Thursday, May 13, 2010

The Market, The State and Money Flow

This is a direct continuation of my previous entry, and precedes subsequent, directly related ponderings, now in the mental pipeline.

Money circulation is what keeps an economy functioning. That money tends to collect at certain nodes, and once it has collected there is unlikely to leave, is a block in the smooth flow of economic activity. The problem is nicely characterised as hoarding, which occurs simply because being rich is better than being poor. (That there will always be ‘rich’ and ‘poor’ is accepted, the only question, as we take this forward, is: rich and poor in what?) So the challenge is to keep the flow going, despite the pressure scarce money systemically creates to be richer than the next guy, and keep it that way.

In our current dominant myth The Market circulates money well, whereas The State does not. This is, if one peers under the bonnet, something of a circular (no pun intended) argument, in which: “black = bad (because it does)”, “white = good (because is does)” where “Market is white” and “State is black.” “Good” is the flow of money from place to place, from person to person. Trade is good. Strangely, as a ‘happy’ – though unintended – spin-off of this, some succeed to riches, while others fail to poverty, where many will be poor and few will be rich. I say this is strange, because these quite fixed and stubborn outcomes are logically contrary to The Market's primary function of promoting smooth money-flow. Poor people neither have nor can circulate money, rich people have but don’t want to circulate all their money. They want to possess more money. This is a systemic issue with money, though not the only one.

Again, smooth money flow is necessary to keep an economy functioning well. And yet as money flows around it ends up unevenly distributed. This uneven distribution inhibits maximum money flow, which means it inhibits maximum economic activity. What to do?

To answer this, I believe an analysis of The Market and The State is vital. An impartial, unbiased analysis. My efforts are those of an amateur of course, and yet I see very little work being done out there to look at this issue dispassionately. Ideology rules almost every roost.

The myth we all know so well relates that markets are efficient distributors of goods and services, and thereby serve society well. Economists call this myth the Efficient Markets Hypothesis (EMH). Markets are blind mechanisms powered by self-interest yet guided by an Invisible Hand, which, over time, ensures maximum possible societal good. Leave them be, let them alone to work their strange magic, and all will be well. Interfere, tinker, regulate, and The Market doesn’t work as it should. It is a force of nature, and best respected as such. Hence the correlation of ‘free’ markets with ‘freedom’. ‘Freedom’ is a social good ensured by ‘free’ markets. Also, selfishness is the inbuilt and unshakable human trait which, counter-intuitively, ensures maximum societal freedom and health.

To find out how we have come to ‘know’ that ‘free’ markets work this way, we must look to economics, and in particular the long journey economic thought took from Adam Smith, through Keynes, and into the neoclassical school. Economics is a strange discipline shot through with bizarre and impossible assumptions, and is seemingly incapable of making accurate or reliable predictions. It has been torn to shreds repeatedly by mighty thinkers, and yet soldiers resolutely on, convinced the nirvana of perfectly free markets it seeks is out there somewhere. Amazingly, despite its perpetual swagger (and I urge the reader to buy and read “Debunking Economics” and “Econned” for further information) orthodox economics has not proved anything, and most of all, has not proved there ever was, nor that there ever can be, a perfect (or ‘free’) market. They have likewise failed to prove that as-close-as-possible-to-free delivers social good.

To refresh, the conditions for a perfectly free market are:

1. forever rational market participants
2. perfectly informed market participants (knowledge of all prices of all goods and services for all time)
3. ease of entry and exit
4. total transparency

These conditions are of course impossible to meet. And yet only these conditions can prevent cartels/monopolies from forming. Cartels and monopolies do not serve the public good, distorting the market’s functioning. Some even become Too Big To Fail. Because the market cannot be perfectly free, it cannot, with or without the Invisible Hand, prevent these distortions from arising. Indeed, its necessary imperfection guarantees that settled imbalances occur.

Enter The State. How we hate The State. It is corrupt, nannying, bullying, dissembling, greedy, and to cap it all off, takes our money and wastes it on useless projects that no one wants. And yet, how could there be a market without a state? Can the infrastructure that enables markets to exist, such as roads and other transportation components, trade laws, criminal laws, courts, police, education etc., be established and maintained without The State? Can even one of these necessary components be run well by market processes? I believe not. If it were possible it would already be so.

