Are we living in the Matrix?

I know what you're thinking — you're thinking 1. that I'm crazy and 2. that this is old hat. When The Matrix came out in 1999 many people talked about whether we live in it or not. Let me reassure you that I am not interested in that. The other day as I drove to work I was idly considering Morpheus' statements about the Matrix and I realised that although I don't believe we are living in exactly what he described, there is one social institution that, almost word for word, can replace the word Matrix when Morpheus mentions it. Consider the following quote:

The Matrix is everywhere. It is all around us. Even now, in this very room. You can see it when you look out your window or when you turn on your television. You can feel it when you go to work... when you go to church... when you pay your taxes. It is the world that has been pulled over your eyes to blind you from the truth. That you are a slave, Neo. Like everyone else you were born into bondage. Born into a prison that you cannot smell or taste or touch. A prison for your mind.

What is everywhere? What is a lie? How are we enslaved? The answer, when it struck me, was obvious: the State. In fact I think Donald Livingston is correct when he says that the modern State, while presenting itself as republic or democracy (or a combination), has little more in common with those modes of government than it has with, say, monarchy. Instead we can call it the Leviathan State, the Total State, that form of government in which one will — that of the supreme People — alone is sovereign over any and all desires of individuals themselves. Of course this is pure fiction — there is no such thing as "the People", there are only individuals. In the Total State there are broadly two classes of individuals: those who produce and pay taxes and those who consume and receive taxes. The fiction is necessary to keep the tax-payers paying without too much complaint. Speaking of fiction:

What is the Matrix? Control. The Matrix is a computer-generated dream world built to keep us under control in order to change a human being into this. [Energy]

Needless to say the dream world we live in is not the product of a computer program, it is the product of a vast edifice of ideas and lies that tell the human mind it is more free as a slave, more wealthy as a vassal, more wise to be ignorant. The State exists to control the taxed and redirect the wealth they produce for the ends of those who control the State — mostly the "liberal" intellectual and the political class. More generally it is those that live from the proceeds of taxes. For most people of either class, since the State is all they've known people promote it and prefer it:

The Matrix is a system, Neo. That system is our enemy. But when you're inside, you look around, what do you see? Businessmen, teachers, lawyers, carpenters. The very minds of the people we are trying to save. But until we do, these people are still a part of that system and that makes them our enemy. You have to understand, most of these people are not ready to be unplugged. And many of them are so inured, so hopelessly dependent on the system, that they will fight to protect it. 

 A more fitting description of those who daily defend the violence of the State even as it engages in violence against them is hard to imagine. This type of person is the chief enemy of liberty, even though he would be the chief beneficiary of it. And why? Because he believes in the State. He cherishes its power to curb the vices of others. Every year he makes his offering of cash, if grudgingly, to ensure that the dangerous liberty of others is crushed by the State. In a sense this is the core belief of those who support the Total State. They believe freedom is dangerous, not because they themselves would abuse it, but because other people would. Others would produce bad and dangerous products, others would rampage with guns, others would spend their money with profligacy, others would fail to care for the parents and children. It is fear of the liberty of others. While this fear governs all thought any excuse will do to curb the freedom of others. Most of the time the excuse is not needed, it is simply treated as self-evident, and the individual may go on in ignorance:

I know this steak doesn't exist. I know that when I put it in my mouth, the Matrix is telling my brain that it is juicy and delicious. After 9 years, you know what I have learned? [Eats the piece of steak and sighs contently] Ignorance is bliss.

Not all people are content with ignorance, however. The State needs a permanent army of intellectuals ready to do battle in its name. They constantly fight the war of ideas to make the insane and irrational basis for the State look like science and wisdom. They must be the gatekeepers of information and the teachers of the next generation. They must be in all places, at one moment an ordinary person, the next an Agent ready to crush the ideas of liberty with a chimera of arguments. Because the State cannot tolerate the spread of anti-State ideas. Its power and permanence are founded on lies and ideas, so any outbreak of truth and the ideas of liberty, that the State is not only not necessary but antithetical to human flourishing must be crushed without delay.

