Also, wealth inequality is always greater than income inequality.

"Patrimonial middle class" - the lower class owns nothing. As an aside, what about the value of assets owned by the government and, for that matter, services?

Some comments on the disputes on the left in the time of Marx. It seems that Piketty's analysis of history is bound to be better than Karl Marx or Adam Smith.

Agriculture leads to the concentration of wealth in the form of land.

Note how he manages to get rid of money as a measuring stick. He uses worker earnings, ratios that cancel out money. Good to change your thinking, in addition to questions about fables like GDP.

How did the wars cause such a big drop in private property? Not just the bombing.

We have been persuaded that we participate in history through politics and voting. In fact, we participate through income and debt.

The concept of property changed. Expropriations increased equality in the "debtor" nations and created losses in the bondholder classes in the colonial powers.

*Progressive" systems redistribute income among taxpayers. The truly poor don't pay income tax at all but are subject to other taxes, such as VAT. Redistribution is, therefore, in the form of spending programs. For example, Canadian Medicare and pension program are forms of UBI. Health and pension support have become (except in the USA) the core of fundamental social support.

New Deal: "Bargain Basement Social Democracy."

Note - Canadian public owns the medical system. In the US it is a private asset. This contrasts with attacking the "problem" as a wealth vs. income issue.

"Nationalization" of the US medical system would involve owners' compensation. Probably staggering cost.

Contrast Germany's move to worker participation on boards with the US undermining of unions. This didn't happen by accident. Note that this could only apply to publicly traded companies. Or does any corporation need a board?

All this co-management is a harmonious compromise with Marxian ideas.

Thinking that increasing tax on vast management salaries can be avoided by just increasing the wage, but this effectively increases the tax on corporate tax profits.

Talk about national "competitiveness" in terms of taxes etc. but misses the educational gap.

Very low inter-generational mobility in the USA. This is perhaps a key factor in "injustice." How back does this go? Why do the "poor" fail entrance exams? Are the "Ivy League" universities for-profit capitalist enterprises? 10.1% return on investment in richest endowments.

"Trust fund babies."

 Lack of transparency. Effective in raising funds. Comparison with the Ching dynasty practice of buying qualifications.

Does he skip over the problems with meritocracy itself?  "Meritocracy Trap" - the new aristocracy. Deals with social unrest. Related to the ultimate rewards for beneficiaries of elite education.

He struggles to find reasons why central planning doesn't work and why you need just a bit of private property. Attempts to sort out where one kind of ownership is to justified over another.

==== Chapter 13 =====

A useful discussion of "National Income" vs GDP

Or "Net National Income"

Net National Income balances out globally except for tax havens.

Good analysis of climate change

Some note about "intellectual property"

"Washington Consensus" - neoliberal manifesto

Chat about central banking. 

    Euro was created with the understanding that the bank's job is limited.

======= Chapter 15 ==========

Account of how the makeup of the vote in the US reversed

- educated people started voting Democratic

- so now Democratic party is the party of the educated - good news bad news

- those who rose the most tended to vode Dem

Do Economists Understand Money?

I'm no expert, but I can see when "experts" are 180 degrees from each other.

For example, in an interview with New York Times "Daily", an expert economist is asked where all these trillions of dollars of the bailout money are coming from. He seems to think that all Federal funds are either collected in taxes or "borrowed into existence". The implications are that it will take generations to "repay" all these massive loans.

This seems factually wrong in several respects if you know "Modern Monetary Theory (MMT)". MMT is not exactly a "theory" needing proof. It is simply a description of how things work in the accounts of a sovereign nature when it comes to its sovereign currency.

For one thing, all government funds spent are materialized "out of the blue". This applies to all spending all the time and not just in times of crisis. The exception which is not really an exception is government borrowing that covers the gaps between outright cash expenditure and money acquired by the sale of bonds, T-bills, and the like. This is not really an exception since these bonds are serviced and/or repaid out of funds that are "materialized". There is no limit to how much money the Federal Government can "print". Some of it appears in the current year. More is sprinkled into future years in debt "service" and repayment. All of it appears magically by Government fiat.

Taxes are not in any way "revenue" for the Federal Government. They cancel out a tax obligation, likewise created "out of the blue". The effect is to remove currency from circulation, preventing the world from filling up with money printed by the government. The difference between "spending" and "Income" (the deficit) is a made-up number that nobody cares about except when opposing social spending and ranting to the general public about impending doom. For the Federal government, there is no such thing as a "balanced" budget any more than there is a "purple" budget. Of course, the situation is different with the levels of government that are forbidden by law from printing money.

So, where do the trillions come from? They just roll off the press, or, more precisely, they are keyed into a computer at the Federal Reserve (or similar institution). Congress (or the PM) simply orders up a number and voila, it exists ("borrowed" from the future or printed).

Why would a government borrow money it can print? This is an (often ineffective) way to steer the interest rates in the general economy. Banks and the "shadow banking system" actually create far more money than the Government. "Control" of interest rates is hopefully influenced by the bond market. But the government certainly doesn't "need" the money raised by bond sales. On the other hand, this method of control builds up a fictitious number that grows to frightening proportions, called the "national debt". This is "money" that can either be serviced or paid off with printed money or simply ignored. The size of this number is meaningless. Yet we find "expert " opinions on things like the dangers of allowing debt GDP rise to some number pulled out of an economist's nether regions. "Servicing" this debt has the effect of putting vast sums of printed money into the hands of the investor class, but this is beyond the scope of this essay.

So what seems to be the sensible view of injecting trillions into the economy to keep the lights on?

For one thing, we can see the catastrophe that results from not doing this in the horror of the '30s in Canada. Among the many problems in the Canadian depression was the simple lack of cash and the universally accepted gospel of the "balanced budget". Yet, when Canada entered the war against Germany, all of a. sudden there was no problem paying thousands of previously out of work young men and transporting them overseas at considerable cost. Obviously, there was a problem with our assumptions.

