Social Credit

The discussion of Fisher's "Chicago Plan" below reminded me of another monetary reform movement -Social Credit, proposed by British Engineer C. H. Douglas in 1924. It had much traction in the 1920s and 1930s, and lasted into the 1980s in some variants. The ideas proved very attractive in Western Canada, especially Alberta. The British Columbia Social Credit Party, the SocReds, ruled the province for forty years, until it imploded in 1991, although it had abandoned most of the earlier monetary ideas.

Much of the theory is a little hoary, like Douglass's "A+B theorem" which appears to overlook multiplier effects. But some of it appears of contemporary relevance. For example, he emphasizes the stock of knowledge and technique and wealth. From the Wikipedia article:

Douglas disagreed with classical economists who divided the factors of production into only land, labour and capital. While Douglas did not deny these factors in production, he believed the “cultural inheritance of society” was the primary factor. Cultural inheritance is defined as the knowledge, technique and processes that have been handed down to us incrementally from the origins of civilization. Consequently, mankind does not have to keep “reinventing the wheel”. “We are merely the administrators of that cultural inheritance, and to that extent the cultural inheritance is the property of all of us, without exception.”[9] Adam Smith, David Ricardo and Karl Marx claimed that labour creates all value. While Douglas did not deny that all costs are ultimately due to labour charges of some sort (past or present), he denied that the present labour of the world creates all wealth.

And he was correct in focusing on the nature of money:

According to economists, money is a medium of exchange. Douglas argued that this may have once been the case when the majority of wealth was produced by individuals who subsequently exchanged it with each other. But in modern economies, division of labour splits production into multiple processes, and wealth is produced by people working in association with each other. For instance, an automobile worker does not produce any wealth (i.e., the automobile) by himself, but only in conjunction with other auto workers, the producers of roads, gasoline, insurance, etc. In this view, wealth is a pool upon which people can draw, and money becomes a ticketing system. The efficiency gained by individuals cooperating in the productive process was coined by Douglas as the “unearned increment of association” – historic accumulations of which constitute what Douglas called the cultural heritage. The means of drawing upon this pool is money distributed by the banking system.

Douglas believed that money should not be regarded as a commodity but rather as a ticket, a means of distribution of production.

He was also very conscious of the issue of abundance, which I am very interested in. Scarcity is no longer the essential problem of mankind, but distribution (and incentivizing innovation and good behavior).

Douglas also claimed the problem of production, or scarcity, had long been solved. The new problem was one of distribution. However; so long as orthodox economics makes scarcity a value, banks will continue to believe that they are creating value for the money they produce by making it scarce.[20] Douglas criticized the banking system on two counts:

for being a form of government which has been centralizing its power for centuries, and

for claiming ownership of the money they create.

The former Douglas identified as being anti-social in policy.[21] The latter he claimed was equivalent to claiming ownership of the nation.[22] According to Douglas, money is merely an abstract representation of the real credit of the community, which is the ability of the community to deliver goods and services, when and where they are required.

He proposed a "national dividend" to consumers, a form of basic income, to make up for inherent deficiencies in effective demand.

I don't think the solutions he proposes necessarily work out, although I haven't read the original books and papers. But much of the diagnosis is intriguingly correct.

 

Radical Monetary Reform

This is an interesting development - highly radical monetary reform proposals from two staff economists at the IMF. The often excitable Ambrose Evans-Pritchard writes about it in the Telegraph.

The IMF paper, which apparently came out in August, argues for a renewed look at a "Chicago Plan" which Irving Fisher put forward in 1936. It required 100% reserve backing for bank loans, thus eliminating the ability of banks to create credit. And that, IMF authors Benes and Kumhof argue, would eliminate much of the volatility of the business cycle, eliminate the possibility of bank runs, and dramatically reduce both public and private debts. It would not be inflationary, and it would boost output by 10%. They claim they can demonstrate this with a DGSE model in a way which Fisher never could.

This shows just how disillusioned the wider world has become with the banking and financial system. The IMF staff has always had some variety of viewpoints - and of course this is very strictly speaking the view of the authors, not the institution - but it is still hard to see the folks on 19th St NW producing something like this ten years ago.

Would it work? It essentially replaces a largely private money system with a 100% government money system. Fractional reserve banking means that right now a bank only has typically 5-10% of "money" - mostly central bank reserves - underpinning the rest of the asset side of the balance sheet, which is bank-created credit.

In our current system, a bank creates money by issuing a loan, and crediting the borrower with an offsetting deposit at the same time. ( eg if Citibank lends you $10,000, it has a $10,000 loan as its asset, and you have an additional $10,000 in your deposit account to spend). The proposal would stop banks creating money, because they could only re-loan reserves from the central bank.

The problem, of course, is that money systems can be too inflexible, too rigid as well as too volatile. This most often shows up in exchange rate policy. The gold standard had fixed exchange rates (but freer credit). However, it still forced international adjustment by inflation and deflation of the price level, because gold was the fundamental reserve asset, not central bank fiat money. "Ye shall not crucify mankind on a cross of gold", William Jennings Bryan famously said.The euro is a prime contemporary example of the problems monetary inflexibility can cause.

