Economic System Not the Problem
It just hasn’t ever been utilized as well as it could be.
Everybody agrees that poverty is a bad thing. Some people think of it as an unfortunate but unavoidable demerit for an economic system that provides benefits to society that far exceed that cost to some people. Also, they point out that no one is ‘pulled out of the line’ and forced to be poor. Hopefully, they would acknowledge that racism/bigotry and patriarchy have contributed to making poverty more likely for some than others — though plenty of white males have been poor — even if none of that is part of the system in itself. For other people (including this author), poverty is an inexcusable blight on society regardless of who is affected or the presence of any other, more positive outcomes the system has produced.
So it goes. There is a long litany of issues regarding this economic system that some people see as problems but others do not: it is ‘capitalistic’; the central government is too involved in it; it caters to the interests of ‘the rich’; the central bank is too much a part of it; it is indifferent to the needs of human beings who aren’t rich; it is destroying the natural environment; etc.
Those are all social/political/moral issues that have people lined up on both sides of each of them. Even sustainability, which is an existential problem of a physical kind, has many naysayers.
The purpose of this essay is to relate a systemic solution to the problem of poverty — not just ‘mitigate’ it, but eliminate it. The whole of the solution is contained within the existing economic system. No part of the structure of the system has to change, only how one part of it — money (specifically, money as currency) — is utilized. It just so happens that this solution also eliminates unemployment. It would also vastly increase environmental sustainability. Finally, it creates a way to eliminate taxes. None of that comes with any trade-offs.
This solution was a result of one question: within the existing system, would there be any possible way to eliminate poverty without forcing anyone to do anything — to include contributing taxes to the effort (even taxes that were already being collected anyway)? This author found a way. [For the record, I do have an M.A. in economics.]
Someone might be convinced that the end of eliminating poverty justifies — even invites — forcing people who have more than enough to share more of what they have. For some people, it must be allowed, taking from ‘the rich’ seems to be more important than relieving poverty is.
Emotionally, I at least agree with that first formulation. That’s just one way of looking at it, though. Others can and do disagree. As a practical matter, if you get down to trying seriously to distinguish between ‘enough’ and ‘more than enough’, that moral position starts to get less like the stark clarity of a diamond and more like a chunk of pyrite.
If eliminating poverty is a good thing, though, can accomplishing that without taking anything from anyone really be a bad thing? Surely the answer to that question must be, ‘No’ — even without considering this solution’s other assured outcomes for society.
Besides its impact on those social/political/moral issues, this solution also has a profound but strictly economic outcome. It impacts in a transformative way how the system functions as a system. That is, it happens as well to make the economy self-regulating.
Doubtlessly, some people have already thought, “Libertarian ideology!” (or words to that effect). This proposal, however, is not libertarian. Nor is it socialistic. It is not ideological in any way. As I’ll endeavor to explicate, it is purely a matter of economics.
With this proposal “self-regulating” does not mean a dog-eat-dog economy, accepting poverty as an unfortunate but unavoidable part of the equation. It does not mean that regulations for the sake of workers or consumers or the environment must be abandoned. Those are entirely separate matters, issues to be taken up in the political process.
The self-regulation of the economy this proposal happens to provide would not be threatened in any way by regulations of those kinds. It refers to the functioning of the economy as a whole. There would be no further need for the central government or the central bank to intervene in the economy in order to ‘stimulate it’ or to ‘cool it off’.
On a more theoretical level, this proposal does not make the ideological claim that the existing system is self-regulating if only government would leave it alone. Government can’t possibly ‘leave the economy alone’ (for reasons given below in a brief description of the existing system).
Beyond that, in the free-market theory money is actually a nonentity. It is essentially immaterial: a ‘presence’, if you will, that facilitates transactions. There is assumed to be no demand for money other than what is needed for this or that transaction. The availability of an amount of money sufficient for all transactions is assumed.
An economic theory that does not account for money any more than that is at best woefully incomplete. Yet, the economy must have money. Yet again, money cannot just magically appear when and where it is needed.
Whatever entity supplies money to the economy will for that very reason necessarily be in a position of exalted power in the economy. If that power is not constrained, the economy will be anything but free for everyone else in it.