On the other hand, we can see some famous examples of governments attempting to print their way out of disaster, resulting in hyperinflation.

Let me give you a metaphor infested personal view of this.

When the government gives you $1, it's an IOU. The government is saying, I owe you $1. But the Canadian Economy is what stands behind this idea. They are saying, this piece of paper can be exchanged for any goods or services created or acquired by the Canadian economy. You can redeem the IOU by spending the $1 on what Canada has for sale.

So the trick is to have enough of these $1 floating around that they more or less track the amount of goods and services available. A dramatic increase in these IOU's will, all things being equal, lead to an over-supply - too many dollars chasing a fixed amount of goods and services, resulting in inflation. This is the classic objection to "printing money" even though that's the only way a Federal Government spends money. Note that the "same problem arises if money is created by the banking system - credit and debt. This leads to the conventional way of attacking inflation by raising interest rates - sometimes to painful levels - and why the government keeps its toe in the sea of debt by issuing bonds when it could just as easily print money. The effectiveness of this policy is questionable, but that's a subject for another time.

But what happens when there is a big drop in the amount of goods and services available, such as when the economy is locked down for months? People following the situation mostly hear about people's dwindling buying power and, in Canada at least, massive direct injections of cash are made (for example) to prevent people from losing their homes. But a more subtle danger is the loss of productive capacity in the economy, leading to a drastic reduction in the amount of goods and services for sale. The latter problem is far more complex and difficult than the first. You can't just throw money at it. For example, many small businesses constantly skate on the edge of. bankruptcy. Moving at "government speed", there is no way to save these businesses from disappearing - possibly forever. Moreover, mass failures of these businesses has an implication for creditors, including Federally-supported banks. The Government will presumably save the banks but not the millions of businesses whose loads went bad.

Put these together ("supply-side" and "consumption") and you see a drastic contraction in the amount of money needed in the economy and a serious risk of runaway inflation. From a monetary point of view, the task would seem to be interventions that recognize both sides of the issue. "Fortunately", the current situation results in contraction of both supply and consumption so, in theory, we can visualize a "balanced' intervention. In the current situation, the added problem of keeping people alive makes it a problem from Hell. One obvious long-term problem (especially in the US) is that direct subsidization of wages is laughably inadequate. Even if a low-wage person manages to keep a roof over her head, she will emerge with staggering debt. Similar situations will emerge in most of the "supply-side", where businesses will survive only by accumulating debt. Since all money is an IOU to somebody, we see the emergence of an even larger creditor class whose size depends largely on who gets the trillions of dollars being printed to deal with the current problem. It is the creditor class (the rich) who are deciding all this.

Sorry if you were expecting solutions...

A Modern Utopia

Some thoughts about the super-obscure "Modern Utopia," by HG Wells. This is almost free (99 cents) from Kindle. It's well worth reading for the money, and I encourage people to give it a look.

For one thing, it's a literary tour de force - a totally unique way of dealing with a subject. HG sets a task for himself that's worth noting for those of us who "live in our heads". Thinking about Utopia is a special kind of meditation. What would be a perfect world? HG takes due note of other efforts going all the way back to Plato's Republic and Thomas Mores' Utopia.

HG says you need to jump into this perfect world yourself and imagine this world to be populated by people you recognize as humans like yourself and people unlike yourself. Perhaps imagine a Utopia that doesn't boil down to a world governed by people like you according to your values. Given HG's example, I have found this to be good advice - even a roadmap to encourage us to think in this way - perhaps to examine our own assumptions about what would happen in the perfect world we imagine.

HG actually jumps into his Utopia with a friend who completely rejects the project. The friend wants to imagine an alternate world where his own personal life turns out better. He cares not about the details. Now, is it really possible to imagine a perfect world that doesn't fix your own issues? For example, in my perfect world, I'm a lot younger with all my bad decisions rolled back.

HG has made me think about a lot of stuff - the litmus test for decent literature. Here are a few things worth turning over ...

• HG feels that the only role of government is to guarantee individual liberty. For example, he wants the government to step in to make sure that the liberties of mothers are not compromised by them having children. People interested in the history of socialism will recognize this one. So we see the central role of "liberty" and the germ of sympathy for women (from a man's point of view).
• HG needs some kind of Utopian money. He wants an underlying value. Not gold. Maybe "energy". Not a bad idea, but it side-steps the actual security behind money - debt. HG is a bit vague about the role of debt in the Utopian economy. Interestingly, he wants a woman to assume debt to cover the social cost of raising her children. I find HG's economic (monetary) ideas to be completely implausible, but that's OK because HG explicitly admits the Utopia is his Utopia with all the warts that may afflict his own imagination. 
• In HG's world, legislation and executive authority are trusted in a kind of priesthood. Ironically, HG himself would spectacularly fail the entrance criteria for the elite (HG was a famous womanizer). But one must ask a more better question: would actual humans ever accept the rule of any kind of "morally superior" group? Isn't this a bit like the Communist vanguard or the Chinese Communist party?

HG's line of thinking forces you to consider the details in a way that other "Utopias" don't. This is not entirely different from HG's most famous work: "War of Worlds," which imagines real people caught in an alien invasion. Both are classic examples of the "Science Fiction" method, which is to ask "What If?"

What Money Can't Buy

In "What Money Can't Buy," Michael J. Sandel attacks the value issue as a philosopher.

Ideally, the job of a philosopher is to make us think more clearly about critical issues. As a philosopher, Sandel doesn't offer definitive answers. His business is to ask the right questions, clarify the terminology and provide "edge cases." If you watch Sandel's lectures on Justice, you will get a taste of his process: A "Socratic" moderation of discussions about what is right and why.

Sandel looks for "edge cases" and questions our vocabulary. The result is penetrating insight into the subject that pushes aside much of the discussion that assumes that justice can be achieved by tweaking the economy. Economics, especially since it embraced the concept of "incentives" has abandoned the pretense of moral neutrality. Specifically, economics is seen in the light of political philosophy.