That means that anyone we haven't unplugged is potentially an agent. Inside the Matrix, they are everyone and they are no one. We have survived by hiding from them, by running from them, but they are the gatekeepers. They are guarding all the doors, they are holding all the keys, which means that sooner or later, someone is going to have to fight them.
I won't lie to you, Neo. Every single man or woman who has stood their ground, everyone who has fought an agent has died. But where they have failed, you will succeed. I've seen an agent punch through a concrete wall. Men have emptied entire clips at them and hit nothing but air. Yet their strength and their speed are still based in a world that is built on rules. Because of that, they will never be as strong or as fast as you can be.

Now, I admit this might be stretching the analogy a bit, but hear me out and judge for yourself. The ordinary person may occasionally wake from the fiction of the State, but when he does he faces the intellectual equivalent of an Agent: a barrage of ideas all centred around the goal of convincing him that the State is the solution to his problems, and not their principal cause. That is why every day I seek to arm myself with the only weapon that can defeat the State: truth. Truth is the sword that never loses its edge, it is the shield that remains forever intact and perfect. It kills the Leviathan by unmasking its friends as the fiends they are and defeating its hubris, turning the ordinary person who formerly loved the State into its unwavering enemy. The State lives in the mind, so every person who rejects the State, is enabled to pierce the fog of lies that surrounds it and see its true nature, is a death of the State. Every time someone wakes up and sees the justice and reason of liberty, the State dies.

Let me tell you why you're here. You're here because you know something. What you know you can't explain, but you feel it. You've felt it your entire life, that there's something wrong with the world. You don't know what it is, but it's there, like a splinter in your mind, driving you mad.

Mises knew it. He saw that all was not right, that the State could not be God. He helped provide us with the ideas that build on the foundation of human liberty, that advance the cause of freedom and bring death to the State not with violence but with the gentle whisper of thought.

The following is a modified quote, also from The Matrix. See if you can work out the original: "Do not try to defeat the State — that's impossible. Instead, only try to realize the truth: there is no State. Then you will see it is not the State that dies, only your support of it."

I know you're out there. I can feel you now. I know that you're afraid... you're afraid of us. You're afraid of change. I don't know the future. I didn't come here to tell you how this is going to end. I came here to tell you how it's going to begin. I'm going to hang up this phone, and then I'm going to show these people what you don't want them to see. I'm going to show them a world without you. A world without rules and controls, without borders or boundaries. A world where anything is possible. Where we go from there is a choice I leave to you.

Why does the State fight so stolidly against liberty? Why must it crush the ideas of freedom and spread its influence into every aspect of life? I put it to you that it is because the State is fragile. Leviathan is not a battleship but a jellyfish. Its justification is so tenuous, so patently illogical and unreasonable that it fears even a hint of truth. It cannot stand to be examined, to be argued and debated. It cannot abide opposition even from a child. That is why if we stand ready to engage the soldiers of the State, if we argue and oppose it, if every day we walk the path of truth it is as a body blow to the State. We may never wake to find that there is only seawater where before the jellyfish swum, but we can enjoy the warm glow that comes from sticking Leviathan in a tender spot. The truth can be its own reward, and that may entice us to strive against the State, not giving in to it but proceeding ever more boldly against it. I don't know the future. I do know that the Mises Institute and its academics and contributors are showing us a world without the State. A sea with no jellyfish. I, for one, intend to take a swim.

Why the carbon tax?

Julia Gillard has been having an awful time in politics because of the carbon tax. She's been roundly criticised for stating during the election that it was not on the table, then backflipping the moment she became PM (this is not an isolated case, of course). The opposition really lay into her for that. Then there's the fact that it is mathematically certain that a) the carbon tax will have no direct measurable effect on global temperatures even if in theory it did reduce overall carbon dioxide emissions and carbon dioxide is a major problem and global temperature rises are a major issue, and b) it will further hollow out the already nearly dead industrial base in Australia. Point a means that it will never be possible to tell from the global temperature measurement whether the carbon tax has had the desired effect. Point b means that production currently happening in Australia will almost certainly move to other countries where the power is cheaper and dirtier, so the nett effect will be to increase over all carbon dioxide emissions in accordance with the well-known Law of Unintended Consequences.