There are proponents of the ‘pure’ free-market economy who insist that individual, independent banks offering redeemable notes to be used as money in a free-market fashion would be the way to go. That was tried in places in the U.S. before its Civil War. That event turned the page in the development of the U.S. economy: a continental-sized, industrializing national economy required a nationally coherent approach to money.
It is worth noting that having a decentralized approach to supplying money to the economy would presumably lead to a decentralized economy of local production for local consumption. Environmentally, that would be a wonderful thing — but the forces driving economic development in the U.S. and other nations in the 1800’s drove a freight train over that quaint notion. This proposal is dedicated to the proposition that what can actually be accomplished to make the functioning of the economy better for society must take precedence over some idealized, hypothetical vision of what might could be.
So there is all that.
The economy is the production/acquisition of goods/services (including as “goods” in the very broadest sense assets, such as a house or a share of stock, etc.). Total output is the total of goods/services produced. So making the economy self-regulating would render concern for total output null and void: it would simply be what it would be.
But what about employment? poverty? taxes? sustainability?
As noted, this proposal would make this economic system self-regulating in a way that eliminates unemployment and poverty (at any level of total output) as well as taxes (so long as spending by government anywhere does not exceed its allotted funding) while increasing sustainability. This author happened to discover a way to utilize the existing economic system in a new way that would transform the outcomes for society from the economy.
With the serendipity of this strictly realistic proposal presumably established, let’s move along.
It is of the utmost importance that the solution proposed herein is not a matter of diddling about with taxes and/or public debt. Much less does it involve manipulating any ‘variables’ (the numerous statistical categories that economists use to build their ‘models’) then insisting, against all evidence from the history of the system, that the predicted outcome will in fact result — and be permanent, at that.
Rather, to repeat, this solution is systemic. With it, those outcomes get built into the structure of the system. All of those outcomes except eliminating taxes (see below) become ‘givens’. They become simple facts of life, no more subject to beliefs or desires than the rising and setting of the Sun is.
So, what about this existing economic system?
Since the fall of the Soviet Union and its cohort of so-called ‘communist’ nations there has been one economic system that has dominated the planet. The U.S uses this system. Russia uses this system. So does China, even though it has not officially abandoned ‘communism’.
Structurally, the system consists of money, a banking system culminating in a central bank, and a nation’s central government. The central government is every nation’s largest single economic entity (and even in the U.S. has been since Day 1 of this nation’s existence under the Constitution). That makes it of itself a determinative part of the economic system: the way it operates goes a long ways towards shaping how the whole system operates. The central government is at the same time the source of the immaterial structure of the system: the rules and regulations that govern participation in the economy by all actors in it. As far as the structural components of the system are concerned, as my dear old Daddy would say if he were still with us, “that’s all they are to it.”
Those rules and regulations determine how the system functions. Since different nations with this system have very different forms of government and very different rules and regulations governing participation in the economy, the way nations’ economies function varies significantly with that same structural system in place.
The way the system functions is further shaped by the roles of the central bank and the central government in influencing, if not ‘managing’ the overall performance of the economy. In every nation there is an imperative to maximize total output — subject to avoiding ‘excessive’ price inflation — in order to maximize employment, total income, and the collection of taxes given whatever rates exist.
Different nations approach that imperative in different ways. How they approach it depends on ideology/theology (or sheer lust for power and riches), whether they are net exporters or importers, whether they primarily produce finished goods or raw materials (including agricultural products), etc. To be sure, larger, more economically powerful nations have a greater wherewithal than smaller, less powerful nations do to determine their own destinies in that respect (among others). In every nation, though, that imperative is the paramount economic concern for the nation as a geopolitical entity.
Therein lies THE economic problem with the system in any of its current variations.
That problem is that all other outcomes in the economy are related to total output. Any attempt to change outcomes in any significant way must take into account effects on total output, due to its effect on all other outcomes.
I get it: it’s sentences like that that make people throw their hands up and curse the discipline of economics and all who partake in it.
That isn’t the fault of economists, though. Rather, it’s down to the nature of this system as it currently exists: every part of it it is affected by every part of it and does affect in turn every part of it. Changing that state of affairs is yet another good thing about the proposal being proffered in this essay.