Economic theories are thinly veiled political theories, which concern themselves with who shall have rights. These turn out to be discussions about who shall have anything at all. Faith in the "efficiency of markets," and the "invisible hand" substitute for arguments about justice, somehow rationalizing the situation where it is "efficient" for large segments of the population to be denied basic human rights. Sandel puts "markets" under the microscope. As discussed elsewhere, "money" greases the wheels of the marketplace, but the marketplace, not "money" is where most of our problems arise. Modern economists claim that the market is society. Everything is for sale. This is precisely the issue where Sandel makes his stand.

Sandel mostly limits his discussion to markets that are "greased" by money. The same approach is taken in "experimental economics" which has blown big holes in the theories of conventional economics for entirely different reasons than Sandel discusses.

Is it OK to offer woman money to give up her right to reproduce? How about selling the "right" to exceed the speed limit, waiving speeding tickets? How about "scalping" tickets to "free" public concerts? Why not sell kidneys? Hearts? Does it make sense to put a specific monetary value on life itself, as insurance companies and the UK government do? As I write, the Trump administration has agreed with Boeing that it's ok to kill hundreds of people with an aircraft with known problems in its autopilot -- problems with a known fix that it will take Boeing some time to roll out. What's the problem?

Sandel is an expert on the philosophy of justice and rights. It is therefore not surprising to find Sandel analyzing the way that markets create injustice or, to put it another way, force the poor to "sell" their rights to the rich.

Dimensions of Value: Money Under the Microscope

One basic claim of "Dimensions of Value" is that money is a poor yardstick for measuring value. Unfortunately is the language we use to speak about value. Even so, money itself is not as "real" as it seems, even when we look at it all on its own. How is it that we, as individuals, see money to have value?

Money appears to be simple. It obeys the rules of arithmetic. You can add or subtract money to money, divide or multiply money by a number, multiply. This tends to give money an extra aura of "reality", hiding what it stands for, namely debt.

With its mask off, money can be obtained by accumulating debt. Money can be used to pay a debt. Money can be used to pay or collect "interest" on a loan. Money is a way to create, buy, sell and ultimately eliminate debt. According to capitalist economics, every single thing is "worth" the amount of debt the buyer is willing to incur to "own" it. This may seem to be a crazy way of putting it, but it is increasingly exactly how ownership is acquired by individuals and the nation-state. But most of us don't think of it that way. In this post, we will treat money as "worth" something in itself. Why is that?

Of course, the main thing about money is that we value it and use it a lot to buy things we value. The more money we have - the more money "floating around in the economy" - the better things are. Right? Well no ...

ANOTHER LOOK AT MASLOW

If we bring Mr. Maslow back we can see how money relates to our basic needs.

PHYSIOLOGICAL

We are in deep trouble if we can't "afford" to meet our "physiological needs". We need to buy food and shelter. Even water is not free in most of the world these days. We need a certain "subsistence" income to stay alive. Capitalist economies tend to drive worker's salaries down to this level or below since these economies value only the work the person can put in. If the person has no "job", persistence income is somebody else's problem. To the individual, obtaining this level of income is literally a matter of life and death.

Subsistence income may come from subsistence property, such as a little plot of land that is farmed to produce the essentials. Capitalist economies put a market value on the land itself. Land may be used to secure a loan. If the land doesn't produce enough income to service the loan, the land (and the income it produces) is lost. This is the dynamic underlying thousands of suicides by farmers in India.

SAFETY

Once subsistence income is obtained, safety becomes important. If you are close to subsistence income, safety is a luxury. If you have more than enough, you can live between walls and pay staff to preserve your safety.

LOVE / BELONGING

Income plays a large role in the selection of partners. People select mates from the "class" created by relative income. Establishing a family requires income beyond "subsistence".

ESTEEM

At some level of income, money is available for visible signs of social class to signal membership in that class and "keep up with the Joneses". This operates in society with surprisingly low income. For some, ownership of knives and plates is a status symbol.

SELF ACTUALIZATION

Many people decide early on what kind of income would be "appropriate". I remember feeling a bit cheated as I struggled to obtain an income. It bothered me that many people in my same field made more than this - sometimes astonishingly more (Bill Gates and Steve Jobs were in my field). It wasn't just the money - it was connected to my own feeling of self-worth.

MARGINAL VALUE OF MONEY

This brings us to consider an aspect of money that is not reflected in its numerical nature. For the mathematician, what we are talking about is a derivative of money - either by time (which is income) or income by wealth - the amount of income as compared to the wealth one already has.

For some, an income of $1,000 per year is the difference between a miserable life and starving to death. For most "middle class" people in the West, it's a rounding error. $1,000 is not likely to make any difference in meeting our needs anywhere in Maslow's pyramid.

This holds true as income levels rise. To the very rich, $1 million is a rounding error. We tend to think of money as a percentage of either income or wealth. We laugh at the old lady who has a $2 million estate and comparison-shops for the cheapest light bulbs.

We conclude that the value of money varies greatly between individuals - a fact that is ignored in GDP figures. "Growth" of GDP (a central goal of political policy) means different things to different people and can actually mean the reverse of what it seems to show. If "growth" adds a few percentage points to the income of the very rich but pushes the general population "down the pyramid", "general happiness" is reduced by growing GDP. In fact, the capitalist economic system is engineered to do exactly that since capitalism drives labor costs to subsistence level or entirely out of the picture. 

People don't just look at their income and their cash-equivalent assets. They compare these to what they had a year ago and what their neighbors have. They are unhappy if their incomes remain stagnant and their assets are more and more pledged to the bank. A great number of people in Western Economies have a negative net worth - and it gets worse for them. This is a problem for them even if their standard of living is beyond the imagination of most people on the planet. We can see this as a problem of "Esteem" in Maslow's hierarchy, but it may even be a matter of safety and physiological needs as the household teeter on the edge of bankruptcy and/or a job is lost. Many people in the over-50 demographic are crushed to see their career hopes dashed. Their plans of "self-actualization" were psychologically tied to their jobs.

