A New Economy

After debating the Venus Project, the gold standard, and other economic ideas I consider misguided, I figured I'd put some of my own thoughts on the table for some of the innovative economic ideas that I've studied, and believe would be helpful in reshaping our world in a more sustainable, life-affirming, and integral direction.

Land Reform

In the late 1800's, at the height of the Industrial Revolution, a journalist-turned-economist named Henry George sought to investigate why it was that poverty seemed to persist or even get worse even amidst the greatest economic growth the world had ever seen up to that point.  What he found is that those gains in wealth and innovation were privatized and monopolized in the form of land rent.  Now, when I say "rent," I'm using it in a slightly different manner than what is meant when one speaks of renting an apartment, though the two concepts overlap.  Rent, as the term is used in economics, is essentially the unearned increment of wealth derived from owning a finite resource without having to apply labor to it.  The recent housing bubble provides an excellent illustration:  People earned obscene amounts of wealth from buying properties, sitting on them, and then selling them at a higher price than they paid.  The increase in price was driven by the fact that land is fixed in supply, and if the supply doesn't change in response to demand, as other goods do, the result is an increase in price, which occurs through no effort on the part of the landowner.

So the land market is driven exclusively by demand, since land is not a manufactured good(as Will Rogers once said, "Buy land.  They're not making any more of it.").  So what drives the demand for land?  Well, in the case of a housing bubble, one factor is the speculative potential of making a profit off of it, which is in turn driven by increasing demand.  Thus, the more demand there is for land, the more it accelerates that demand.  You can well imagine how this would have a destabilizing effect on the economy(in fact, you don't need to imagine it -- we've experienced it in the last couple years).  Other forms of speculation which drive economic instability, such as derivatives and debt instruments, lie on a foundation of increasing rents.  Furthermore, speculation in land contributes to urban sprawl by holding areas of land out of use or underused, leading to a sort of "leapfrog" effect.

Aside from the speculative demand for land, the main driver of demand is that people need a place to live and work.  And not all such places are equal.  A place that has high crime, few public services, poor access to jobs, and environmental degradation is going to be pretty cheap.  Meanwhile, places that have healthy infrastructure, lots of jobs, clean environments, and safe communities are going to be more expensive.  Essentially, the health and value of a community can largely be measured by the value of land.  However, because those areas which have abundant wealth will tend to see a further increase in wealth via the increase in land values, we run into the Matthew effect. ("For to all those who have, more will be given, and they will have an abundance; but from those who have nothing, even what they have will be taken away." -- Matthew 25:29)

Furthermore, the advance of land rents has the effect of depressing wages.  Since keeping high-demand land out of use drives demand up further and thus increases rent, those businesses who own the most valuable land have a perverse incentive to underuse the productive capacity of their land.  Only those businesses at the margin of production who receive no rental income find it profitable to use the full productive capacity of their land.  This difference between full productive capacity and the profitable level of production under these perverse incentives ends up reducing the demand for labor (and capital) as rents increase, thus keeping wages and employment down (not necessarily in absolute terms, but relative to the growth of the rest of the economy).  As an economic bubble grows, more and more of it is driven by rental income while production stagnates, until eventually there isn't enough production to drive further growth, and the bubble bursts.

Henry George proposed a solution which is as radically genius as it is simple: tax the full unimproved value of land.  Whereas other taxes tend to increase the price of the commodity they tax, this tax would actually lower the cost of land by eliminating its speculative demand while not affecting supply (remember the Will Rogers quote I mentioned earlier).  However, the rent that did remain would be put to use for public purposes, on things like education, health care, and other important infrastructure.  Since these things would raise the rent according to their value, they would essentially become self-financing.  Communal wealth would be paid for by the communities that benefit from it, in proportion to the benefit received.  Taxes would also never have to be raised or lowered again, as the amount paid would adjust automatically according to the increase in human welfare.  Wages would rise and unemployment would fall, as the demand for labor would be filled by the need to put land to its most productive use.  Furthermore, there would be an understanding that the land belongs to all of us as a basic right, not just a privileged few who can afford it.  Unlike Marxism, this system recognizes the difference between earned and unearned income, and mobilizes the free market to work more efficiently and effectively, rather than abolishing it altogether.

Monetary Reform

Many people falsely believe that our money is created by the government.  While this is mostly true of the roughly 5% of the money supply that exists as physical dollars and coins (though even here, it's not quite as clear-cut as you might believe), but the vast majority of money exists purely as numbers in a database, such as your deposit statement from your bank.  When you deposit a check in your account, banks are able to lend out a portion of that money, depending on the reserve ratio.  A reserve ratio of 10% means that out of a deposit of $100, the bank can lend out $90.  Or, at least, that's how people imagine it to work.  In reality, the $90 that was lent out still remains on the bank's ledger as a deposit, which means that the bank can lend out an additional 90% of that $90, or $81, of which they are able to lend out an additional 90%, or $72.90, and so on.  So, with a $100 deposit, the amount lent out is $90 + $81 + $72.90 + $65.61 + $59.05 + $53.15, etc.  Thus, in the process of issuing loans, banks are actually creating money out of debt.  In addition, they are charging interest on that debt.  Where does the money to pay off the interest come from?  From more debt, of course.  Thus, we have a continuous cycle of musical chairs, where so long as the music keeps playing, there's still money to pay off existing debts.  That "music" is growth, which, as I mentioned earlier, can no longer sustain itself when production can no longer sustain the increase in rents.  Thus, when economic crises occur, investments come crashing and burning, debts can't be repaid, and money is literally destroyed, creating deflation, or at best, disinflation (an abrupt drop in inflation leading to economic stagnation).  When these loans are spent on speculative activities rather than on wealth creation, the impact of economic crises becomes more profound.

