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A Way Forward
Stephen Yearwood   Sep 16, 2016   Ethical Technology  

In its “Vision”statement IEET says that the “liberal democratic revolution” is “still growing strong.” These days, it is difficult to find evidence in support of that statement.

Rather, it seems that the approach to governance that is liberalism is stalled. If a way is not found to revitalize, if not to say resuscitate that revolution, it will presumably be replaced by humanity’s demonstrated default-value for governance, rule by the most ruthless. 

At the same time, we stand on the threshold of at least two technological revolutions. One of those is a revolution in the production of energy that would assure sufficient supplies of it without damaging the ecology of the planet. The other nascent revolution is in cybernetics and robotics, which could deliver the long-sought promise to remove the drudgery of menial labor from the human condition. We need to find the means to nurture those revolutions—to include taking into account the material well-being of the millions of people who currently depend on menial labor for sustenance. 

There is a way, not only to accomplish those goals, but to exceed them. Doing so would propel humanity into an era of social goodness greater than anything ever even imagined (outside, perhaps, the texts of the most optimistic writers of science fiction). All of that good would be accomplished by making the economy more just. 

[The rest of this section of this essay is taken from “The Key to a Better Economy Lies in the Principles of Democracy,” published (as titled by an editor there) at Independent Voter Network (IVN: inv.us).] 

Increasing justice would follow from reducing arbitrariness. As John Locke famously pointed out, injustice is people having other people’s wills arbitrarily imposed on them. While we cannot hope to eradicate arbitrariness from human relations, justice does require that we seek to minimize it. Decreasing injustice increases justice.

Every community of human beings necessarily has a political process and an economy. To try to achieve through their structure and functioning either ‘social engineering’ of persons or particular material ends is an abuse of power. The only legitimate goal is to increase justice as an end in itself.

This essay makes the case that we could reduce arbitrariness in the economy by adopting a new and different approach to supplying the economy with money. The results it guarantees are astonishing:

  • The market-based economy would become the self-regulating thing it is supposed to be in theory, without even any means for monetary or fiscal ‘management’ of it.
  • We would no longer use taxes (with their inevitable arbitrariness) or debt to fund government (which would be funded forever at the current per capita rate of total government spending).
  • There would be a sufficient income available for all adults, with no (involuntary) unemployment or poverty—at no cost, without redistributing anything. (The new minimum income would be based on the current median income, though it would have to be phased in to give supply time to adjust.)
  • Demographics would govern total output, enhancing our chances for environmental sustainability.
  • All of that would be accomplished with no limit on income or property. (The incomes of people making more than the new minimum would not be affected, except for the absence of taxes.)

The only possible macroeconomic problem would be inflation (a general rise in prices). The system does have built-in safeguards against it, however, and as the only possible macroeconomic problem it would have our undivided attention. Preventing inflation, whatever it took, would be in everyone’s self-interest.  

Consistent with the requirements of justice, those outcomes follow from a reduction in arbitrariness in the economy. Here I’ll briefly relate how political democracy provides a template to use to achieve that goal.

Socialism has made any idea of linking together democracy and the economy suspect for many people, but that’s because socialists have tried to equate particular material ends with justice. Here the concern is reducing arbitrariness in the economy as a process; the outcomes really are coincidental. In the subsequent sections of the essay I’ll focus on the specific institutional changes that would be required.

Political democracy is perhaps most immediately associated in the minds of most people with ‘majority rule’. One might think that majority rule reduces arbitrariness because fewer people (who care enough to participate in the process) must accept a political outcome with which they disagree than if a minority, or a few, or a single person made that determination.

 Really, though, political democracy is a just process because of the rules governing participation in it. Those rules establish that whatever choices are adopted by the community, they are not being arbitrarily imposed on some by others.

In any nation, ‘the people’ must abide by whatever choices are effected in the political process (or bear the consequences). In every nation there are rules governing participation in the political process. Those rules place restrictions on participation in it. The less arbitrary those restrictions are, the more just the political process is.

In a democracy everyone is allowed to participate in the political process through freedom of speech. Political democracy is therefore completely devoid of arbitrariness in that respect. (Freedom of speech also provides the great practical advantage of democracy, that new ideas can come along as needed.)

