Questioning economic assumptions

Even before the Corona crisis we were being faced with a multitude of challenges, including but not limited to slowing economic growth, climate change, biodiversity loss, exorbitant pollution, inequality and extremist populism. Most of these issues have moved to the background now but we should not lose sight of them. Already some people start saying that the money we have put aside to tackle climate change should be used to help reboot the economy instead. It again highlights the assumption that we need to make choices between the economy and about everything else and that the economy should always come first.

It has always been stated that solving certain issues would make other problems worse. When ambitious climate actions are suggested, the immediate cost is often cited as a barrier to their execution. That cost is sometimes even pitted against social welfare where the claim is made that high investment in climate is not compatible with a well funded social welfare system. 

What the Corona crisis is showing is that the impossible can become normal very, very quickly. All of a sudden government debt is no longer an issue, although we are already being told that we’ll have to pay it back afterwards, hinting at future austerity measures.

Luckily there was already a shift in perspective going on before the crisis and more and more voices were being raised that solutions need to be found to tackle all these challenges simultaneously and that economic growth in itself should not be the ultimate goal. New Zealand started on a course that puts the welfare of its population at the centre of its economic strategy while also investing in measures that deal with climate change. The OECD released a report [1] in which they urge to look beyond GDP growth and take welfare, environmental sustainability and reduction of inequality into account when plotting out economic strategies.

I want to continue on these paths and look into the tools and strategies that can be applied to accelerate these initiatives. If we want to resolve the challenges before us we need to take a step back, and now is the perfect time to do that. We need to look at our current economic system, see where it helps and where it hinders the solutions that need to be put in motion. The first question to ask is: what is/should be the purpose of our economy? Apart from the voices that are rising up, in most cases, the health of the economy appears to be a goal instead of a means to an end. And the main mantra is still that a healthy economy is equal to a growing economy. That growth paradigm still prevails in the OECD report, even though there is a shift in the perspective of how that growth is measured and what its purpose should be.

Continuing along the lines of thought of the OECD report and the economic policies of New Zealand we can come to the conclusion that the economy should be a supportive system for a thriving world where the well being of humanity and the health of our living ecosystems should be the ultimate goal. However, today the needs of the economic system are often at odds with both the well being of large portions of humanity and with the health of our living ecosystems. Can we do better? Can we build an economy which supports a high standard of living for all and at the same time helps us to be stewards of the planet we live on? Can we build an economic system which is distributive by design so that everyone has an equal opportunity in this world? If so, how would we go about that? Which tools can we use?

Along with these questions come other questions which can be very confrontational but which need to be put on the table nonetheless. Do we dare to consider upper limits to personal wealth if it reduces inequality and serves our society? Are we open enough to question our core assumptions about the economic system we have today? And are we brave enough to consider alternatives?

I want to challenge some of those core beliefs and propose alternative solutions. It is an invitation to widen our perspective on economics and embed it in a living world.

Challenging the assumptions

Assumption 1: all goods are scarce and human wants are infinite

All economic textbooks talk about how the economy must seek to manage the distribution of scarce goods to people with unlimited wants. Scarcity, however, carries a heavy emotional load. It conjures up images that there is never enough. Infinity on the other hand carries an equally loaded, be it different, emotional load. It creates the idea that people are never satisfied and their wants can never be fulfilled. These images do not align with reality. Although some goods are scarce and some people are never satisfied, there are plenty of goods that are available in abundance and for most people there is a level of sufficiency.

The idea of infinite wants is strengthened by the idea that we live in a consumption society where it is the consumer’s needs and wants that drive production. I would argue that it is the other way around; we live in a production society with such a tremendous production capacity that the wants and needs of the consumer need to be created and/or stimulated. Production is more a driver of consumption than the other way around. The marketing and advertising world provides the tools to stimulate these needs and wants. Production strategies even adapted to adhere to the ever increasing output capacity of our production society with things like planned obsolescence. Products are too often produced with inferior quality or are hinted to be ‘out of fashion’ so that consumers would buy the newer product. Durable, repairable and long lasting products are bad for business. And diminishing production output is bad for the economy. But does that serve us as a society? Do we actually need to fully utilize all that production capacity?

With the current definition of economics it seems that it’s about trying to satisfy every possible want of every individual as much as possible. That’s comparable to satisfying every want of a toddler who has been let loose in a candy store as much as possible.