$1 million per year income can be seen as a problem if your next door neighbor makes $2 million.

Again we see the subjective value of money is not measured by the amount in question. That would not be a big problem except that, beyond subsistence, the value of money is only subjective.

This simple observation puts a lie to fundamental assumptions of traditional economics. A dollar is not the same to all consumers, employees, investors or any of the other supposedly interchangeable cogs of a market economy. Add to this the relentless efforts of producers to suck as much money out of consumers, which is another way of saying that the consumer is motivated to pile on as much debt as the system can bear. Advertisers play with Maslow's pyramid, convincing consumers (for example) that their old car harms their status - a new one is "needed". Or even that the world "owes" you a Lamborgini. Show the world that you have "made it".

What need is met by this $488,888 car?

While we are at it, we should mention the 680 billion dollars spent every year to make Americans feel "safe". 680 billion is not 328 million Americans spending $2,000 each to feel "safe". Nor is it $5,350 each to make 127 million households feel safe. Is it really true that America spends 2/3 of its GDP per capita to feel safe? The math doesn't seem to provide much insight. Somewhere along the line, we have lost sight of what $1 billion means. Perhaps we need to ask who or what is actually being protected and at whose cost.

Dimensions of Value: Influence, Power and Status

In a previous post, I mentioned how our world view - especially our perceived system of values - comes into our politics. At the same time, political players tend to misrepresent their own value system and the value system of their opponents to gain power. Power itself is a value worth looking into. In fact, "political" power seems to show up in all the "social great apes" and many other species. My aim here is simply to visualize this dimension - to come up with a visual metaphor that helps us think of this type of value. There are many values similar to "political power". I chose to talk about "influence" as a representative of this class of values. These networks are essential to understanding one of the themes of this entire blog: the superorganism. Networks of value play a role similar to the nervous system of the individuals who make up these organisms. They account for "why" these organisms value what they value and do what they do. They explain the "nuts and bolts" of how individuals are "programmed" by the superorganism.

From "Connected: The Surprising Power of our Social Networks .." Page 289

Social networks transmit all kinds of social things, including "influence", "political power" and "debt".

As already noted, debt is the shadow of "money", but this is a rather abstract idea that we can conveniently ignore. In practice, each of us in debt to identifiable entities, such as the government, the bank, and persons such as our society, our mentors and political patrons. Much of our behavior is governed by perceived obligation, even if we pretend to ourselves that we act freely.

In "Thieves of State", Sarah Chayes provides a detailed description of the architecture of one particular well developed "kleptocracies" - Afghanistan. This networked structure is composed of two-way relationships between the "boss" and the "client". Money (bribes etc.) flow "up" to the boss and perks, protection and status flow down. The link is usually established by the "client" paying for the position in the first place.  Sarah's analysis is particularly helpful in revealing how the corruption of the entire "government" structure works. It is, in effect, a criminal conspiracy that has captured the government. It is extremely durable since it comes to be an accepted aspect of the culture itself.

As Chayes points out, there are different structures in different countries, all lying on a spectrum of "corruption" - from outright capture of the economy by organized crime (Russia) to "white glove" capture of the economy by the rich, where political power and wealth are assumed to be interchangeable.

Networks of influence effectively control governments (including ours) where "corruption" is technically illegal.

Individual voters imagine that their "influence" flows to their representative in the form of their vote. In fact, such influence is openly sold to large campaign donors. "Fundraising" actually takes up the lion's share of the time available to elected officials. One of the key ideas of "socialism" is that each individual citizen should have an equal influence on the decisions of the government. This is specifically denied by the capitalist system, which is effective "one dollar, one vote". Capitalist politicians, such as Republicans in the USA, devote their energies to voter suppression - specifically standing against "equal representation" - "equal influence". They also vigorously defend mechanisms that maximize the influence of individuals and organizations with "deep pockets" (PACKS). We should note that the purpose of a PACK is to reverse the flow of influence - to influence the voter in favor of the PACK's agenda.

A whole library of books could be written on this subject. For the moment, I'd just like to point this out as one of the "dimensions of value" that matter in a fundamental way. Dimensions like "money" obviously play a role, but political power itself is a key value, most obviously to politicians but also to those who feel they are being left out - those who can be convinced to vote against their own interest in the name of some populist rhetoric. The dynamic "works" for the politician, but seldom for the disenfranchised voter. "Money talks". The rules of the game are set by those currently in power, resulting in a system as resilient to change as that in Afghanistan.

In political networks, loyalty functions more or less the same way it does in the Afghan-type kleptocracy. Individual representatives commit political suicide if they don't support the party agenda. In turn, the party provides financial help to get the representative re-elected. Loyalty networks function to draw the compliant politician closer and closer to the center of power while banishing anyone who shows a hint of disloyalty to the political wilderness. Newly elected politicians are "shown the ropes" by senior experts at the game, resulting in powerful loyalty networks between mentor and student.

Before leaving aside this topic for the moment, I should mention how "money" is only a value in itself when it buys the basics of life (food, shelter, security). Beyond that, money is a symbol of status and valued membership in a group. Status and membership are values on their own. Beyond "minimum wage", money buys status. A with all the great social apes, status figures into every minute of every day. It is the key to obtaining access to other values, such as mates, medical care, education, information and, of course, power. They also allow the individual to obtain shiny things like gold, jewels, and fancy cars, whose main function is to signal social status, even if this status is empty and devoid of actual influence or power - "status in the mirror".

Dimensions of Value

I have written a lot in the past about what I called "The Zen of Value". The "Zen" idea refers to the concept of sitting back, clearing your mind of preconceptions and seeing things as they really are. Another title that occurs to me is "Dimensions of Value". It turns out that this metaphor is quite fruitful and worth exploring. It grows out of a previous post: "Human Welfare And the Four Economies". Upon thinking of it, there are more than four and the mental picture of "dimensions" is helpful. The "dimensional" aspect promises to add some rigor to the underlying subject. The "royal road" to the "Zen" view of this subject is the realization that "money" is a poor measure of "value".  You already know in your bones that this is wrong but you have never wondered how, in detail, it's wrong and how, specifically you could see things better in a way to make better decisions for yourself, your family, your society and whoever comes next.