The problem with maintaining societal infrastructure is money flow, how to effect it without ruffling too many feathers. We do not charge for education, and yet schools must be built and run, teachers and other staff paid. Money goes into the process, but does not generate money-profit. This is true of establishing laws; running courts; paying the police, armies, navies; road building and maintenance, and so on. Money flows out from The State into the state sector, but not arrive back as private spending from the private sector. In terms of The State making a profit, it has but one revenue stream; taxes. Or, in fantasy land, it plays the markets and charges citizens for all its services at point of use, thereby becoming a business. This cannot be. So, because The State relies on taxes to draw existing money to it, making a 'profit' would mean taxing back more than it spent. Is such a thing possible? Can such a business demand on The State make sense in any circumstances? (Absolutely, it's called interest and paying off the bill, should you choose to create government money that way.)

Remember, we are talking about money as a created tool. Isn’t it unrealistic to expect the same monetary performance/behaviour of an entity whose function is to spend money, as that of another entity whose function is to circulate money (while profiting from that circulation where possible)? As discussed in my previous post, for some to save or make profits, others have to spend or make losses. For this to be otherwise, there would have to be an abundance of money, and everyone would have to be rich. This is of course logically impossible. Money works as an incentive precisely because it is scarce. Money exists to deal with scarcity, and has to stay scarce in order to ensure competition and productivity.

In my view we have, therefore, a false dichotomy. Comparing The Market with The State is worse than comparing apples and oranges. It is in fact like comparing the right hand with the left. You may be right handed, but that doesn’t mean you’d be more efficient, or benefit, if you chopped your left arm off! The entire debate around this false dichotomy is a manifestation of a power struggle to control money, because money is the best tool humans have for controlling and shaping society. People in positions of power are there because they like it. Control is what they enjoy. The Market/State battle is in some ways a smokescreen, a pantomime in which the actors and actresses are sincerely convinced the right wing/left wing battle lines are helpful and genuine. Ideology rules the roost.

But there are systemic reasons why it must stay this way (for a while yet). Experimenting with entire societies is not easy, so what is done, what is determined to be the ‘best’ way, is the result of battle, propaganda, consensus, and contrived argumentation, not by scientific methods. This means that arguments such as those laid out here are almost bread and circuses for the masses. I can make any claim I want, show any assumption I find to be false, show the entire socioeconomic apparatus to be flawed and doomed, and it makes no difference whatsoever. The show must go on.

Except, except, except... I am part of the process of understanding ‘Life, the Universe and everything’, just as everyone else is. As our understanding changes, so, in time, will our societies also change. Change is the only constant. Sadly, Great Big Global Change is likely to be very bumpy indeed.

More on this in due course.


Debra said...

Over there in the "jungle" of Sudden Debt somebody stuck down a comment about anarcho capitalism...
A while ago I realized that the logical concluding point of the neoliberal economic dogma was to turn us into a motley collection of ungovernable "individuals", each looking to make a buck any way possible.
When you talk about the "free market" system, Toby, you are talking about the circulation of PRIVATE wealth.
Nothing PUBLIC about the market.
Nothing... COLLECTIVE about it either.
So... WHY are we so busy bottoming out the LEGITIMACY of the State at this time ?
Why does the State have to turn a profit ?
Why does the State have to balance its budget JUST LIKE AN INDIVIDUAL ?
Because in our own minds there is.. NO DIFFERENCE between private and public, maybe ?
No difference between the way that the State should be seen and the way private enterprise should be seen ?
Poppycock, Toby. That's ridiculous.
And you're hearing this statement from someone who is... a Christian mystical anarchist....
I think that the State's revenues SHOULD come from taxation, and that we need to.. reinvest taxation as a way of FEDERATING INDIVIDUALS in a collective venture/society.
We have been dumping on it for too long.
One of our biggest problems these days lies in the propaganda that stipulates that government services MUST turn a profit, must be run like BUSINESSES.
While I agree that they SHOULD be run in a way that does not WASTE resources, I do NOT agree that their mission is at all the same.
And at this point in time, I don't see private enterprise being any LESS WASTEFUL of resources because of the ideological hype about turning a profit. The trains in your mother country are an infamous example...
On being rich and poor...
Saint Francis of Assisi was the son of a VERY RICH cloth merchant. Daddy destined Francis for the family business, but... Francis was not happy with the arrangement.
After much, much soul searching, and dabbling in 13th century Italy, (similar to soul searching and dabbling in 20th century U.S.... or U.K....) Francis FINALLY found what allowed HIM to get out of bed in the morning.
Jesus... A life dedicated to poverty, and the poor.
And one day Francis took one of his Daddy's PRIZE reams of cloth out of the shop, and sold it, and gave all the proceeds to the poor.
And... Daddy had Francis arrested, and brought him to trial. And Francis, at one point in the trial peeled off ALL of his clothes, one after the other.
Daddy was eventually silenced, and gave up. The Pope was wise, and was THRILLED to have Francis on the side of Catholicism...
And.. Francis went on to become one of the brightest beacons of light humanity has EVER seen.
Through.. cultivating poverty as a source of GREAT WEALTH. There is more than meets the eye to poverty.
End of story.

