Saturday, April 24, 2010

Sketches of money systems

I've been trying to gather into crude shape my learning thus far on what money is and how systems which use it might work. I found myself drawing diagrams to clarify my position, and feel I have learned a little from the process. Here they are for comment and analysis. I'm only looking at fiat, not commodity-backed money, because I believe there's no real functional difference between them when pondering what money actually does in an economy. [With enormous thanks to my brother for pointing out my embarrassingly bad maths -- this blog has been edited since it first appeared!]

Scenario 1

The simple world of this sequence, made up only of companies for illustrative purposes, is loaned 10bn by 1Bank to crank the system into life and get the game moving. Awkwardly, because of interest, World has to pay back to 1Bank 10.5bn. This is of course impossible, because only 1Bank is allowed to create money, and furthermore only creates money as an interest bearing loan at 5%. Even if 1Bank employs extra people to do hitherto unnecessary tasks, like polish its current employees' shoes, thereby returning money back into the economy, there is simply not enough money in the total money pool to cover the interest. The only way to sustain this simplistic system beyond round 1 is to loan the world more money to cover the outstanding interest. However, in this crude scenario and to illustrate a point about the necessity of lubrication, the amount of money in circulation slowly diminishes with each passing month and 1Bank extends no further credit. Companies that do best are able to make their repayments with their larger share of the available pool of money (profit), while companies that fare worse go quickly bust. Unemployment soars -- there is never enough money to pay workers -- as 1Bank inexorably retrieves from the economy the money it loaned World. When the debt is expunged it is game over, or system reset.

Scenario 2

In this improved and fairly realistic scenario we have 1Bank loaning a total of 10bn to 5 commercial banks (CB1...CB5). Government, as a borrower, is hidden in World. The commercial banks have the right by law to loan out money (create new money) at the ratio of 10:1. This means that the injected 10bn can become 90bn in the economy. Again, since in Scenario 2, as in Scenario 1, all money is created as interest bearing debt, there can never be enough money in the economy to pay back to the lending institutions the loan plus the interest. In this total money pool we have 100bn in principal (to be expunged upon repayment), but owed to the banks is 107.7bn. The system is therefore 7.7bn short of necessary lubrication. For the banks to be able keep the system from collapse (only they can), accruing as they do 'real,' durable money from the economy (interest payments), they must pump back into the system their earnings (the interest). For any kind of balance to occur, the combined action of defaults, plus bank spending in the economy (via its employees and otherwise), plus new loans and rolled over debt, must keep the amount of money in the system equal to the task of lubricating the economy to some sufficient degree. Theoretically it must be more or less possible to keep this system going indefinitely, depending on what we mean by “to some sufficient degree.” In the philosophy of the people who favour this system, poverty is a necessary evil, as are defaults of course, both of which act as a spur to keep us working, to keep us motivated. Put simply, success is good, failure is bad. Here Smith's Invisible Hand can be faintly detected keeping the system tuned automatically. Look, no governmental interference needed!

Scenario 3

Scenario 3 is a little like MMT (Modern Monetary Theory) as I have understood it. In this model Government has emerged from World as an institution that can also create money, but, in contradistinction to the banks, may do so as spending, which means no interest is charged. Government may choose to tax money out of the economy, or it may not, its decisions in this regard being guided by inflationary/deflationary pressures. (I include no arrow for taxation because the picture would have suffered in clarity.) In this theory we have a situation where defaults and financial ruin are not necessary parts of the system staying in some sort of balance. Government acts as a dynamic stabilizer, injecting and retracting money as the situation demands. Is this, potentially, monetary Nirvana? Seeing as there is no such thing as Nirvana, I very much doubt it.

So much for the theory. To please Bill Black (and myself) my final chart adds a little real world colour in the form of corruption.

Scenario 4

Included in corruption are human imperfection, mistake making, fraud, crime and so on. Also, not represented is that systemically there is constant pressure towards corruption, simply because being rich is better than being poor. So at each place where corruption can occur, there is pressure to ensure it will occur. Such occurrences destabilize the system to some degree.

One of the features of money that so fascinates me is its logical bond with scarcity, and its ability to act as power-lever. Those who control it control the system's functioning. Money can, in my view, never be only a medium of exchange, the simple and pure lubricant of those systems which depend upon it. All diagrams, models, and theories which do not take this into consideration are therefore flawed as far as I can tell. At those points of the system where corruption can occur it will, and this compromises the system's long term integrity, before we even think about problems of inflation, trade, currency exchange etc.

In the circle representing World is a massive amount of detail no picture can convey, while the flow of money round and round represents, of course, only a tiny fraction of what really takes place in human civilization. However, as broad-stroke sketches, such images have some use in representing the simple maths of money creation, and the nature of the systems we might create that depend on money for their functioning. How important are the threats of poverty and default as systemic motivators? How beneficial/dangerous is full employment? How effective can government be at establishing the correct tax policy in a system prone to corruption? If we were to leave government out of it, how effectively could 'The Market' take care of corruption, or of roads, laws, education, the health of humans everywhere?