Samuelson, amongst others, talks about the what, how and for whom of production, but not about the deeper why.

Assumption 2: the economy needs to grow

Although both economists and non economists [2][3] have called to abandon the growth model, this idea has not yet created a significant change in the course of action of our world and business leaders. The mantra of the day is still that we need growth in order to have a healthy economy. The question to ask here is: why? Why is growth imperative to a healthy economy? If we look at the two components of economic growth, demographic growth and increased production capacity per capita, continuous growth raises some hard questions. One of them being: is this even possible? Our planet can not house an infinite number of people, which means that demographic growth needs to come to an end at one point. One person can not produce an infinite amount of output, which means growth in production capacity also has a hard upper limit. Even machines have a hard upper production capacity limit because there is no infinite amount of energy or resources available. These two limits, limit in demographic growth and limit in production capacity, taken together imply that continuous economic growth is an impossibility. It would thus be logical to look at our economy as something that can not grow indefinitely. Therefore there will be periods of stagnation and very possibly even degrowth. Insisting on growth as a requirement for economic stability is in conflict with reality and should thus be abandoned. The challenges now become: how can we create a stable economy without the need for continuous growth? If a solution to that question can be found it would create a lot of maneuvering space for other challenges such as those concerning our resource use and our waste problems.

Assumption 3: full employment is a main goal

Most developed countries strive for an employment rate of 80% or higher. And higher is better. But this employment rate only takes paid work into account. There are numerous people who do unpaid work too but this is not taken into consideration when we talk about employment rates. The reality is that this unpaid work does create enormous value in our society though. Parents raise children, children take care of their elderly parents, people deliver valuable work for non profit organisations, …

Income, however, is coupled to paid work, regardless of whether that work contributes to society or not. US economists Benjamin B. Lockwood, Charles G. Nathanson, and E. Glen Weyl did research on this [4] and discovered that in many, but not all, cases the highest paying jobs actually contribute the least to society. Add to that David Graeber’s research about bullshit jobs [5] and full employment goals, which are strived for today, become very questionable.

Most jobs are currently created on the basis that employing the people that do the job costs less than the revenue generated by the work of the employees. Not all work that contributes value is profitable however. The solution is not to start paying all work either. As Dan Ariely pointed out in his research, paying people can sometimes have a detrimental effect on productivity due to the fact that it can interfere with intrinsic motivation.

Thus we need to ask the question whether it is possible to provide everyone with a decent income without necessarily coupling that income to paid work.

It may seem like an impossible question. The current perspective is that we need to get people into paid jobs because paid jobs provide the government with taxes. These taxes can be used to supply a limited amount of people with an income through social welfare. But having too many people on social welfare creates a budget problem according to economic theories that insist on limiting government deficits.

The question now becomes: is there a way around this? 

Assumption 4: the current monetary system is the best there is

This is a very difficult topic to get on the table. Our monetary system is taken for granted and is being ignored by the vast majority of economists and policy makers. And yet, it is our monetary system that is part of the foundation of our economy. It’s the grease that makes everything work. But it is considered to be neutral and therefore not worthy of attention. This is a mistake.

There are 3 monetary theories in existence today. Banks as intermediaries, fractional reserve banking and banks as creators of credit money through loans. Richard A. Werner has delivered empirical evidence that the third one [6], banks as creators of credit money through loans, is the correct one. This theory is supported by, amongst others, Steve Keen, the Bank of England and the European Central Bank (on their web page ‘What is money?’ [7]).

This has consequences. About 95% of the money in the economy consists of credit money and therefore the supply of this money is crucial to the health of the economy. However, this supply depends on banks issuing an adequate amount of loans [8], which is dependant on the demand from within the economy and the profitability of issuing those loans for the banks. This creates an unhealthy circular dependency between the state of the economy and the money supply, exacerbated by the profit seeking behaviour of banks. If lending would grind to a halt, the money supply would dry out, spelling disaster for the economy. The only remedy currently available is central bank quantitative easing, a policy which is ill regarded by many and has so far failed to fulfill its goals in the Eurozone.

The effects of our current monetary system reaches beyond its impact on the money supply however. Studies have shown that money influences the way people behave [9], even from an early age [10], and therefore it indirectly influences how we organise our society. 

This leads to the toughest question of them all: is it possible to construct a monetary system which is not dependant on the state of the economy while still being the foundation of that economy? Taking that thought even further, is it possible to construct a monetary system which would have a positive influence on how we behave and organise our society? Can a monetary system have such a big influence?