As things currently stand, an outcome can be a direct result of total output, such as employment: it straightforwardly goes up or down if total output is increasing or decreasing. Howsoever, if a desired outcome is not a direct result of total output, such as, say, providing more public money for programs to help people who aren’t rich, the effect on total output must be taken into account because of its effects on employment, etc. In this system as it currently exists in any nation, the effects on total output of any proposed change are always arguable, and that is often enough to prevent any proposed change from being implemented. Moreover, even if a positive outcome is achieved, that can have negative effects in other areas, such as an increase in employment via increased total output increasing the pressure on the natural environment.
That problem, the overweening centrality of total output regarding every possible outcome for society from the economy, is the specific problem that the self-regulation of the economy in this proposal solves — to reiterate, without changing the structure of the system. Neither does it require changing in any nation the rules and regulations governing participation in the system — meaning any nation with that system can readily adopt this proposal. (It could also be adopted by a group of nations, with no loss of sovereignty.)
The key to this proposed solution is money.
Unsurprisingly, the way money is supplied to the economy and how much of it there is in the economy are the most important aspects of this economic system related to total output. Money is, after all, the fuel of the economy, the necessary ingredient for the system to operate, that which allows it to ‘go’. For anything to happen the presence of money must be combined with some need or want, but, simply put, without (sufficient) money the production/acquisition of goods/services as we know it would not exist.
In this proposal the size of the money supply is itself self-regulating. Given the way it is supplied to the economy (through a guaranteed minimum income for adult citizens and the funding of government — below) and the amount of money that is supplied to the economy (lots of it), the economy as a whole would become self-regulating. The general idea is to create money as needed to ensure enough for all (citizens, at least), with a mechanism in place to remove ‘excess’ money from the economy — without requiring one single person to part with any money anyone has acquired.
At present, money is created two different ways.
Both ways of creating money are ad hoc. That is to say, the amount of money created is determined by whole a series of one-off decisions. There is nothing regular about it. Regarding the functioning of the economy, that is, at bottom, what this proposal addresses: it makes supplying money (as currency) for the economy a regular thing that — passively but effectively — regulates the economy as a whole.
One way money gets created is that banks create money when they make loans. They don’t actually hand over money. Rather, they ‘issue credit’. Essentially, they give the borrower an IOU that can be used to make some purchase(s) in lieu of actual money the borrower may or may not have on hand. The seller(s) accept the IOU knowing that the bank will honor it. They pass it along to other sellers in making purchases of their own. In that way the IOU gets used as money, becoming part of the money supply of the economy. (Credit cards work the same way.)
[Back in the days of horses and buggies the use of debt as money was more obvious. Checking accounts did not yet exist, much less debit cards, much less phone-based transactions. When people would borrow money from banks they would receive ‘bank notes’ (in varying amounts), actual pieces of paper that promised to remit to whoever appeared at the bank with a note the amount of money indicated on it. The borrowers would then use those notes to purchase whatever goods or services they had borrowed the money to procure. To redeem a note a person had to go physically to the bank that had issued it (or another bank willing to accept that other bank’s notes, which back then was a far from certain prospect). Rather than go to the trouble of going to a bank to redeem notes, sellers might just use notes they had received to make their own purchases of goods and/or services. In that way bank notes could stay in circulation indefinitely. Debt-as-money in today’s highly integrated, computerized, digitized financial world is essentially the same thing that it was back then, only now it has become a bulwark of the economy. (Anyone remotely interested in the history of banking who has not read Hammond Bray’s Banks and Politics in America from the Revolution to the Civil War ought to.)]
As that money changes hands it becomes income for every seller who takes it in. So the total income in the economy is always a multiple of the supply of money in it (called, in the subject of economics, the ‘multiplier effect’).
Loans are repaid out of income. As money (subsequently obtained by the borrower as income) is returned to the lender, an amount equal to the original loan is ‘written off the books’. That amount of money is effectively ‘annihilated’ (like a meeting of matter and antimatter).