Finally, also not represented is change. Change is the only constant. The models I have sketched, which broadly represent the choices of monetary systems available to us -- at the functional level -- do not take technological unemployment into consideration, nor production-consumption at levels that threaten the health of the ecosystem which supports those money systems in the first place, nor technological advances which offer us abundance, nor the coming beginning of global population decline. In the final analysis, money is a tool which solves particular problems, but, as all solutions do, also brings new problems with it, such as corruption and entrenched societal divisions. And because scarcity is assumed as an eternal problem solved only with money, we have war as an inevitability too.

Is there really no other way?


Debra said...

Hi Toby,
A while ago I read a legal detective novel called "Undisclosed Materials".
It was really interesting to see the way things go on in the world of the law, and in the courts, and not in our imagination of how they IDEALLY go on, for example. The novel is set in the U.K.
For some time I have noticed that we have become, as a civilization, obsessed with corruption everywhere, as though.. corruption could ONLY be a BAD thing.
But.... "Undisclosed Materials", by an Englishman whose name I don't remember, astutely points out that corruption is ALSO the place where our INTELLIGENCE, our capacity to innovate and produce change, pulls us towards something new.
Now... WHY are we so obsessed with corruption RIGHT NOW, when corruption has always been with us, and always will ?
One of the reasons that we are so obsessed with corruption is NOT EVEN BECAUSE WE'RE REALLY HURTING, because most of us who are griping on the blogs have not PERSONALLY felt the incredible discomfort yet which is due to arrive ? When, exactly ? Remember... the (Roman) Empire has ALREADY fallen with no big thud or crash, and we are ALREADY LOOKING FORWARD (!!!) to decline while continuing to indulge ourselves individually and collectively in some of the most shamelessly wasteful behavior the world has ever seen !!
We are AFRAID. We are, to put it very vulgarly... shitting in our pants in the sudden realization of how SELFISH we have been, thanks to our selfish thoughts that we have justified rather conveniently with Darwinian doctrine for quite a while now.
But, we MAY never personally feel this discomfort.
It MAY be... for our children, and our children's children (sadly to say...) to feel this incredible discomfort.
Yes indeed, the sins of the fathers are visited on the sons. Don't let us ever forget it...
Personally, I think that what you hinted at on another post, the economy of abundance, is the way for us.
i call it the economy of.. benediction. People have known about it for quite some time now.
But it is outside the economy of... interest.

Rupert said...

I like the concept of corruption being innovation but before it's time. As politicians and law makers struggle to maintain a level playing field there is an equal and opposite force trying to gain an 'unfair' advantage. Like in sport some argue that performance enhancers are simply the next step in our evolution. If we allow every competitor access to the same 'tech' then temporary parity is achieved and the competition becomes fair again. At least in athletics they all have to cover the same distance in a single race, I don't know if the same could be said for other professions.

Toby said...

Thanks for the comments. Debra, your points on corruption are very interesting. Rupert, great to have you commenting at last!

Right now EVERYONE must watch this lecture as soon as you can.

More from me later...

Toby said...

Hi Debra,

as I said in my quick drive-by post yesterday, your thoughts on corruption are very interesting, and have given me pause for thought. One of the things that troubles me most about The Venus Project is that it is an engineer’s wet dream, or, to use your analogy, an erector set lover’s fantasy. Corruption, as you point out, is a manifestation of intelligence. It is gaming the system, testing it, part of the forward momentum (if forward is the correct preposition) of change. There will never be a system which cannot be gamed somehow, including purposefully designed systems by genius engineers.

Two “howevers”:

1: Economics fails miserably to take corruption into account, and therefore fails miserably to achieve what it sets out to do. It fails at its self-appointed remit to efficiently (despite the fact that efficiency is over-promoted – see Lietaer) allocate resources and make accurate predictions about those things it supposedly governs. This must change. Its ignorance is causing unnecessary damage, whatever “unnecessary” means.

2: The Venus Project is the only effort I know of which at least has a plan, however loose, about how to build a presumption of abundance into our social systems. This is not to be sneezed at. I disagree with much of their presentation, but for the moment I know of no other hub around which strong ideas can coallesce. They also acknowledge the emergent and ever-changing nature of all systems. That is built into their prospectus, so to speak.