Assumption 5: laziness, greed and selfishness are an integral part of human nature

The rules and regulations of current society are built on the assumption that people, when left to their own devices, mainly think about themselves. One of the biggest arguments used against installing a basic income, for example, is that people would stop working, despite all the contradicting evidence from experiments. This is based on the false assumption that people are mainly focused on self interest and are completely driven by seeking pleasure and avoiding pain, and thus need extrinsic motivation in order to work. This perspective is woven in with the control mechanisms society has constructed to make sure people don’t abuse the welfare systems. Sadly enough this mainly affects the weakest in our society today. It is in line with the world view of Thomas Hobbes.

Anthropological evidence against this view on human nature is mounting [11][12][13]. It appears to be human nature is more in line with the views of John Locke and Jean Jacques Rousseau who considered people to generally be kind, collaborative and caring towards each other.

If we look at the outbursts of solidarity today I think it’s fair to conclude that mankind isn’t a selfish lot which doesn’t care about each other. Quite the contrary I’d say.

Man is however capable of atrocities, which is proven by the genocides and brutal wars we find in history. More often than not though, these acts of violence are instigated by a small but powerful and influential group. Power can have a corrupting effect on people when that power is given to people with weak moral identity [14]. Add the phenomenon of groupthink to that, a group only communicating with like minded peers, which reinforces and extremizes the ideology of the group, and you have the recipe for disasters.

The question here is: can an economic system be built where power does not end up with the wrong people and where there are safeguards against groupthink? Maybe the system can even inherently distribute power? Can an economic system have that kind of influence?

The Sustainable Money System, a proposal for the future [15]

At Happonomy we have been working for several years on developing and fine tuning a new monetary system with the purpose to facilitate solving the challenges which are posed in the previous section. We have developed games to research the impact of the new system on people’s behaviour, compared with the current system. The games also give an indication how hard or easy it is to provide for individual needs and to achieve common goals in both systems. The preliminary results show that people experience less stress, have it easier to provide for themselves, are more open to collaboration and more easily succeed in completing common goals.

The model

Guaranteeing money supply

The first goals of the system are to guarantee the money supply regardless of the performance of the economy and to provide an income to individuals regardless of paid jobs.

In order to achieve this, money is created which is regularly put on individuals’ accounts, thereby providing them with a guaranteed income. This guarantees a steady money supply, which scales with the population, as long as there are living individuals.

Safeguarding against inflation

Due to the nature of money creation through a guaranteed income, inflation, and possibly hyper inflation, would occur if no measures are taken against it. In order to do this, demurrage (comparable to negative interest or tax on monetary capital) is charged when the balance of an individual’s account(s) exceeds a predetermined amount. This demurrage is implemented in incremental brackets, comparable with the incremental tax brackets on wages.

The amount up to which no demurrage is charged is called the demurrage free buffer. Only individuals have this demurrage free buffer. The reason for this is that, should this buffer also be given to organisations, there would be a proliferation of shell companies in order to be able to hoard money. It is however possible for organisations to attain a demurrage free buffer as will be explained below.

Funding public services

The demurrage is used to fund public services such as healthcare, education, environmental care, … Should a public service have a shortage of funds, extra money can be brought into circulation in order to bring the budget up to the necessary amount. That way public services never have a shortage of funding. In order to counter fraud, all expenses done by these public services are visible to the public, which makes auditing them easier.

The cost of a public service also scales more or less with the population and therefore money creation for this purpose would most likely not contribute to inflation in a significant way. Especially since the expenditures end up on accounts which are subject to demurrage.

Money creation for these public services will eventually become the exception once the system ‘saturates’. This happens when the amount of money created for the guaranteed income plus the amount of money expended by public services equals the amount of money paid on demurrage. In that case public services will get in more money than needed. This surplus money is then taken out of circulation, stabilizing the total monetary mass and safeguarding against monetary inflation.

The advantage of keeping the mechanism of money creation for public services in effect, even after saturation of the system, is that it allows for emergency budgets. These might be necessary if, for example, a speedy energy transition, for which large investments are required, is needed. This leads to a temporary inflation in money creation but it goes hand in hand with an increased output and an increase in demurrage flowing out towards public services.