This post is basically an outline of a new line of thought in this blog: "Dimensions of Value", tagged "#Dimensions" in the index.

MONEY

Many folks are totally unfamiliar with "money" in general. I won't repeat myself on that subject. The bottom line is that every dollar of "money" is backed by a dollar of debt. When the debt turns out to be uncollectable, the money vanishes from the system, as in 2008. For some background on that subject, along with lots of reading links, check here.

So, "money" is one "dimension" of value. In fact, in "finance capitalism", money itself, rather than any assumed underlying value, is what as seen as "value". With the "dimensional" approach, we take a close look at how this presumed value can be projected on other forms of value. As already mentioned, "debt" is the "real" basis of this form of value, so it makes sense to take a look at "debt" itself as a value, which it obviously is to the creditor. If this isn't immediately obvious, consider the "books" of the bank, where debts (outstanding loans to customers) are listed as assets. But we should go a bit deeper to take a look at debt itself as a measure of value, remembering that the correspondence of money and debt is an assumed relationship that can turn out to be wrong, as it did in 2008 where 4 trillion in money was backed by debt that was, in fact, uncollectable. Another thing we could look at is government debt, which can turn out to be uncollectable in cases such as Greece.

There are other promising "dimensions" of value with connections to money that are so loose that they shout out for separate analysis. Most obvious is human life itself, perhaps the value that we can all agree on. However, we find many situations where the lives of others are routinely valued at zero or cases where an individual will value his/her own life worth throwing away for some perceived value. What is that value and how can we visualize the transaction.

LIFE ITSELF

Insurance companies provide some useful guesses for the money value of human life - we'll take a look at that. Lawsuits against polluters that compensate for the loss of life and quality of life are useful sources of information. Such information effectively places a floor on the value of life. We can all agree that nobody can compensate anyone for the loss of a loved one. And, of course, if a person is dead, the whole idea of compensation to the victim becomes meaningless - a bit like dividing by zero.

For centuries, the value of labor has been assumed to be a fundamental value (Marx assumed this for example). This can be a bit slippery since we tend to only value "work" that can somehow be turned into money and we ignore the fact that "work" adds to the value of life for some people and amounts to throwing away time you will never get back for others. Nonetheless, with our "dimensional" approach, we can perhaps get a new way of seeing why labor, the compensation for it and the economic value of it varies so mysteriously.

RESOURCES

Centuries ago, the economic theories of "mercantilism" assumed that gold and silver were the basis of all value - driving the policies of governments and a wave of colonial conquest. Even though this theory is long dead (except in the minds of Donald Trump), we need to take it seriously. There are three aspects of it that seem to be almost independent (dimensions). One is the actual value of the resource (its "utility" or usefulness). The other is scarcity. The third is widespread acceptance of the resource as a kind of "money". Bitcoin is a recent attempt to create a "store of value" that is based on scarcity and trust alone. Bitcoin believers tend to think that "real" money - what they call "fiat" money - is "nothing but" arbitrary tokens that we trust and scarcity.

There are a few resources that are undoubtedly valuable and are becoming scarce, at least locally. Their value depends on how we use the resource and many "technical" features. There are many examples of this, namely:

• Water
• Fossil fuels
• Coltan
• Uranium

It's useful to look at what these resources have in common as well as how they differ. Since water is emerging as a "physical" resource of this type that's "in the news" these days, it's a good example to consider in detail.

THE ENVIRONMENT

Many people regard the "environment" in general, including the animals that live in it, are in this category. For example, expansion of "arable land" has an opposite cost in "habitat". Whether you care about this tradeoff or not, it eventually comes back to bite you when, for example, "commercial" fish stocks vanish due to pollution and/or climate change. 

At bottom, the issue is whether to treat the environment as a "resource". If we see it that way, only human values apply. If not, we see only the human value of maintaining life on the planet.

We can treat the "environment" as a dimension whether or not people care about this dimension. We have objective measures available, including the rate of species loss, the rate of habitat destruction and, of course, the mother of all environmental costs: climate change, which is being studied to death.

ENERGY

Another interesting source of value is energy and its evil twin "entropy". Life of any type requires an energy source. The big picture is that life fights "uphill" against entropy which is increasing everywhere in the universe at all times at all scales. This is perhaps the fundamental struggle of life, making energy the basic "value" and entropy the basic "negative" value. Life is a constant gamble in the casino of the Universe, where the "house" always wins in the long run.

We all see energy costs translated into money in our fuel and electricity bills. But, by the basic laws of nature (namely the laws of thermodynamics), energy "creation" involves an opposite creation of entropy (actually more entropy than energy is created). An irreversible consequence of all human political systems is that "entropy" is created by irreversible pollution of water sources - something that the energy companies magically avoid accounting for - passing it on to society and the environment itself. Such systems also tend to regard direct costs in other dimensions (such as the value of life itself) as somebody else's problem. 

The same phenomenon can be seen in nuclear energy. Even in "renewable" sources, the same laws apply, although you need to follow the energy transactions. For example, "free" energy from wind power ignores the energy cost of creating the hardware, transmitting the energy and maintaining the system. 

POLITICS

The subject of politics cannot be avoided here. All political theories involve a "meta-theory" about the value and dangerously ignore or misunderstand most dimensions.

For example, political debate in Canada (where it happens at all) is about "money" and its assumed relationship to "jobs" which are a proxy for "life itself". All other considerations can be set aside as long as we can grow "GDP" (Itself an abstraction of an abstraction). We are unable to discuss other "dimensions" intelligently. Capitalism assumes that all resources are "owned" by someone. Even the idea that the "Government" "owns" resources not owned by others is an assumption with sweeping consequences. Assumptions about the "value" of "work" and "money" are buried so deeply in our debates that it can seem crazy to challenge them. The effect of this is that major problems sneak up us from unknown "dimensions". We lack even the language to recognize the enemy.