The upshot is that money in that form is already self-regulating. Whether lending is increasing or decreasing the supply of money in the economy depends on whether lending is exceeding repayments or vice versa. That very much depends on the state of the economy as a whole. If it is doing well people are more willing to borrow and spend — which helps to contribute price inflation. If it is doing badly people are more likely to refrain from borrowing to spend — further dampening the performance of the economy. So borrowing/lending (or its absence) is like a catalyst that drives the economy further in one direction or the other. The most important point, though, is that the money that gets created when banks make loans does get destroyed.
The other way money gets created is when it is created for central banks or central governments to use for whatever purposes they might have for it. To distinguish such money from money that starts out as lending by banks we can call money in this form ‘currency’. The central government and central bank determine together how much money-as-currency will be created at any time, depending on everything that is going on in the nation in terms of the economy at that point in time. In the last one-and-a-half decades a stupendous amount of currency has been created, especially in the last few years. This graph shows the total amount of the narrowest definition of the money supply (“M1”) in the U.S.; not all of it is currency, but almost all of the net increase is. [To be clear, these days currency is not created in the form of ‘folding money’ and coins; that’s a wholly separate operation undertaken by the central bank that does not affect the size of the money supply, but only changes some of it from computerized digits to physical money.]
As the proponents of MMT (‘Modern Monetary Theory’) have pointed out, as the economic system currently operates there actually is no limit (other than traditional thinking) on how much money, as currency, can be created. In celebrating that insight, the thing that MMTers have failed to take into account is the permanence of currency: once created, it is in the economy forever. It is immortal. It is never annihilated.
That is massively important.
Not only is currency immortal, like all money it never sleeps. It just circulates—though some amount of it is always parked for a time in some account merely earning interest — which means the holder of that account must be dealing in assets to generate income to pay that interest.
The mere presence of money does of itself generate a demand for assets: something to put that money into. A constant seeking after assets with money that will always be present has created a permanent (unless the whole thing crashes completely), endless ‘vortex of prosperity’ for the investor class. It has all but created two different economies, one for the rich and one for the masses, with a pittance of the income from the one trickling like a weak stream of urine onto the grateful souls struggling to make ends meet in the other: precisely the way the ‘trickle-down economy’ was intended to function.
The vast creation of currency that has occurred of late has led to so much inflation in assets that two things of particular note have happened. For the richest individuals and corporations, they have become so wealthy that prices of things have lost all meaning. Secondly, in seeking to diffuse cash into assets, hyper-wealthy individuals and corporations have ventured into real estate, helping in a big way to drive the cost of housing to absurd levels. That has made owning a home more and more of a mere dream for more and more people. Decisively more important than whether dreams are coming true, though, is that the basic human need for shelter is something more and more people simply do not have enough money to acquire.
Unlike MMT, this proposal takes the immortality of currency into account.
Of course, money created in making loans and money as currency are not separate things as far as the operation of the economy is concerned. The two get instantly comingled as soon as they pass the first time to a seller of some good or service or get deposited in an account with other money in it.
The central bank does seek to affect the amount of money in circulation. Lowering or raising interest rates encourages or discourages borrowing money to spend. It can require banks to keep less or more money on hand. It can buy assets to put more money into circulation or it can sell assets it holds to absorb money from the economy.
The effect on the economy of all that is all rather hit-or-miss, though, and the more money already present in the economy, the harder it is for the central bank to obtain its desired impact. At this point the central bank is mostly reduced to using signals to indicate what it thinks the investor class should do for the sake of the economy as a whole, hoping that enough of them, especially the biggest asset-holding entities, will ‘do the right thing’. Most importantly, the intentions of central banks can be simply overridden by events beyond their control.
Speaking of events beyond the control of central banks . . .
Until Covid came along, basically all money that had ever been created was created for the purpose of making purchases of some kind. That is obvious in the case of individuals and businesses that borrow money, but government also spends whatever money it acquires to make purchases of goods and services (counting labor as a service). The money that does go to individuals as ‘transfer payments’ is used by them to purchase goods/services. All money created for central banks to use has been used to make purchases of assets.