Given the furore and the heavy hits she's taken in the polls, and the fact that she's still the Labor leader, I have speculated in the past that it may be due to pressure from the UN that this is happening at all. It is well known that Labor and the Greens are in cahoots, especially given the fact that the Labor government is a minority government, but to me that did not seem like enough reason to waste all the Labor party's political capital in this way. UN countries really hate it when some people become too wealthy, and a carbon tax is an ideal way to really scupper a country's productive capacity and make its people poorer. Thus it's possible the UN wanted to cut us down to size. If Gillard gets a job at the UN, World Bank, IMF or ITO in the near future we'll know beyond a reasonable doubt, but in the mean time there is another issue that has come up.

Recently ol' Julia has been criticising the states for the extreme rise in electricity prices, and threatening that if prices don't come down the Federal Government will act to force them down. For anyone familiar with economics this should be ringing alarm bells the size of planets. A few of the questions that might be raised are:
If prices genuinely are too high, why isn't the "market competition" that's been introduced in recent years driving down the prices?
If prices are simply the response to carbon taxes, won't a plan to force them down cause shortages?
Why didn't the energy futures market provide a better buffer to the power prices?

This threat from the Federal Government got me thinking about who is benefiting from this whole thing. In politics one should always look for where the money is. The people who asked for a given piece of legislation are usually the ones who benefit from it, this is merely common sense.

One group that might benefit from this bill is producers of "green" power and the manufacturers of the technology used in its production (mostly windmills). Of course, it's mostly the foreign manufacturers of the technology are helped because CO2 inducing electricity must be used in the types of heavy manufacture that producers of green power technology employ.

Another group that could conceivably benefit is the Federal Government itself. This could well be some type of power grab to seize control of all of Australia's power infrastructure from the states. Another obvious benefit is the potential for greater tax takes and indirect control of the energy producers themselves who will be only too happy to beg and roll over if the Federal Government threatens to raise taxes.

The third group I can think of that might benefit is unionised and or skilled labour. Expensive energy makes capital intensive processes more expensive and will increase the over-all demand for labour. This, in turn, will drive up the price of labour, especially of skilled labour of the type that can stand in for capital goods. Along with the controls over entry into the skilled labour market due to barriers to entry, licensing, compulsory unionisation and a number of other regulations this could well have a significant effect on the price of skilled labour, which will of course have a negative impact on the general welfare and particularly on the poor.

Now, I know that any minute now you expect me to reach for my tinfoil hat. Why so conspiratorial? you might well ask. We have learned the hard way that in a democracy politicians are still only doing what will get them more votes, money and power. I think I've outlined a credible case of how those three objectives might be served by this bill. The policy is merely a continuation of the fundamentally fascist way public affairs and "public good" businesses have been conducted in Australia for some time, and most especially since the acceleration of privatisation during the Howard government.

I believe this attack by Gillard on the states is an extremely worrying sign, another expression of the economic fallacy that if a small group of monopolists are doing a bad job the solution is to create a single monopoly. Time will tell if it will materialise into a fully-fledged takeover of the power grid by the Federal Government but I wouldn't be the slightest bit surprised if that were the endgame.

They are there to see that Justice is Done.

The following comes from an episode of The Games:

John: "Who are the other side?"
Dennis: "When I say 'the other side' I mean the people running the inquiry."
"Who are they?"
"There's a chairman and a barrister who's called Counsel Assisting."
"And who employs these people?"
"Well, they're employed by the legal process. They're there to see that justice is done. That is their duty, that is their sacred trust, and that supervenes any and all other responsibilities in their mind."
"Yeah. They're employed by the government, aren't they?"
"They're indipendent people, chosen for their jurisprudential and evidential skills in areas deemed most useful for determinations of this kind."
"Are they paid for their services, these people?"
"Oh, some moiety may inhere in work of this type, of some kind, yes."
"And who pays them?"
"The question of emoluments would rest with the state in this instance."
"Yeah, they're paid for by the government."
"Yes."
"The government the Mininster's a minister in."
"Well, the enquiry will have quite clear guidelines."
"And who writes the guidelines?"
"They'll be prepared by the Attorney General."
"Yeah, another minister. So the government's going to hold an inquiry into its own activities, supervised by itself and run under conditions jacked up by the Attorney General. It's no wonder they want a bit of fresh blood in there, is it?"