The essential place of freedom of speech in democracy is consistent with rational persuasion as the only really just means of achieving any outcome in the political process. Any form of conduct that is contrary to rational persuasion, i.e. coercion or manipulation (such as lying or cheating), is illegitimate. For any nonessential factor, such as money, to influence outcomes is also illegitimate. While those ideals are impossible to realize fully, they are nonetheless valid as ethical standards for the political process. 

A democratic distribution of political rights minimizes arbitrariness in restrictions on further participation in the political process. A “democratic distribution” of political rights means that any restriction on those rights is universally applicable and universally applied.

For instance, in all democratic nations age is used to determine whether a citizen may vote and what elective offices a citizen may seek. Age is a proxy for maturity. While choosing specific ages is ultimately, if unavoidably, arbitrary, age itself is universal; it does apply to every human being. Gender, race, color, and creed are not just restrictions on political rights because they are not universal, and are therefore patently arbitrary.

Although we must make fundamental changes to reduce arbitrariness in the economy, we must retain the market-based economy. There is an abundance of randomness in it, such as the circumstances of one’s birth and blind luck, but being market-based does reduce arbitrariness in it compared to other systems.

Similar to political democracy, a market-based economy allows individuals to choose for themselves the nature and the extent of their participation in it (subject to the resources anyone has to bring such choices to fruition, to include talents, abilities, and determination). People’s freely acting in the economy, as both producers and consumers, determines in turn the allocation of capital and labor.    

There is one fundamental area, however, in which there is too much arbitrariness in the market-based economy: incomes. Incomes accrue to positions in the economy.

People decide the competitions for the positions available in the economy. Psychological testing has established that, people being what we are, even for those who are honestly trying to be completely objective factors that are irrelevant to potential job performance, such as physical attractiveness and racial or ethnic heritage, do influence their decisions.

Moreover, within any business enterprise self-interested people are in a position to determine what the incomes of various positions will be, with the understanding that the less others are paid the more there will be for their own compensation. That occurs in all businesses, including long-established corporations in which those ‘deciders’ are not the owners or the founders of the business, and did not incur the initial risk. (Incomes paid positions in government are no less arbitrary; at best they are based on incomes in the private sector.)

How could we reduce arbitrariness in incomes? We can look to political democracy for the answer.

Think of it this way: money is to the economy as political rights are to the political process. Just as rights are necessary to participate fully in the political process, money is necessary to participate meaningfully in the economy. Just as a democratic distribution of political rights reduces arbitrariness in the political process, a democratically distributed income would reduce arbitrariness in the economy.

Rights are abstract, however, whereas money is material. It is therefore easy to see how any number of people can share a right, but difficult to see how any number of people could share an income.

That can be done. It can be accomplished through an alternative monetary system that would provide the supply of money for the economy in the form of a democratically distributed income, i.e. one that would be available for any number of people, based on universally applicable and universally applied conditions.

As was noted above, there would be no redistributing anything and taxes (and public debt) would be eliminated—along with unemployment and poverty. It also bears repeating that there would still be no limit on how much money a person could make or how much property a person could own. To be clear, while there would be no poverty, there would be no Welfare or public pension, such as, in the U.S. Social Security (solving that whole problem).  

Those outcomes would not depend on policies, programs, or any particular behavior on the part of individuals, whether competitive, cooperative, rational, ‘good’, or of any other description. Rather, they would be built into the structure of a new and different monetary system.

Turning to the monetary system

[This section of this essay appears with very slight differences on intellectualconservatitve.com as “Re-forming the Central-bank System.” It was also published at IVN as “How to Fix the Central Bank System, Improve the Economy, and Charge Taxpayers Nothing to Do It” (as, agaon, titled by the editor).]

In 1688 England experienced its ‘Glorious Revolution’, transitioning nonviolently from the Protectorate to a constitutional monarchy. As part of the changes associated with that event, control of the money, which had always been the prerogative of all monarchs, was kept from the Crown and eventually put in the hands of the Bank of England (established in 1694).

With that, the central-bank monetary model, which the English got—along with their new King—from the Dutch, was well-established. Today, almost all nations employ a version of that model. [The only notable exception is the eurozone central bank, but whether it could exist as it does without traditional central banks, especially those of the U.S., England, and Japan, functioning as they do is an open question.]

One of the functions of the traditional central-bank system that is necessary to this narrative is the central bank’s role as the lender of last resort to the central government. What that means in today’s world is that it ensures that all bonds issued by the central government will be bought. The central bank has the option of having the central government print money for it to use to buy any amount of those bonds.