So, in this blog, we will frequently discuss how political theories perceive the multidimensional world of human value. I know of no political theory that does justice to this subject. We are left with a choice between sets of dangerous misconceptions.

How Our Politics Misses the Point

An excellent CBC Ideas episode is a nuanced treatment of how we tend to become more "conservative" as we grow older. I felt that the entire discussion was missing the point, or at least the "lefties" and "conservatives" were talking past each other. We have lost sight of the real world around us and have grown to depend on utterly unreliable ways of thinking about it.

There is a lot to unpack here.

For one thing, words such as "liberal" and "conservative" suffer from "reification" - slipping into thinking that something is a "thing" just because we use a name. "Socialists" have famously never agreed on what "real" socialism is - they are always accusing each other of not being "real" socialists" The idea of "conservatism" is just as amorphous, as illustrated by its defenders in the CBC episode. Why, for example, is Trump "conservative". Of course, conservatives are quick to say he's not a "real" conservative. There are echoes of religious schism here ...

It seems to me that terms like "liberal" and "socialist" are used mainly by "conservatives" as pejorative terms for an ideology that may or may not exist as a cohesive political ideology. On the other hand, those who lean to the "left" misunderstand the nature of their opposition. To cite just one element of this, I rarely find a "leftie" who understands the religious core of the Republican party. There are many who will not vote Democrat because they honestly believe that God is a Republican.

My problem with the whole debate is that it is not really "about what it's about".

On the "left", the concern is officially about "social justice" - providing each citizen with a tolerable lifestyle and civil rights. "Lefties" regard the political project as engineering all aspects of the system toward this end. "Conservatives" tend to appeal to fundamental principles that they feel preclude the need for analysis. As with religious conservatives, political conservatives miss the rapidly evolving image of what things were like in the good old days.

On the "right", it's officially about money. Balanced budgets, GDP and taxes. They provide lip service to social justice but always want to know "who will pay". When talking to a "conservative", you always feel the implied answer: "Not me". Conservatives hate to pay taxes and they take it personally.

I think that other issues tend to "stick" to one side or the other out of a historical accident or careful "engineering" of the political climate. For example, there is no obvious reason why "conservatives" should oppose abortion rights or, specifically, the "right" of the government to have a say in the reproductive rights of an individual. There is no obvious reason why "conservatives" should be climate change deniers or gun rights advocates. It's a matter of strategic alliances.

The fundamental core division is, I think, over two ways of seeing the world: people who see the problems and opportunities of real people versus people who see the issue as a zero-sum game of who pays. This is unfortunate since you simply cannot see what is going on in the world through a lens of money.

• The modern conservative is engaged in one of man's oldest exercises in moral philosophy; that is, the search for a superior moral justification for selfishness.
• The only function of economic forecasting is to make astrology look respectable.
• Under capitalism, man exploits man. Under communism, it's just the opposite.

John Kenneth Galbraith

In my reading of Galbraith, my "takeaway" was his insight that it's all about the "commons" - the assets we own together as a society. Political "left/right" fights, especially when taxes and balanced budgets come up, are about the "commons". For example, Should the "commons" include affordable medical care for all? Why do I have to pay for schools if I have no children? Why should I pay for libraries when I don't read?

Conservative opponents of "tax and spend" liberals tend to overlook the stunning expansion of the "commons" over the last two centuries, which has nothing to do with what kind of government is in charge. For example, a conservative that advocates that roads should be paid for by precisely the people who use them (toll roads everywhere) would be seen as a crackpot. We see this kind of thinking with privatized fire departments who watch buildings burn because the owner is not paying "insurance" to the right fire department. Perhaps we should have toll booths at the entrance to every park.

But that misses a deeper point. We have created an environment that is 99% artificial. Who are "we"? Increasingly, every object in our environment has been created by thousands upon thousands of faceless individuals in a production train. Sometimes we need to have our noses shoved into this fact by, for example, asking how we would make a toaster from scratch. I ask the reader to pick up any object nearby and ask if he could make it from scratch. A plastic spoon? A ballpoint pen? A sticky label? Do we have any idea how much every person in the production line of any of these things got paid for his contribution? Does such a question even make sense? The fact is that everything around us has been created by the human race. We have no idea who designed this stuff, who built it or how it came to be regarded as "ours". The money we paid for it is, generally speaking, an absurdly low estimate of its "worth". To a large extent, what we pay for things in this world is a pretty arbitrary measure of what their value is to us. We access the vast amount of that value for "free".

But how do we regard our money as "ours"? If we look closely, most of us are also involved in a production chain too Our own contribution is lost in a sea of other contributions, with some kind of value popping out at the other end as if by magic. For example, for 30 years I worked to improve aircraft safety. I have no idea if my contribution saved any one single life. It only makes sense to think of my efforts as a contribution to the work of millions in the transportation industry.

What I am left with is a vision of the "commons" as a vast universe of value. Each of us contributes and (maybe) gets paid for it. We withdraw things from the commons and (rarely) pay for that value.

We should have our political discussions around enhancing the value of the commons, reducing the cost of accessing it and fairly compensating those who contribute to it. Automation threatens to completely disrupt the "compensation" part of this system while driving down the cost of "things" that the commons produces. Some members of society see their access to the commons painfully restricted or eliminated while others seek to "fence off" the commons and call a chunk of it "theirs".

So why are some things so expensive and why do some people get paid almost nothing for their contribution?

It seems to me that it boils down to personal, individual, one-on-one service. You can't mass produce cancer care or Nobel Prize winners. But there is no shortage of people who will work in warehouses or flip hamburgers.

That's the status of my current thinking on this issue. The devil is in the details.

The Creation Myth of Money

(Originally posted in "The Zen of Value")

Discussions about how money originates often start with the assumption that it evolved to facilitate trade and "store value". Otherwise, so the story goes, you and I would simultaneously want something somebody else had (say, you have more fish than you need and I have extra sheep).