Meanwhile, when government needs money to spend, they can either tax it (almost always an unpopular move) or they can borrow it by selling debt.  Most of the American government debt used to be owned by American citizens, but as the need for money has increased along with globalization, more and more of it has gone abroad, such that countries like China own a large portion of our debt.  In situations like the present economic crisis, where the economy is stagnant, it is often necessary to increase spending without increasing taxes in order to stimulate the economy.  However, under the current system, doing so means borrowing more money, thus increasing the national debt.  The famous economist John Maynard Keynes proposed that borrowing be increased during recessions, and the debt be paid off during more prosperous times(this latter part is often forgotten by his critics), thus reducing the extremes of the boom-bust cycle.  However, introducing austerity measures during prosperous times (often compared to taking away the punchbowl at a party) tends to be politically unpopular, particularly among the Wall Street investors who exercise a disproportionate influence on policy in this country.  Thus, we get situations like our previous president continuing to borrow and spend while cutting taxes regardless of the condition of the economy.  Meanwhile, our current president is faced with the need for more economic stimulus amidst protests that we can't afford all this debt.

However, this is a false dichotomy.  The government has the Constitutional authority to create its own money debt-free, as it did under Lincoln with the Civil War greenbacks.  This new money could be spent on valuable infrastructure, which would ensure that increases in money are tied to increases in wealth(thus preventing inflation), as well as increasing rents with which the money could be paid back(see previous section).  Since the money is not borrowed, there is no debt incurred, and any excess inflation will find its way into land rents which are taxed away.

However, such a system remains in jeopardy so long as banks hold the power to create money.  They don't like competition, and their ability to create money from debt is the source of their great power and influence on our society.  Take away all they have but leave them with this power, and within a generation they will have it all back.  Thus, our system of fractional reserve banking must be abolished.  What should replace it?  The system that everyone thinks exists now -- one in which they lend out deposits, but do not multiply them by sleight-of-hand.  The money would be created by government, and then circulated through public expenditures which would go out into the private sector.  Banks would have every incentive to seek out deposits in order to make loans.

But what of the interest problem we mentioned?  One option would simply be for the government to anticipate the annual interest rate, and create money accordingly.  However, the German economist Silvio Gesell proposed something even more clever.  Wealth, he noted, is subject to the laws of entropy -- in other words, it rots.  Debt, on the other hand, only gets bigger over time.  What if instead we had a kind of money that "rotted" like the goods we buy with it?  He proposed a system in which currency notes had to be stamped on a weekly basis with a stamp worth a small percentage of the bill's face value, such that on an annual basis it would cost about 5% of its value to hold on to it.  This would make money a hot potato for both the holders of money, who would be eager to spend it, or the banks, who would be eager to lend it, even at zero interest(since the depreciating value would essentially constitute a negative interest rate).  This would keep money constantly circulating, so that the economy as a whole would require less money.

Steady-State

As I've mentioned already, our current economic system relies upon unlimited growth.  However, such growth cannot be sustained indefinitely in a system of finite resources.  Eventually, it runs up against ecological limits, and the results can be ugly.  Non-renewable resources cannot be replaced, and renewable resources cannot continue to be used up at a higher rate than their rate of renewal.  Furthermore, ecological waste sinks cannot break down and dispose of waste at an ever-increasing rate.  And yet, unlimited growth requires exactly these laws of physics to be suspended.

The growth we're talking about here is growth in throughput.  Throughput is the flow of low-entropy raw materials from the ecosystem through the economy and into the high-entropy ecological waste sinks.  The need for ever-increasing throughput is driven by the fierce speculative competition for land and resources and by the impossible contract of debt-based money financed by more debt.

A major factor is also the fact that resources in their natural state are valued at nothing, and only once they are extracted and used in the economy do they have a value assigned to them.  This is a serious accounting error.  The ecosystem performs services for us in its natural state that would be prohibitively expensive, if not impossible, to replace with technological services.  There is a concept in economics called opportunity cost, in which the cost of something is what you give up to get it.  And yet few economists have bothered to apply this concept to ecosystem services.

In order to have long-term, sustainable prosperity, throughput must be kept at a steady rate.  Non-renewable resources must not be used up at a faster rate than they can be replaced with renewable alternatives.  Renewable resources must not be used up faster than their rate of renewal.  Waste and pollution must not be generated faster than the environment's capacity to absorb it.

To accomplish this, we need to think not just in terms of determining the optimum price on the use of resources, but actually determining the optimum scale.  We do have a precedent for scale-based policies.  It's known as cap-and-trade.  A limited number of permits are auctioned off for the extraction of some resource, and prices are set by the market as demand adjusts to this rationed supply.  The revenue from auctioning these resources can then be distributed evenly among the population, in recognition of everyone's equal right to the earth.

When the idea of ending economic growth is brought up, it sounds to many people as if we are talking about the end of prosperity or of economic improvement.  However, we must draw a distinction here between growth and development.  Growth is quantitative, while development is qualitative.  Growth simply means more economic activity is going on, whereas development means that actual quality of life is improving for the average citizen.  Herman Daly coined the termed "uneconomic growth" to describe growth which actually works as an impediment to development by gouging resources and producing waste to the point that any increase in economic activity is offset by these negative effects.  He points out that growth becomes uneconomic long before it reaches its ecological limits.  Unfortunately, many neoclassical economists continue to think that the only way out of any problem is to grow our way out of it.  We can only hope that their paradigm dies out before it kills us all.

I guess that's enough for now.  I'll probably post a part II sometime in the future.  Thanks for reading.