The "Chicago Plan" would require policymakers to carefully calibrate the supply of reserves, and if they did not there would be serious problems. Of course, many economists think rules rather than discretion is better for policy in any case, as the track record for discretionary monetary policy is mixed at best. So making policymakers stick to a rue or money growth might be a good thing.

The plan would not necessarily imply government would allocate loans , or choose specific winners and losers. Banks could still lend to whoever they wanted, but they could not create money at the same time. the lack of leverage would cripple bank profits, however.

There might be more role for equity based venture investors in such a system, offsetting some of the credit supply. And the reduction of government debt looks very attractive in current circumstances.

Patience with banks is wearing thin. Policymakers are clearly very frustrated that they are launching massive balance sheet expansions like QE3, but the transmission mechanism to convey that liquidity to the real economy seems to be blocked in the banking system. The banks generally claim that it is because there is less demand for loans, not their reluctance to lend. But whatever the cause, the Fed, BoE and others are not getting much traction. Cutting out the middleman becomes more attractive, at least in theory.

Clearly the financial system would fight this to the death, as it would remove most of the profits in the industry. But radical as it is, perhaps it deserves serious scrutiny as a plan - if only as a device to hold over the banks. Our system does seem to have an inherent bias and drift towards debt, both private and governmental.

Perhaps we need a better system of money creation calibrated to create flourishing in society rather than simply credit. The legitimacy of the current system has been shaken by the crisis, and much of the intellectual confidence of mainstream economics has been eclipsed. I'll read further reactions to the plan and examination of potential flaws with interest.

 

 

Seneca and the Stoic Life (and Power and Philosophy and Death)

I said the other day I was reading Seneca's Letters from a Stoic (Penguin Classics) , largely because of his influence on Montaigne. I finished the book earlier today.

The Letters are vivid and intimate  in its references to daily life - dinner parties, baths, the construction of houses. It is a very personal account from the deep past, including a perspective on life that is of its time. That alone makes it an interesting read.

It is revealing, though, that it is so personal, and mostly focused on individual fortitude and self-control. Seneca wrote the book after retiring from public service. Just a few short years before he had been one of the Emperor Nero's two chief ministers, and thus one of the most powerful people on the planet.

He was forced to commit suicide shortly afterwards, in AD 65. A plot to overthrow Nero would have allegedly raised Seneca himself to become Emperor. So he had to slit his veins and slowly expire in a bath.  A twist of fate could have made the Stoic the master of the world.

Perhaps that explains the personal focus and emphasis on virtue. Anything to do with public affairs was simply too sensitive. So the book is much more concerned with self-control and preparing oneself for adversity, for moderation in emotions and in eating and drinking, for ignoring the allure of wealth and power.

It may also explain his alleged hypocrisy. The introduction says "Seneca .. may well be history's most notable example of a man who failed to live up to his principles." He condemned preoccupation with wealth, but amassed a dazzling fortune of three hundred million sesterces. He argued against tyranny, but served one of history's worst tyrants.

It is a pity that there is not more reflection on the nature of power and public policy and practical wisdom from someone so close to the center of power.

Still, perhaps it is a doctrine that is suitable to the times. The upper classes enjoyed dazzling wealth. Seneca complains of hosts who artfully arranged changing the carved or painted ceilings of the dining hall between courses, or shot saffron perfume through the air.

But life was also violent and capricious, subject to the whims of the more powerful and the afflictions of illness, shipwreck or theft.

One issue Seneca explores is that the wise man ought to know when he has enough.

Nature's wants are small, while those of opinion are limitless. Imagine that you have piled up all that a veritable host of rich men have ever possessed, that fortune has carried you far beyond the bounds of wealth so far as any private individual is concerned, building you a roof of gold and clothing you in royal purple, conducting you to such a height of opulence and luxury that you hide the earth with marble floors - putting you in a position not merely to own, but to walk all over treasures - throw in sculptures, paintings, all that has been produced at tremendous pains by all the arts to satisfy extravagance: all these things will only induce in you a craving for even bigger things. Natural desires are limited; those which spring from false opinions have nowhere to stop, for falsity has no point of termination. When a person is following a track, there is an eventual end to it somewhere, but with wandering at large there is no limit, p65

In other words, without having some sense of a track - a purpose - there is no real sense of what is enough.

There is a tremendous sense of fragility that haunts the whole book. Everything could be taken away in an instant. The wise man should not count on possessions or power, but be prepared so that when adversity comes it will not perturb him too much.

That may be hard advice to take, and often ignored. But, he says,

Words need to be sown like seed. No matter how tiny a seed may be, when it lands in the right sort og ground it unfolds its strength and from being minute expands and grows to a massive size. 

People need philosophy as a kind of therapy, not simply as quibbling or academic disputation over syllogisms. He dismisses pedantry.

Shall I tell you what philosophy holds out to humanity? Counsel. (p98)

He complains about the "amount of useless and superfluous material to be found in the philosophers", however.