There is scant evidence for "cash" arising out of this situation. Evidence for another narrative can be found in human behavior that naturally arises when "cash" is in short supply.

Say, you go fishing and catch 5 nice big salmon. It would not be unusual at all for you to show up at my door and offer me a fresh salmon "for free". On the other hand, we would tacitly understand that this establishes a debt. Perhaps at some point, I'd mow your lawn or give you a basket of berries, or jam from my last berry picking trip. The math doesn't need to work out. If I'm in bad shape and have nothing to give in return, it would not be unusual for the fish to keep appearing at my door (perhaps even more frequently).

Such a system is not "communism", where all goods are held in common, no matter how and by whom they were produced. It's based on sharing, generosity and reciprocity between friends and neighbors. It is embedded in a wider set of customs that add up to encouragement of behaviours that tend to bind he community together while discouraging freeloaders and cheaters. All the great apes seem to behave in this way to some degree.

Bringing the discussion into the 21st century, we see that money is just a standardized form of an "IOU". A dollar bill is an IOU from the Government. If I give you a dollar, the Government owes you one more dollar and me one dollar less. Most of my "dollars" are actually numbers in a bank account, which record an IOU from the bank to me.

If there were no banks and all cash magically vanished, we would instantly go back to an IOU-based economy. This apparently happened in Ireland during a 6 month strike of bank employees. Magically, the economy boomed without "money".

Money based on specie (such as gold) is actually a step backward from the natural system. It quickly converts itself back into an IOU system. Gold certificates (IOU gold) replace actual gold for all but the smallest transactions. Banks naturally step in to the void to "do the math" in a complex web of who owes what to whom. Quite naturally, we evolve into a system where most debts directly or indirectly are owed to or from a bank. Nations establish "central" banks and currency that is, in effect, an IOU from the central bank (the Nation).

Of course, "official" money has a serious drawback. The assumption is that all things traded (or "owed") can be measured in money, which flies in the face of both everyday experience and the way our "great ape" minds work. Value is based on what one individual perceives to be needed at a particular time. Such needs are not subject to the rules of arithmetic. Failure of money as a proxy for value results in all kinds of distortions, including the illusion that

1. The more money you have, the more goods and services of value you will be able to access.
2. If you don't have enough money for food and shelter, you are allowed to die, establishing a rather precise money "value" of a human life.
3. Any given object has the same value to anyone at any time
4. Anything of value has a price

Violation of rule 3 results in the common situation where person A values the same object less than person B, resulting in his willingness to "sell" the object to B. We sometimes forget that the result of this transaction is an increase in total value, while the amount of money in the system remains constant. The increase is a direct consequence of the fact that money is not a proxy for value.

The trouble starts to arise when we separate the role of the "social IOU" from the context of community. Money is an abstract IOU from an imaginary "person" - a debt that no longer contributes to strengthening the social fabric. Our money transitions that buy and sell, hire and work are conducted with strangers or even completely abstract theoretical "persons". 

Or are they? Does it make sense to re-introduce the social aspect of money through things like customer loyalty, "nepotism", referring friends to friends ...

It does appear that, as societies grow larger and more complex, there is a tendency to:

• minimize the value of human effort (driving wages to the bottom)
• ignore "externalities" such as the decrease in common values such as clean air, open space, personal choice etc.

Debt and Money

In a previous post, I wondered about how debt becomes the "civilized" mechanism to form the skeleton of a structure that recognizably similar to the kleptocracies documented in "Thieves of State". The theory is that over time (and a few political revolutions), "Western" societies settle into a way to suck the blood out of the poor "legally", eliminating the need for overt corruption such as bribes and kickbacks. In many of these "democracies", bribery continues to be important in the form of "dark" political contributions that constantly outweigh the desires of the general public. Money itself becomes a corrupting influence. But let's take a look at debt first - especially its connection to "capital" or "wealth" - the material goods of a society.

Especially with the appearance of cryptocurrency, we find people believing the myth of "fiat currency" - the idea that the government can print pieces of paper and convince us all that they are worth something. That's not how money is created in a capitalist system. Money is based on and backed by debt. If you get a loan of $100,000 from a bank, the bank owns a piece of you in exchange for the $100,000 that they create out of thin air. Every dollar is brought into existence by the creation of an equal but opposite debt.

The idea is that the bank will only "lend" you this money if you can convince them that you are able to repay the loan. Ideally, you will put up collateral that the bank will seize if you fail to meet your payments. So the entire system, especially the "money" is based on (a) credible assessment that the borrower can repay (b) value of the collateral. All this came unraveled in 2008, causing trillions of dollars to vanish from the system due to (a) banks creating money and fees for themselves when there was no realistic hope of the loan being repaid and (b) crash of collateral values (houses).

So, if all money is created by debt, where does the money come from to repay the debt? In the big picture, this comes from value added. The borrower somehow creates more value than what he borrowed. For this to happen, the entire economy must "grow" - causing the total value of its assets to constantly increase, or the value of the money must decrease (inflation). In effect, this means that the borrower is repaying the loan with dollars that are worth less than what he borrowed.

It's distressingly easy to game this system. For one thing, the traditional analysis ignores the role of crime, especially international crime and "money laundering". It's common for major players, especially in real estate, to use bankruptcy as part of their business plan. They never intend to repay the loans. Banks create money out of nothing and hand it to the Trumps of the world. Magically, the money slips away, another Trump business declares bankruptcy and Trump buys himself another jet. The bank actually looses only the interest on the loan. The debt vanishes and Trump keeps the jet.

It's also possible for the Trumps of the world to accept "loans" from international criminals - loans that will never be directly repaid, especially when the enterprise in question declares bankruptcy after all that now "clean" money slips away.