Sound familiar?

There's still time - just - for an orderly Greek exit from the Euro

So, austerity is not working (big surprise) and my earlier plan for a Greek exit from the Euro is also now unworkable. The reason is that I think it is now impossible for the Greek government to get a hold of enough gold to make the plan workable. This was in fact already somewhat dubious before, but now it definitely isn't possible.

However there is still time to exit the Euro without consigning the Greek economy to the metaphorical basket. Unfortunately in this case the solution is only partially free market. I'm sorry, Greeks, it's the best I could think of.

What many people expect must ultimately happen is that Greece must create its own currency and replace all Euros in Greece with this new currency. This is a terrible plan (and yes, I know the alternatives are worse) because inevitably it will result in bank runs, people having their savings partially wiped out or, if hyperinflaion results, which is extremely likely, all of their savings.

My solution is a partial default. Tada.

It's obvious to everyone that this is what must happen, the only question is how. I believe my solution can provide bond holders with some confidence, protects the Greek people's savings, restores Greece's currency sovereignty and gives the lowest chance of hyperinflation. It also doesn't require any bank holidays

Brief outline:

The purpose of stage 1 is to prepare the world and Greece for the changes.
1. a) Announce debt repudiation. Redenominate all outstanding bonds in new Drachma currency at 1:1 Euro.
1. b) Announce low tax liability for transactions or income involving new Drachma.
1. c) Establish new Drachma as sovereign fiat currency receivable in taxes.
1. d) Announce no additional bond issuance by Greek government.

The purpose of stage two is to make the necessary changes to bring about a prosperous Greece.
2. a) Pay off bonds when due with newly printed Drachma.
2. b) Establish limiting of Drachma supply (to ultimate ceiling of total Drachma bond liabilities) to prevent hyperinflation.
2. c) Rapidly but smoothly reduce governent spending to near 0.

The purpose of stage three is to prevent the same from occurring ever again.
3. a) End fractional reserve banking and eliminate most legislation.
3. b) Create a new constitution.
3. c) Establish citizenry as the first line of policing and defence.

The first stage of this plan is to hit the bond holders with the default. Announce that all outstanding Greek bonds will be redenominated in the new currency, which I will call Drachma. This will not be popular, but it is necessary and bond holders will prefer it to alternatives, because they will be the first reipients of the new currency.

A parallel announcement will be made in Greece that the new currency will attract a consumption tax of say 10% and no other taxes of any kind. This is in order to drive demand for the Drachma over the Euro in Greece itself. If the tax for Euros is high and for Drachmas is low, people will start to prefer it. This is how the Drachma is monetised in Greece. At this point no Drachma are in the possession of any Greek. The Euro and Drachma will be parallel currencies until the Euro is effectively demonetised. Both will be acceptable for tax liabilities.

Stage two is to print new Drachma to pay off the bonds denominated in Drachma. The new money will be fully sovereign currency - in other words, no bonds will be required to expand the money supply. The size of the money supply will be determined by the Greek government, but an excellent practice would be to only print all money necessary to pay off the existing bonds, and then only print such money as is needed to replace worn out currency. The money supply will be constant. There will be no need for a central bank as such, only a government printer replacing worn out notes and a mint to coin the lower denominations. Constant money supply will make it an exceedingly safe currency and increase its trust and money value in the eyes of trading partners and the Greek people themselves. It makes hyperinflation an extremely remote scenario.

Fractional reserve banking would end.

The era of Greek government bonds would have to end - only a balanced budget would be possible going forward. This will be an economic shock, for sure, but people will be heartened by the low taxes in their near future. Investors might well find Greece an attractive place to do business if they are confident that business could be conducted in a currency that attracted minimal taxes. This would be a big boost to confidence in Greece itself and prevent the depression from spiralling too far. Once Drachma started to circulate back to the government it would be time to redenominate certain avenues of government spending in Drachma. What is clear is that with Drachma taxes so low Greek government spending will also need to decrease drastically. The shock of this, as stated before, will be partially offset by dramatic increases in investment funds flooding the newly liberalised Greek economy and low priced labour. Even so, great care would be taken to make sure that people relying on the State for their livelihood are not suddenly dumped. Pensioners and the old are particularly vulnerable, so might be worthy recipients of newly printed Drachma themselves. They might be considered a secondary vehicle for the monetisation of the Drachma, however this is not really necessary. The 10% consumption tax will soon provide adequate funds to give state dependents a living income if they have no other sources, however entitlements will have to be the same for all recipients and anyone with an amount of Euro savings would not be eligible. All previously contracted pension obligations would have to be reneged on. All government employees would have to gradually be given the sack and join the real economy which hopefully will begin to boom because of the influx of investment.