[Before the Great Financial Crisis of 2008 the only asset any central bank ever purchased was newly issued debt of the central government; as a response to that crisis they started buying existing assets — including the infamous ‘toxic assets’ that banks, hedge funds, and other financial entities needed to offload but could not sell to any other buyer for the simple reason that ‘none of them along the line knew what any of it was worth’, to borrow from Bob Dylan (“All Along The Watchtower”).]
Due to the economic shutdown that was used to contain Covid, money was created (as currency) to supply income directly to individuals and businesses. Having been required to forego income, money was created to reimburse them for that loss.
That gets us in the neighborhood of how this proposal would function.
Here, though, money would be created without involving debt in any way. In the system as it has always functioned, the creation of money has always involved debt in some way. Even in supplying money for incomes due to the shutdown initiated as a response to Covid, assets in the form of ‘securities’ (i.e., debts in various forms) were shuffled around by the central bank and central government to ‘balance the books’.
So this proposal does represent a major change in the operation of the system in that regard. Money would be created as needed — for specific, absolutely limited purposes — without involving debt in any way.
[The remainder of this essay is a brief overview of the proposal. Please do keep in mind, dear reader, that this is just that: a brief summary. Just because a question goes unanswered here does not indicate the absence of an answer for it in this proposal. More details can be obtained in either of two other essays, “Same Economy, Way Better Outcomes for Society ” or “Paradigm Shift” (see below, following the essay).]
Money (as currency) would be created as needed to fund a minimum guaranteed (‘bulletproof’, actually) income for which any adult citizen could become eligible. Setting it higher than the ‘poverty level’ — say, at least the current median income — would thereby eliminate poverty.
One way to become eligible for the income would be to have a job that paid it, and in this proposal everyone who needed one would be guaranteed such a job (without doing harm to any business).* It would also be paid to retired citizens and adult citizens unable to work (replacing existing public programs for them, such as, in the U.S., Social Security). Those three categories are sufficient to allow for any adult citizen to become eligible for the income.
It would be as easy as not to pay that income to one parent in a household with at least one (legally recognized) dependent living there. Doing that would obviously have a huge impact on the supply of available labor, but it is an option within this monetary paradigm.
People who were retired and adults unable to work would be paid the full amount of the income right away. To prevent price inflation, for other people being paid the income it would have to start at an amount close to the current minimum income. It would be raised gradually to its ultimate amount. After that initial iteration of the income it would only be replacing existing incomes, so in itself it could not contribute to inflation. The presence of significant benefits would, however, free income for other expenditures. That is why the income would have to be increased gradually, in order to allow overall supply to keep up with the increases in overall demand that would ensue.
To eliminate using taxes to fund government (as well as public debt, which in turn requires taxes for its repayment), money could also be created for that purpose: to be clear, funding all government, from local to central. Government would be funded from now on at the current per capita rate of total government spending. (So everyone would be benefiting immediately from the absence of taxes.) How the money would get appropriated among the various geopolitical entities within the nation is another topic.
If any government did opt for selling bonds to supplement its funding for any reason, it would sell bonds on the open market like any other entity seeking to raise money that way: no more creating currency for the central bank to use for that purpose. If selling bonds did happen, at least the taxes that would be needed to pay off those bonds would be starting at zero. [To be clear, bonds existing at the time of conversion to this system would be paid off in full from the funding for government provided.]
All of that would presumably be administered by the central bank, though a new Monetary Agency could be created to administer it. Either way, the amount of currency created would be totally independent of both the central government and the central bank: neither would have any say in the matter of how much currency would be created.
Funding that income and all government that way would generate a constant flood of money into the economy. That creates a need for some way of capturing money and remitting it to the central bank (or Monetary Agency) — either to be ‘annihilated’ or to be recycled as funding for government and the guaranteed minimum income (reducing the amount of new currency that would have to be created).
To reiterate, this proposal does have strict limits on how much currency would be needed at any time: the number of people eligible for the income and the size of the population (for funding government). Still, the amount of money entering the economy would be vast and ongoing (say, monthly for people and quarterly for government).