Another problem is that money itself becomes a commodity, resulting in what's called "finance capitalism". Money no longer stands for value in the "real economy" or even the credit worthiness of the society. It "floats free" - just numbers in computers. As we have seen, these numbers have a distressing tendency to crash for mysterious reasons. They actually behave like the mythical "fiat currency" because they are actually based on smoke and mirrors. Actually, what happens is that "trust" between the lender and borrower (who may have actually met face to face) is gradually replaced by a mathematical construct of "risk" evaluated by an opaque computer algorithm. Of course, you can't hold an algorithm accountable or toss a computer in jail.

For the "little guy" with a mortgage, car loan and a student loan, this debt is a crushing daily experience. Unlike Trump, he can't walk away from it. Unlike the banks, he is not "too big to fail". All this debt compels him to work - maybe two or three jobs. It is debt that locks him into the existing economic structure. By debt, he is "assimilated". As a citizen, society owes him nothing.

Especially during the 1930's, there were a lot of ideas about how we could solve our social issues by tinkering with the way money was created in the system. "Social Credit" was tried in Alberta but failed partly because the Province didn't have the legal right to print money (and lots of other reasons). In the American colonies, and during their civil war, various attempts were made to create a currency backed by the "goodwill" of the society (government) in general.

The perverse role that debt-based money plays in our economy is outlined from a neo-Marxist point of view in "Killing the Host".

Behind these schemes is the idea that value, like they mythical fiat currency, is created "out of thin air" by human effort. Is it possible to create money that reflects this value? It's amusing to note that many people think that this is the way things work now.

I like the idea of money being created as a byproduct of creating value. For example, a bank could create the money a farmer needs to buy seeds and pay expenses. This would look a lot like the way a loan is currently made, except it's backed by the production of value, not the "collateral" of the farm and buildings. If the farmer fails to create a crop or can't sell it for the planned amount, the loan is only partially repaid or simply written off. The bank loses nothing by not being able to collect the loan since it created the money out of thin air in the first place. If things go as planned, the money created by the loan "stands for" (part of) the value of the crop.

This concept could be applied to any situation where the value is being created, such as construction, infrastructure, and even retail. It could not be used in many situations where the value is not being created, such as real estate which only moves value from one pocket to another.

In theory, the government could simply create the money needed for infrastructure projects - even public health or education. This would eliminate the need for a lot of taxation and public debt.

There is a connection between this idea and the concept that there is an intrinsic, minimum value of human labor. In other words, there should be a living minimum wage. If a business cannot recover the cost of its labor inputs by selling its goods or services, it should not be in business.

Is there value created by simply having a pulse? There must be, after all, a consumer side to the value equation.  We need not assume that every consumer creates as much value as he consumes. This is certainly very far from the case in the current system, where the top 10% consumes the lion's share of the value created by the sweat of the other 90%. There is no obvious reason why the government could not create money to cover the as healthcare and shelter, plus an allowance for incidentals. The logic for this "hand out" is that all citizens are entitled to a share of the value created by society at large, simply by virtue of being citizens. It is the same logic that permits the lowliest panhandler to use the roads, the water, public parks and the clean air.

There would be nothing stopping someone from lending money for a mortgage, except that the money could not be created in the process as it is now. (since no value is created). The lender would need to actually have the money to lend. It is obviously necessary that the old and new system must be compatible and able to run side-by-side - possibly by creating two types of loans or two types of banks. This would probably involve sweeping changes to banking regulations since it is banks that create money in the current system. Banks are incentivized to create as much money as possible since their fees and interest go to their bottom line. This incentive is perverse in the sense that the bank's assets are not at risk.

Definition of what constitutes "creation of value" would be tricky. We see a germ of the alternative banking system in what's called "microloans" in third world economies, where the loan is based on a business plan rather than collateral. Such banks are the darling of the politicians who love "small business". Anyone who has owned a small business knows that banks are not in the business of lending money to people with great ideas (don't believe the ads). They want collateral. "Value-based loans" would look a lot like the loans we see banks giving out in the TV ads but not in reality.

The other type of bank would need to operate the way most people think banks do now: lending money placed on deposit, not printing it.

The idea is that money would ultimately be based on value rather than debt. The individual's connection to society would depend on his ability to create value plus the benefits of being a citizen, not his ability to repay debt.

Intuitively, it would seem that the transition to this system would result in a dramatic reduction in consumer loans - mortgages and car loans, for example. Such loans would only be available on the basis of the "fire sale" collateral value of the asset backing the loan. Ability to repay would be a minor consideration. "Sub-prime" loans would make no sense since the lender's actual assets are being put at risk. We would see much higher down payments on houses and an end to "zero down" car loans. That would deflate the real estate bubble and bring some common sense into the auto industry. Sadly, we would see a lot less money in the system - precisely the money that tends to find its way into the pockets of the very, very rich.

Is it workable? Would it reduce corruption? Would it be more fair and just? My guess is that the idea is not original. Some research is called for. Perhaps it's best to start with a few impertinent questions:

• Is there some reason why the government could not simply create the money needed to fund infrastructure and basic medical care? At present, governments tend to avoid funding their operation by taxes (especially corporate taxes or royalties), so they borrow more and more. An increasing share of revenue goes to service debt - to the banks.
• What would be the case for and against the minimum wage and a basic income?
• How would "value added" banking fit into the existing system?
• How could the central bank increase its balance sheet requirements in a way to phase out the ability of banks to create money?
• Does any of this appear in the platform of any political party?

This post returns to my long-standing concern with money versus value. I have re-posted an entry from an entire blog on this subject here. That blog was concerned with an "impertinent question": What, if any, is the relationship between money and value? After giving that question almost a two-year rest, perhaps it's time to take another look. Coming back in from the "assimilation" and corruption angle leads me to ask if there are toxic effects in society when the two ideas are confused. Coming at the question from the "Christian Skeptic" angle leads me to ask if such confusion can lead to bad personal decisions or what a Zen master would call "unhappiness".

The idea presented here: that creation of money could be tied to creation of value is new to me and, I confess, much in need of clarification.

Backing up a bit, I recall that "impertinent questions", like "imagination pumps" are an important way to shake out unexpected insight by challenging everyday ways of seeing the world.