Two major exceptions are police and military. In the mean time the police and military would be responsible for maintaining law and order and preventing foreign invasion, respectively. To aid law enforcement all Greek adults would be encouraged to buy and carry firearms that may be used to deter unauthorised access to one's property. However this will not be a free for all in murder because the police would still treat any death as a potential murder case. Citizens should be encouraged to use non-lethal force except in cases of imminent threat to life. The number of police and military personnel could thus be greatly reduced, leaving the state's main spending to the old who cannot adapt to the new situation, and the small number of law enforcement and judicial officials. It is clear that only the most basic laws could be handled under this reduced judicial system. No fraud, no theft, no rape, no murder would pretty much be the scope. In such severe times all other regulations are an unacceptable burden. What remains of the government should focus on creating a new constitution that enumerates the constant money supply condition, a common law framework, and otherwise establishes the Greek people as the master of their government, not the other way around.

In the long run, whatever happens Greece will eventually recover. The purpose of this plan is to make that transition as fast and painless as possible - for Greece and the rest of Europe. It requires a radical rollback of the Greek state and a radical plan for monetising a new currency, but when the situation is unique the solutions must be also. I only hope that whatever happens is as kind or kinder to all parties than my proposal.

This plan may begin implemetation at any time, under almost any conditions as long as the government sitll exists and has some clout. It goes without saying, however, that sooner is better. Between the beginning of stage one and the end of the whole process would be about two years, so time is of the essence. I greatly fear that no such plan will be used and the Greek people and other Europeans of modest means will continue to suffer under the heavy yoke of poor growth and high taxes. If that happens things could become violent, and no one wants that.

A fresh look at Austrian business cycle theory

I recently read a very interesting critique of the Austrian business cycle theory (ABC), and I just couldn't resist adding a few of my thoughts. Here follows my comment on the piece.

1,2,3) If a lot of capital goods turned out to be in the wrong use at the same time then a large investment in labour would be required to convert them. Capital conversion is thus a natural part of the economy but would spike at certain times - namely some time during a recession. The same applies to labour itself because retraining takes time of course, and when a person studies he is investing intellectually in that career path.

4,5) Any unnatural change in the money supply will cause a shock, it is just that those shocks are of a different kind. Gradually falling prices are no problem if the money supply is not contracting in a sudden unnatural way. Austrians, I think rightly, blame the fact that such a deflation shock can occur at all on the prior inflation. Once the money supply has been unnaturally (through fiat inflation, FRB expansion, take your pick) increased price stability becomes impossible, because as that additional money filters through the economy and increases the price level the only way to put a halt to that price increase is to actually reduce the money supply. The severity of this will be decided by what level of inflation is considered acceptable. Thus I think that it is the central bank's desire to prevent the price inflation that causes much of the "downside" problem. It would be a much better policy to refuse to change the supply in any way and allow prices to stabilise at a higher level.