Building up a demurrage free buffer for organizations

As stated above, only individuals are granted a demurrage free buffer by default. These individuals however are allowed to make all, or part, of that buffer available to organizations of their choice.

Founders and owners of a business are the obvious subjects to do this. But more is probably needed of course.

Reasons why individuals would make part of their demurrage free buffer available to organisations could be because they believe the organisation provides products or services for them which are useful and/or beneficial. Employees who are given meaningful and interesting work in a stimulating work environment might also be willing to help out the organisation by making part of their demurrage free buffer available to the employer.

This could create a major shift in the relationships between organisations and society at large and could nudge production capacity towards value adding outputs.

New business models

Due to the demurrage, large volume monetary transactions and large short term profits become a lot less interesting. This can possibly nudge towards more long term and sustainable investments. The ‘product as a service’ business model also aligns more easily with the limited storage capacity of money compared to the ‘one off’ sales models in use today. Product as a service also changes the relationship with the customer, putting emphasis on maintaining that relationship to the forefront. It also has a positive impact on the durability and energy efficiency of products since repair cost and energy use fall on the producer.

Transitioning

In normal circumstances the idea was always held that flipping a switch on the economy was impossible. The situation today shows that numerous switches can be flipped when needed. Maybe the switch of the monetary system can be flipped too? At least the consideration of a transition should be put on the table. SuMSy is a theoretical model which has not yet been thoroughly tested in real world situations. But a lot of the measures that are being implemented today have not been tested in real world situations either and yet, here they are. The idea of implementing a universal basic income is gaining momentum again and Spain is even planning to make it a permanent thing. Then why not embed it in the monetary system itself?

My main goal is to open up minds and provide economic thinkers with out of the box perspectives. In the words of Albert Einstein: we don’t solve problems with the same way of thinking that created them. 

References

[1] OECD - SG/NAEC(2019)3 - Beyond growth: towards a new economic approach

[2] Research & Degrowth (R&D). September 6, 2018.

Notes: https://degrowth.org/2018/09/06/post-growth-open-letter/

[3] Parrique T., Barth J., Briens F., C. Kerschner, Kraus-Polk A., Kuokkanen A., Spangenberg J.H. Decoupling debunked - Evidence and arguments against green growth as a sole strategy for sustainability. July 2019. European Environmental Bureau (EEB). Brussels. 

Notes: https://eeb.org/library/decoupling-debunked/

[4] Benjamin B. Lockwood, Charles G. Nathanson, and E. Glen Weyl, "Taxation and the Allocation of Talent," Journal of Political Economy 125, no. 5 (October 2017): 1635-1682.

[5] David Graeber - Bullshit jobs - 2018

[6] Richard A. Werner - A lost century in economics: Three theories of banking and the conclusive evidence - 2015

[7] European Central Bank - What is money? - 2015

Notes: https://www.ecb.europa.eu/explainers/tell-me-more/html/what_is_money.en.html

[8] Stef Kuypers - Money supply in a no growth economy - 2019

Notes: https://www.academia.edu/39995035/Money_Supply_in_a_No-Growth_Economy

[9] Nicolas Guéguen, Céline Jacob - Behavioral consequences of money: When the automated teller machine reduces helping behavior - 2013

[10] Agata Gasiorowska, Lan Nguyen Chaplin, Tomasz Zaleskiewicz, Sandra Wygrab, Kathleen D. Vohs - Money Cues Increase Agency and Decrease Prosociality Among Children: Early Signs of Market-Mode Behaviors - 2016

[11] Rutger Bregman - Long live intrinsic motivation. Or why it’s time to ditch the carrots and the sticks - 2016

Notes: https://thecorrespondent.com/5889/long-live-intrinsic-motivation-or-why-its-time-to-ditch-the-carrots-and-the-sticks/226402605-5dbd8da4

[12] Keith Jensen, Amrisha Vaish2 and Marco F. H. Schmidt - The emergence of human prosociality: aligning with others through feelings, concerns, and norms - 2014

[13] Hepach Robert, Vaish Amrisha - A New Look at Children's Prosocial Motivation - 2013

[14] DeCelles Katherine A., DeRue D. Scott, Margolis Joshua D., Ceranic, Tara L. - Does power corrupt or enable? When and why power facilitates self-interested behavior. - 2019

[15] Stef Kuypers - The Sustainable Money System (SuMSy), white paper - 2017

Notes: https://www.happonomy.org/inspiration/get-inspired/sustainable-money-system/