Bernard Lietaer’s presentation, the one I linked to, is very interesting on how to begin to build a more varied economics, one not obsessed with efficiency, though it fails in my opinion to address the abundance/scarcity issue deeply enough. He points out recent advances in Information Systems Theory, which show over-dependency on either efficiency or diversity leads to unstable or stagnant systems. Money-type diversity, coupled with a new (renewed/reawakened) sense of what humans ‘need’ at a base level such that blind material acquisition and addiction to GDP ‘growth’ are no longer seen as panaceas, could be the ticket right now. Another part of this change needs to be the embracing of technological unemployment as an opportunity to free humans of unwanted drudge work. All this together will reorient society profoundly. Money needs to be exploded, exposed, reassessed, redesigned, opened up to open processes and made a flexible part of how we organise ourselves, rather than the unquestioned God of all we do. Once we have broken through the money/economics wall, we can, I feel, redesign education from the ground up, to be relevant at last in the face of a quickly changing world. After that, civilization will finally have a chance to progress beyond the morass it is currently mired in.

@Bro1: can competition be fair? Should it be? Can two competing things be perfectly equal, with or without drugs? Perhaps even the way the wind blows in the stadium favours one sportsperson over the other. And then comparing sport with real life competition is interesting, but shows us perhaps how fundamentally different the two processes are. Thoughts?

Rupert said...

What is it we celebrate in sport? The competition? The victory? I love to see a good fight, when all competitors are evenly matched. I think that perfect competition is an oxymoron, so for me it has to be close, to ensure my need for drama. I wonder what is there, outside of human involvement with nature, that has the ability to 'cheat' or corrupt the established systems. Will the first monkey that learns how to juggle be branded a monkey witch and burned at the steak? Maybe, with fewer restrictions, we could move on from where we are now or will our over developed sense of community and fairness stifle our urge to invent and overcome. If we change the system those behaviors begin to make more sense.

Toby said...

Found an article just now that has got me very excited. I hate to blow my own trumpet, but it looks like I was right on the money:

"The concept that pressing the button of a single gene can change any complex behavior is entirely unsupported by biological evidence at any scale: genomic, molecular, cellular, organismic."

And perhaps my favourite zinger:

"The “selfish gene” concept as presented by reductionists of all stripes is arrant nonsense. To stay with the car analogy, it’s the equivalent of a single screw rotating in vacuum by itself. It doth not even a cart make, let alone the universe-spanning starship that is our brain/mind"

The article is here:

I'll probably post a wee bog on it this evening.

Hey Rupert, I like the monkey gag, though in a way, we monkeys have been burned at the stake for lesser offences than juggling. I think "witches" have even been burned for insisting on cleanliness. We are often an embarrassingly stupid monkey, more stupid by far than our all-over-haired relatives, particularly the sex-loving bonobos.

But yes, systemic change is what is called for, though attitude change leads to systemic change. It's a little bit chicken-and-egg, but doable. In fact, I really believe it's happening, only the outcome is uncertain. Which is good, since certainty is the death of change and creativity.


Debra said...

Toby, I think that we need to step back and start asking ourselves painful questions about how much we want to control our universe, and what this desire to control (and prediction is a big part of control...) is doing to blear and smear our daily lives, and our perception of the meaning of our existence.
We have got caught up in the prediction game, while it definitely has its limits, which we refuse to acknowledge a lot of the time.
Efficiency is less important to us, unfortunately than... the "measurement" or the "quantification" of efficiency.
The name of the game is translation.
We want to amputate the world to make it fit our symbolic systems..
BUT... the world is just not going to let itself be amputated, Toby. The world refuses to let itself be reduced the way we would like to reduce it.
No way.
Not for our.. HUBRIS.

Toby said...

Hi Debra,

I agree, step back as far as we can and question as much as we can, though doers want to act of course, and most don't want to tinker so deeply that something "breaks."

Perception is inevitably interpretation or translation, which makes the whole process of stepping back and asking the deeper questions fraught with difficulty. Humility is the only appropriate posture, but it's a very hard one to maintain. Control is one of those ego needs I touched on in my previous post, an illusion in my opinion, which we ought to be unravelling. Though because perception -- whether of the rational abstraction kind, or directly with the five senses -- is an act of interpretation, we can only perceive illusions to some degree. I think the onion of reality -- thinking of the layer analogy here -- goes on forever, inwards and outwards. So ultimately there will always be a kind of permanent disequilibrium, including of those efforts we bring to the task of understanding and controlling/tinkering with The World.

And control is good too, in measure. I like to sleep naked, on my stomach, with my pillows beside my head. If I can't control that, my sleep suffers. What I mean is we arrange our environment to suit us, while the environment is always changing and presenting us with new challenges, as we ourselves change and have new needs and requirements. It's all a question of balance.

Rupert said...

Those aren't pillows!!!!

Toby said...

Get the fuck out of my bed, stinky!

Rupert said...

Thankfully my bed-wetting days are behind me and I'm testing a new cream for the fungal thing.

Toby said...


Debra said...

Fungus.... I sympathize, I sympathize...
Anybody have a MIRACLE recipe against toenail fungus that doesn't cost a fortune and require.. YEARS ??
Ya, I know... I want my cake and eat it too, mea culpa..

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