6,7,8) I think it is reasonable to say that Austrians discount risk in the interest rate issue. The question then becomes, is it that lower interest rates will decrease savings because of poor returns or increase them because of lower perceived risk? I think this is at the core of what causes the business cycle, because low interest rates will cause low yield investments to become more populous while at the saver end the average man will save less because the perceived risk in a bank is usually close to 0, and thus the interest rate is very much a supply/demand. Personally I think that at very low interest rates (say, less than 3%) the savings rate is inelastic because those savings are prudential rather than an investment.
So if we assume that time preference is the wrong way to look at it and we instead consider risk perception, we need to understand why perception changes suddenly. I believe that the injection of cash into the investment sector will gradually cause the prices of capital goods to rise and at some tipping point it will become evident that some enterprises will not be profitable under the current price levels and expected future prices (for capital goods). These higher prices will thus conceivably cause a crash in the demand for capital goods as the contageon spreads. The demand crash causes unemployment from those unprofitable companies, causing a demand crash in the consumer goods sector as well, further exascerbating the unemployment problems.
As a result of these demand crashes only the highly profitable producer companies will be able to keep trading. From their perspective it is better if the money supply remains constant because then the price inflation will allow them to pay off their creditors through higher numerical revenue despite decreased sales. If the central bank elects to focus on inflation and raises interest rates these companies will face reduced revenue and higher interest rates, likely making many of them insolvent as well. I believe this is a very plausible explanation for the Great Depression, since we know deflation occurred. In a sense the motivations for deflation are immaterial - it will cause a bust proportionate to the deflation. The magnitude of the impact of the previous inflation is then a function of how far deflation is allowed to continue - if it goes to the money supply before the boom then it will be as mild as the boom, if allowed or forced all the way down to the monetary base then you could have a truly catastrophic contraction unless the boom started when the money supply was already at the monetary base.
The Austrians do have the cause of producer goods price rises correct, I believe: that low interest rates cause real savings to be lower than real investment, thereby eventually causing increased competition between consumers and producers for raw materials.
So to summarise: deflation is bad because it causes naturally profitable enterprises to go bust, inflation is bad because it causes naturally unprofitable enterprises to be started. There's a pleasing symmetry there, isn't there?

10,11,12) I agree with most of what you said here. Under my construction the idea of a malinvestment is in a sense not there. The investments are all profitable when investment is high and prices are still low. So it's not that the entrepreneurs make a mistake at the time given the conditions, it's that later price increases are unforseen and reveal those investments as unprofitable. The difference, in real terms, between a profitable and unprofitable enterprise is that the former uses fewer real goods than are given up by people when they save, and the latter uses more. The problem with a boom is that it reduces the real resources available to those enterprises on the margin and makes many otherwise profitable ventures fail when the bust comes.

Any way you cut it some companies will have to fail. There are only three options: Deflation, which destroys profitable companies; constant money, which I believe is the cure; and inflation which, in order to prevent the failure of those companies that used real resources not "saved" by consumers would have to constantly increase until the result was hyperinflation. That's the only way to get the necessary "forced saving" and hyperinflation will be inevitable as people realise their money is losing value, since by definition they will be forced to give up more real goods than they actually want to.

All of this suggests what I have been thinking about for a while: the best monetary policy is one where the central bank does not alter the money supply at all. I really need to do some analysis to find out if this theory is borne out by the facts but that is for another time. Look for future posts on this topic.

EDIT: I realised after this that the central bank can continue to inflate even at high levels without this causing hyperinflation (which as I define it is not to be thought of as a threshold level of price rises) because the economy can adjust to permanent money supply increases. It all depends on the psychology of the people and whether they are willing to accept the situation. If they do accept it then through the general ignorance of the effects of inflation real wealth will be transferred to those otherwise unprofitable enterprises.

A novel model for event ticket sales

This is going to be short. Recently I have been rewatching the comdy series The Games, mostly created by John Clarke, master of satirical comedy:

One of the episodes deals with a scandal that broke during the filming of the series: tickets were secretly sold to the rich at extraordinary prices when they were supposed to be allocated on a first-come-first-served basis. This also put me in mind of the Athens Olympics when the stands were virtually empty because people didn't buy the tickets. Same thing happened in Beijing, although the reason there was less clear.

I have a solution for this type of issue and I don't think I'm giving anything away when is say that the core of the idea rhymes with "tree kark-it". That's right: I want people to be able to pay however much or little they want to for any ticket they want.

Technically, this would be done via online auction. It would be trivial to automate such a system. I imagine a system where packages of one or several tickets for some event at some place in the arena would be made available in decreasing quantities as the event approaches. Each auction could last something like a week to give plenty of chance for those who want those tickets most at that particular time to bid for them. One could also envision a certain stock of tickets that might be sold at lottery. You could have anyone who wants them commit to pay whatever price they are sold for but the ultimate recipient and buyer to be selected by lottery. The buyer would then pay for and receive the tickets. That way you could have some tickets available at lower prices than they might be bid to at auction.