Toby said...

I reject the Market/State dichotomy. They are both necessary components of society. Though they function somewhat differently, the differences are presented to us in the Myth of efficient markets as being very stark. State and Market are, in The Myth, chalk and cheese, one corrupt, meddling and inefficient, the other concerned with social welfare and maximizing happiness.

Ha ha, which defines which? The Myth Weavers have inherent contradictions in their story.

I'm not sure if your reading of what I wrote is that I'm against taxation, or if you are agreeing with the thrust of what I'm saying. My efforts in this piece are to look at different ways of circulating money. If you think back to my posts on MMT you'll recall that government does not need to tax to raise revenue, but can spend money into existence. The sovereign can do this. In the private sector, money is lent into existence. Tax becomes a means of controlling money supply, not raising revenue or balancing books.

I have some newly realised objections on MMT to chew over for a coming post, but my thinking here in this post is primarily about how to circulate money in as fair and smooth a way as possible. Taxation would be part of that, since money's tendency to coagulate with the rich needs to be addressed. Imbalances are bad for systems, regardless of our ideology.

Rupert said...

Your point about money stagnating at 'nodes' is interesting. Liquidity begets wealth and then the grip on that wealth creates a bottle neck. Like it.

Debra said...

I think I'm agreeing with you, Toby...
But I like pointing out that there is a lot of propaganda CIRCULATING about the State at this time.
And that the end result has been to delegitimize the State in our eyes. Politically. Bad plan, in my opinion.
I am BACK into social protection, even if I see the disadvantages of it.
My main reason for being FOR social protection at this time is that it consists in VALUING human beings, and the removal of social protection is about... DEVALUING human beings. Not good, in my book...

Debra said...

Toby, can you be more specific about HOW government spends money into existence ?
Is it through credit ?
I have no problem with credit in this sense, and I don't think IT is really our problem right now.
But I DO think that ANY society has to maintain in the social body's eyes the distinction between public and private, which is another way of saying the distinction/difference between the individual and the collectivity, and that because we are animals that NEED differences in order to understand, and give meaning to our lives, IF we remove difference in one area, we will attempt to reinject it elsewhere.
I think that the distinction individual/collectivity IS A VERY IMPORTANT ONE, perhaps THE MOST IMPORTANT ONE, because without it, or if it is mangled... the result is totalitarianism.
Totalitarianism of the "FREE" market, Toby, but, totalitarianism nevertheless...

Toby said...

Spend money into existence means just that. You pay for new roads by transferring new money digitally into the account of whichever company is doing the work ... bingo! new money. No credit, no interest. Should it be necessary money can be taxed out of the system, but not to save it, just to reduce the amount in circulation.

As for totalitarianism, that's another thing entirely. What we have right now and have had for decades (maybe centuries) is very narrow control of money by banks and other credit institutions, where all money comes into existence as credit, with interest owed. That IS a kind of totalitarianism, albeit one masked with heaps of bullshit about 'free' markets and 'freedom'.

Individual-collective is again a dichotomy I don't like. Neither is the opposite of the other. In my view we are given our 'individuality' by the 'collective' but are very bad at perceiving this, because the ego want to believe otherwise. There can be no 'individual' without a collective to produce it, and no collective without individuals making it happen.