They have come to envy the philologist and the mathematician, and they have taken over all the inessential elements in those studies - with the result that they know more about devoting care and attention to their speech than devoting such attention to their lives. (p160)

He could almost be talking about the mathematical turn in modern economics. So frustration over academic detachment goes back a long way.

But he is firmly in favor of the liberal arts in the original sense of free : the pursuits of a free man. They do not themselves create good character. But "when it comes to character the liberal arts open the way to it rather than carry the personality all the way there." p157

Philosophy is essentially about living well and the means to happiness.

Who can doubt, my dear Lucillus, that life is the gift of the immoral gods, but that living well is the gift of philosophy? p161

Philosophy has the single task of discovering the truth about the divine and human worlds. The religious conscience, the sense of duty, justice, and all the rest of the close-knit, interdependent "company of virtues", never leave her side. p 162

Philosophy takes as her aim the state of happiness. That is the direction in which she opens routes and guides us. She shows us what are real and what are only apparent evils. She strips mens' minds of empty thinking, bestows a greatness that is solid and administers a check to greatness when it is all empty show; she sees tht we are left in no doubt about the difference between what is great and what is bloated. p171

Those are fine goals. But is not simply a matter of contemplation, either. People need activity.

The fact that the body is lying down is no reason for supposing the mind is at peace. Rest is sometimes far from restful. Hence our need to be stimulated into general activity and kept busy and occupied with pursuits of the right nature whenever we are victims of the sort of idleness that wearies of itself. When great military commanders notice indiscipline among their men they suppress it by giving them some work to do, mounting expeditions to keep them actively employed. p 111

In many ways he is surprisingly ahead of his time, in his condemnation of the violence in the arena, or his insistence that slaves ought to be treated with dignity and perceived as equally human.  And some of the Stoic attitudes had long lasting impact on Western Civilization. The introduction says that Seneca was second only to Cicero in how much he was read in the Middle Ages, even if he is largely forgotten now.

Perhaps the problem with stoicism was that it was too private, too willing to accommodate itself to detachment and austerity and the expectation of adversity. Perhaps more resistance to Nero earlier would have been a better philosophy for producing happiness.

More pain at hedge funds

A major trader at Moore Capital decides to get out.

Moore Capital Management LLC’s Greg Coffey is calling it quits amid markets that have proved difficult for even the most nimble hedge-fund investors.

Coffey, who has lost money for clients in the past two years, follows other high-profile hedge-fund managers to step away from trading as Europe’s sovereign-debt crisis and concerns over global economic growth roils markets. Chris Rokos, 42, a co-founder of Brevan Howard Asset Management LLP, retired to “pursue his personal interests,” the London-based firm said in August. Billionaire energy trader John Arnold, 38, former Morgan Stanley co-president Zoe Cruz, 57, and oil trader Pierre Andurand, 35, shuttered their hedge funds this year.

The industry has matured and the easy money is largely gone. It's now more a game of the management fees - the '2' in the '2 and 20' standard deal of 2% of assets and 20% of gains.

Angry and rancorous debate

I wonder if the debate says more about the underlying state of the country than the contenders - angry, short-tempered, frustrated, fed up.

I'd say Obama "won" narrowly. CNN lost. Romney didn't gain anything but didn't lose much either. But its mostly people talking at or past each other. Perhaps it's simply the nature of elections, and then deal-making begins again.

It feels as if it is going to be the election mechanics -get out the vote - which will decide this when the polls are so close.

China: Express Line to Corruption

This story in the New Yorker about corruption in the Chinese Railway Ministry is well worth a read. You might think that sounds like something which would only be of interest to obscure auditors. It is not. This is on a spectacular scale, truly dramatic, epic in its lurid dirt and crime, and it is the biggest example of something which is the biggest threat to political stability in China.

Other government agencies also had serious financial problems—out of fifty, auditors found problems with forty-nine—but the scale of plunder in the railway world was in a class by itself. Liao Ran, an Asia specialist at Transparency International, told the International Herald Tribune that China’s high-speed railway was shaping up to be “the biggest single financial scandal not just in China, but perhaps in the world.”

It is the (literally) concrete details which illuminate how life is changing for quarter of the world's population. It would make a movie which would make The Godfather seem tame.

 

Is US Economic Growth Over?

Here is something I'll have to look at (from an NYT article):

The American economy is running on empty. That's the hypothesis put forward by Robert J. Gordon, an economist at Northwestern University. Let's assume for a moment that he's right. The political consequences would be enormous.

In his widely discussed National Bureau of Economic Research paper, "Is U.S. Economic Growth Over?" Gordon predicts a dark future of "epochal decline in growth from the U.S. record of the last 150 years." The greatest innovations, Gordon argues, are behind us, with little prospect for transformative change along the lines of the three previous industrial revolutions:

It is pretty gloomy.

Over most of human history, in Gordon's view, the world had minimal economic growth, if it had any at all - and "there is no guarantee that growth will continue indefinitely." Gordon's paper suggests instead that "the rapid progress made over the past 250 years could well turn out to be a unique episode in human history."

 

An open access version of The Gordon article is here, although I haven't read it yet. It sound similar to Tyler Cowen's arguments.