So this proposal recognizes the need for a mechanism to limit on the other end the amount of money in the economy. In this proposal individuals and businesses would retain plentiful pools of money — based on income — and no money would be collected from any entity before it could be used for purchases, including purchases of assets. There would be no reason, other than indifference, for any person, however rich or not, to have any money captured and remitted. Only publicly traded corporations would encounter any limit on the accumulation of wealth — cash and assets together — but there would still be no limit on the compensation of any employees or how much money could be invested in plant and equipment for the business. The amount of money remitted to the central bank (or Monetary Agency) from the economy would be determined by the production/acquisition of goods/services, not any person, committee, or organization.
There is one change that would have to be made regarding how employees of publicly traded corporations would be the compensated It would affect most the most senior management. It would not affect owners of proprietorships (including partnerships) or ‘closely held’ corporations (the stocks of which are not publicly traded); in those cases the profits would be the income of the owners.
Two things are worth emphasizing. For one, as promised, it does not put any limit on income/wealth. There would still be no limit on compensation or how much in assets anyone could purchase with one’s income. The other thing is that this change is due to the need to ensure that money does get remitted to the administrator of the currency, and nothing else.
The change is that bonuses, in the form of money or stocks or any other financial device, would not be allowed. In-kind benefits would still be allowed and would not be limited, but all compensation would have to be on a fixed, regular schedule: no ad hoc compensation.
Beyond that, it would be possible to tweak the paradigm as a matter of ideology or even theology or mere psychological predisposition. [rest of para. added 12/4/23] It is difficult to imagine any change to the paradigm that would make it more amenable to people on the political right. People on the political left might want to tether wealth to income for individuals as it is in the paradigm for publicly traded corporations: maximum assets (using the price at which they were bought) being some multiple of the amount of cash they could hoard. Lefties might want to set a maximum ratio (say, 20:1?) in the total remuneration (money and benefits) between the highest and lowest compensated person in any business — to include owners — or government. Neither of those — nor both together — would put a limit on income/wealth. The former would result in remitting more money to the administrator of the currency (whether the central bank or Monetary Agency), meaning less currency would have to be created.
The paradigm itself only requires creating currency as needed for the income and, possibly, funding government (but who would vote against that?), and remitting money to the administrator of the currency. Any further issues would be decided in the political process of any nation that adopted this monetary paradigm.
Making the turn towards the barn . . .
The other way money is created, lending by banks, would not be affected by this change to the system. Recall, though, that it and currency get indistinguishably comingled as soon as either is used to make a purchase of any kind. The two together form the money supply. It is not necessary to distinguish money-as-currency from money-as-IOUs in remitting money to the administrator of the currency. They form the money supply in the economy together, and it is the size of the money supply that matters.
So in this proposal the amount of money in the economy would be self-regulating. No single person, committee, or organization would determine how much total money would be created or how much would be remitted to the central bank (or Monetary Agency). Given the amount of money (as currency) being created and that all of it would enter the economy in the form of purchases of goods and services by individuals and government, making the supply of money in the economy self-regulating would make the economy as a whole self-regulating. The absence of unemployment or poverty, at any level of total output, would be a permanent, unassailable condition — along with increased sustainability and the possibility of a tax-free existence for all.
Otherwise, there is little to recommend it.
*[added 12/2/23] Here is how that would happen. People employed in minimum-pay positions would not be paid by their employers, but would be paid that income. Employers could designate any position to be a minimum-pay position. They would find themselves using (in-kind) benefits (insurance, education, etc.) to compete for people to fill those positions. Individuals would be free to work in any such position for that pay/negotiated benefits or not. Government could be an employer of last resort — picking up trash on the sides of roads, if nothing else. Such jobs would pay that income but no benefits (thereby costing government nothing). Such jobs would therefore not represent competition for employees for other employers. The existence of such jobs would, however, ensure that all other jobs would include at least some benefits of some kind.
______________
for the curious, more about the proposal (all of it here in Medium, but none of it behind the paywall):
“Neutral Money” puts the proposal in a historical context.
“Same Economy, Way Better Outcomes for Society” focuses more on the details entailed in implementing the proposal, using the U.S. (where the author has always lived) for illustrative purposes.
“Paradigm Shift” is a more generic — and more technical — rendering of the proposal.
“The Unnecessariness of Marxism” relates how the proposal could be used to eliminate exploitation — but leave property be.