The upshot is that there is literally no limit on how much money the central government can spend. That violates the most fundamental tenet of economics as a body of thought. The whole of economics is premised on the idea of unlimited wants but limited economic means—money—to satisfy those wants. For the nation as a unit, the traditional central-bank system mocks that condition of existence. As a matter of economic theory, that puts that monetary model on the other side of the looking glass.

In practice, from the early 1980’s to the present central governments have taken full advantage of their access to unlimited borrowing. At the same time, the popularization of credit cards issued by financial firms, as opposed to stores, created a new, large-scale form of debt for individuals and households. With those cards, equity loans, and refinancing of houses, debt became a means of sustaining the way of life to which people had become accustomed when incomes stagnated during the period. In the early 2000’s mortgages became the drug of choice in the orgy of leveraging that was ‘high’ finance. The result has been a generally growing GDP, but a faster-growing level of total debt. That tells us that debt-as-stimulus is inefficient.

Whether debt is public or private, as an economic stimulant it provides an immediate boost at the cost of creating a future drag on growth. So, in the long run debt-as-stimulus is self-defeating. Richard Vague has written a book, The Next Economic Disaster, on the relationship of debt to economic instability of all kinds. Quantitative easing, a quasi-revolutionary act in its own right, actually absorbs debt from the economy, but swaps long-term drag for a truly dangerous level of future inflationary risk.

In short, the traditional central-bank monetary system has had its macroeconomic limits exposed.  An unstable mountain of debt has been created that could collapse any day. No one can see any sure way, with that system in place, of getting the economy free from that danger; any proposed path is more fraught with danger than filled with hope. 

Fortunately, an alternative to that system is available. With this alternative monetary system in place the economy would become the self-regulating thing it is supposed to be in theory, with no elected officials or bureaucrats, public or private, having the means to intervene in the economy fiscally or monetarily.  The means to that end is the creation of a new monetary agency.

The new monetary agency would be separate from and independent of both the banking system and government. It would be purely administrative, with no discretionary authority of any kind. The monetary system would interface with people and businesses through their banks.

The central bank would still exist, but would serve only as the bankers’ bank. It would have no role whatsoever in determining the size of the supply of money or funding government. [“Supply of money” refers to ‘M1’, the amount of actual currency in the economy.]

The size of the supply of money would be determined by demographics, and only that. No person, committee, or organization would have the means to influence, much less determine the size of the supply of money.

The supply of money would form a truly exogenous variable to which all parts of the economy, including banking, would adjust. Anyone who has ever constructed a mathematical economic model knows that too much interdependence among the variables generates instability; the system tends away from equilibrium. That is why in economic models at least one independent variable is always made to be exogenous (which also introduces bias into every economic model). That explains why our economy is fundamentally unstable: too much interdependence among the variables in it.

With this alternative monetary system the supply of money would just ‘be’, making it truly exogenous. Such an existential, zero-cost supply of money is in fact assumed (usually implicitly) in standard explications of market theory when money is not the explicit topic.

Functionally, in place of an endlessly circulating stock of money this system would have an endlessly renewed stream of money. To prevent inflation, money would have to be returned regularly to the monetary agency by the banking system. The amount of money returned to the monetary agency would be determined, not by people in authority, but by the functioning of the economy (and only that). 

To be clear, no money whatsoever would be taken from any person or business before it could be used for consumption or investment. There would be no limit on how much money a person (or business) could make or spend or invest. (The monetary multiplier would definitely be smaller, but it would still exist; its magnitude would not be externally regulated, either.) This model is not about setting macroeconomic limits—except for spending by government.

The total amount of government spending per capita [combining central, intermediate (if any), and local government] would be fixed forever at its current level as part of the operation of the monetary system, without using debt or taxes to fund it. That would establish a flexible but inviolable limit on spending by government (part of which would go to retiring outstanding government debt as it matured). With no means of engaging in deficit spending and no taxation, government could not possibly be a source of macroeconomic manipulation.

Much like the Glorious Revolution, changing from the traditional central-bank monetary system to this alternative system would be revolutionary, but not radical. Much as that change in the system of government utilized the familiar institutions of the House of Lords, the House of Commons, and the Crown, this change would retain the institutions that define the market-based economy: freedom, private property, and money. [Put human beings in a community with those three institutions in place and a market-based economy will organically develop.]

The reality that we must accept is that the breaking point of the traditional central-bank monetary system has been reached. It would behoove us to implement an alternative system before the economy fails completely. People apparently find it all but impossible to accept that a monetary model which would realize so much good is possible. I submit it is every bit as possible as the existence of an alternative, superior model of governance was in 1688.

The basic structure and functioning of this alternative monetary system

So, to reduce arbitrariness in the economy and produce the outcomes noted in preceding paragraphs, the ‘only’ thing that must be done is to institute a new and different monetary system. Implementing a new and different monetary system is no small thing, but it isn’t as big as changing to a different kind of economic system.

The basic idea with this system is to provide the supply of money for the economy in the form of an income paid to certain individuals. That ‘allotted income’ would meet the requirements of a “democratically distributed” income as discussed in the first section of this essay. Universally applicable conditions would exist for being paid the income, making it available to an unlimited number of people but required for no one.

The allotted income would be based on the median income at the time of the implementation of the system. It would be the same for everyone being paid it. It would be paid to all retirees and to all adults too incapacitated to work (for whatever period of time. The allotted income would also become the minimum wage—paid by the monetary agency, not employers, as I will now explain.

At the time of the conversion to this system every position in the economy being paid an amount equal to the median income or less would instead be paid the allotted income. The pay for those positions would come from the monetary agency. All other positions would continue to be paid in full by the employer, as at present. (The allotted income could be prorated for part-time work; employers would pay shift differentials and pay in full for overtime.)

Thereafter, employers could designate any position to be paid the allotted income. A person occupying such a position would have to decide whether or not to continue in it for that income (plus benefits—see below). If not, someone else might accept that position for that income—or not. Over time, positions could rise out of and fall into that category. The same job might be minimum-wage in one company but not in another.

Employers would use benefits to compete for employees in the minimum-wage labor market. Again, the allotted income would be the same for everyone being paid it, but benefits would presumably reflect local costs of living. Benefits could have to do with anything, such as transportation or housing, so long as they were ‘in kind’, and not in the form of money paid to individuals. (There is a big difference in the economic effects of those two forms of compensation.) More than incomes have ever been, benefits would be subject to negotiation by individual potential employees. Conditions in local labor markets would ultimately determine benefits.

The new monetary agency would create the money for the allotted income as needed. That agency would simply create each month the necessary amount of money to pay that income to however many people were to be paid it. No debt would be incurred.

The size of the supply of money would be determined by demographics—and nothing else. No person, committee, or organization would have the means to influence, much less determine what the size of the supply of money would be. As at present, the money would not be ‘backed’ by gold or anything else; unlike at present, there would be an absolute limit on how much money would be supplied to the economy.

This system would have a vastly larger supply of money than exists at present, but a correspondingly smaller multiplier. Money would be returned regularly to the monetary agency by the banks.

The banking system would still be private. The whole of the money supply would still pass through the banks. Every adult and business would be required to have an account at a (domestic) bank; local branches of banks would administer the monetary system where it interfaced with individuals and businesses. 

Individuals and businesses would be allowed to retain a percentage of annualized income/profits, with the ‘excess’ transferred to the bank at the end of each month (for individuals) and quarter (for businesses). Individuals could avoid that transfer of funds by simply making purchases of any (legal) thing with that ‘excess’ money. Setting aside international outflows of money (i.e., purchases of imports and international investments), all money spent by individuals would have to be in the account of some business. That ‘excess’ of income would again be there the next month (unless additional financial commitments had been incurred). (Giving money to people or organizations, such as churches, would not damage the functioning of the system.)

[According to the most recent numbers available at the time of this writing, the total amount of money in checking accounts in the U.S. was exactly 10% of total personal income. That is a bit of mixing apples and oranges because the money in checking accounts includes that of businesses, etc. That means, though, that the average person was holding less than 10% of one’s annual income in a checking account. (Do you usually have more than 10% of your annual income in your checking account?) With this new monetary system individuals and businesses would be allowed to retain at least that amount of their annual incomes/revenues in a checking account. It could be 20%. Having a fixed percentage is what is most important (up to a point, of course). During the transition to this system that percentage could be adjusted to help prevent inflation, but at some point it would be fixed, once and for all.]

As for businesses, we’re talking about profits, i.e. after all costs, including all remuneration, have been met. The transfer would not affect the next quarter’s revenue. Since the economy would be much more stable, revenue would be much more dependable. That ‘excess’ revenue would be there again, to use for any additional cost that had arisen in the meantime, such as paying on a new loan. The percentage of money retained by businesses could be higher than it would be for individuals, even more than 20%. That there would be a limit on the amount retained is the essential point.

To complete the circulation of the money, every quarter the total of the ‘excess’ money would be returned to the monetary agency from the banks—after they had been allowed to use it for a quarter, free of charge, for lending (but not investing).  That amount of free capital would exert a downward pull on all interest rates. There would immediately be a new influx of money for lending from that quarter’s transfer of ‘excess’ money in people’s and businesses’ accounts.

Government—federal, state, and local—would be funded by the monetary agency forever at the current per capita level. If the amount of money returned to the agency were sufficient to fund government, no additional new money would be needed (with any surplus retained by the agency). If not, the monetary agency would create the necessary amount of money. That would further stabilize total demand, even in the event of net international outflows of money from the economy.

The only possible macroeconomic problem would be price inflation. Really, though, that problem would only exist during the transition to this monetary system. It would be necessary to increase the allotted income gradually from what is now the minimum wage, to allow for total supply to increase as incomes among lower-paid positions were increasing.

Once in place, this system would have built-in safeguards to prevent price inflation, beginning with the inviolable limit on the supply of money at any time. Also, that many people with a fixed income would help control prices. As the only possible macroeconomic problem we would face, inflation would have our undivided attention. Preventing price inflation, whatever it took, would be in everyone’s self-interest—or at least do no one any harm.

To be sure, there is more to this system than has been presented here. The purpose of this effort has been to make as clear as possible how the structure of this monetary system would eliminate recessions, unemployment, poverty, and using taxes or debt to fund government while enhancing our chances for environmental sustainability.  

Economic deflation/recessions would be an absolute impossibility because a large number of people would have an income that could not be threatened, much less affected, by any circumstance whatsoever. It could even be paid to people temporarily out of work due to a natural disaster.

Government could be an employer of last resort at no cost for that labor (assuming such jobs would pay no benefits). So, every adult who could work would be guaranteed a job, meaning there would be no involuntary unemployment.

With no involuntary unemployment and a minimum wage equal to the current median income, which would also be paid to retirees and adults too incapacitated to perform any work, there would be no involuntary poverty, at no cost to anyone and without redistributing anything—and without putting any limit on how much money a person could make (which is politically important). (A person, for example a ‘starving artist’, could choose to be poor.)

Since (all) government would be funded by the monetary agency, there would be no need for taxes to fund it: no income tax, no sales tax, no property tax, etc. Nor would there be any need for public debt.

With government spending and the supply of money governed by demographics, that variable would passively but effectively govern total output. Yet, whatever the level of total output, there would be no unemployment or poverty.  There would no longer be any requirement to seek constantly to maximize output in order to lessen unemployment, which generates vast inefficiencies that are detrimental to the environment.

For all those improvements, the market-based economy with this monetary system would look and feel just like it did before the change. People would still have to manage their money, but for anyone making more than the median income the only noticeable difference would be the absence of taxes. For people who had been making less than that amount, the absence of taxes would be whipped cream and a cherry on a life that had gone from a struggle for subsistence to an absolutely guaranteed, sufficient income.

There are plenty of details that would have to be decided before a specific form of this monetary model could be implemented. Its essential structure is too straightforward for the functionality of an economy with such a monetary system to be in doubt.

At the same time, transitioning to this monetary system would provide the pending technological revolutions time and social space to flourish. With fewer social responsibilities requiring its funds, government could be used for more nurturing of large-scale technological advances in general. Regarding the revolution in machines to replace people in menial labor, in addition to ensuring every able-bodied adult a job with a sufficient income, this system offers an option for vastly reducing the pool of labor. It would be as easy as not to pay the allotted income to one parent (or legal guardian) in a household with at least one dependent (child or incapacitated adult) in it.

In short, implementing this alternative monetary system would establish a self-regulating, market-based economy that would produce astonishing material benefits to society, with no offsetting costs of any kind. Best of all, all that would be accomplished by increasing justice.

For more details, go to www.ajustsolution.com or the first chapter of my book, A Just Solution (which provides a model with a more far-reaching democratically distributed income, one that would eliminate exploitation)




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