The beauty is that all tickets would be sold, since any event that most people are not interested in might have the less popular tickets going for dollars, even cents, while the most demanded tickets would be decided by the democracy of cash.

If any events organisers are desirous of paying me a small retainer I'll take it in hard currency, thanks.

Reasons why you should never buy a government bond

If there's one financial asset that should really be treated like radioactive ebola virus, it's the government bond. In the past this was not necessarily true, because way back when gold and silver were money and when the government's debts fell due it had to find the money somewhere to repay it. It had to increase taxes. This might not sound like such a fantastic thing, and you right, it's not - really all governments should run balanced budgets no matter what, but at least back then people knew what was going to happen. Of course such tax hikes in the wake of government borrowing were pretty unpopular so all monarchs were always looking for a way around that and the most effective instrument was coin clipping. Governments would reduce the precious metal content of their coins but remint them at the old valuation. When this became really popular after a while you end up with something like the late Roman Denarius with a precious metal content of 0-1%.

All this is to underline why government debt is always a bad investment. In recent times the debt of stable, high performing economies like the US, Switzerland and Germany has come under such high demand that in Switzerland the yield is now negative. In other words, the price of the bonds themselves are now so high that investors are certain to lose money, even after you consider the interest the bonds are going to pay. They are willing to lose the money because they are so afraid of any other inverstment crashing and they want something that is certain to repay their money. All of these investors are going to lose their money, or if not them, then whoever ends up with the equivalent of those bonds down the track. This is certain. Even the ever prudent Swiss or the mighty Germans will eventually end up in the same sort of tight spot Greece, the US and all the rest. Let me explain why.

First we need to examine the purpose of government debts. When a private company goes into debt it usually uses that money to invest in plant, land, resources, anything they need to grow the business and generate the profits that are going to repay the loan plus interest and leave them with plenty of new cash left over. When the government goes into debt it never does it with the intention of spending on things that will eventually repay the debt. This was originally the theory - the government would borrow from its citizens, do some large construction project like a road or a dam or whatever it might be, and as a result of this new infrastructure the economy would be more productive and the tax take would increase and allow the repayment of the original debts. Precious though this theory was to satisfy the general populace that they wouldn't suffer a burden of extra taxes later to make up for it this is not how it has ever, to my knowledge, worked out. The investment was always supposed to pay itself back in taxes and even if it didn't, the bond holders had no fear because if the project turned out to be a dud they would get their money back anyway because the government could always tax the rest of the people more to make up the shortfall. However this lovely theory has never been a reality. The reasons are multiple but the chief reasons are a) if the government's idea for an investment was profitable private investors would be doing it already and b) if - and I stress, if - the government's plan actually did make the economy more productive and did increase the tax take, none of that tax was ever earmarked for the purposes of repaying the debt. It was always more tempting to spend that money straight away and worry about the bondholders when the time came. And what typically happens when it actually does come time to worry about the bondholders? Naturally the government does not actually have the money, so instead of risking the unpopularity of forcing the populace to actually pay for the stuff the goverment had bought on their behalf, it simply sells new bonds to pay off the old bonds.

Are you seeing the problem now? You see now why those bondholders were stupid to buy the bonds at all? The government's incentives always lie towards repaying old debts with new debts. That's why nearly all western governments have had a sustained increase in debt. No one ever stopped to think about the fact that these were loans and that eventually people might ask for their money back and lose faith in the government to such a degree that they would not be willing to give up any more. Everyone knows the US government is never ever going to repay their bonds, and even so investors are still giving it up for new bonds in the certain knowledge that the money ultimately won't be repaid. They simply expect that at some future date they'll be able to find another sucker to sell it to before the bottom falls out, or that the bond will fall due and they won't be trapped into buying back into America's pyramid scheme right before it all goes west. The only reason, in other words, that the bonds have any value at all right now is because the investors expect to be able to sell them or get paid back by the US government before it has to resort to devaluing the Dollar, which, by the way, it has already been doing heavily.

Greece is substantially different from the US. In the US if they really wanted to give those bond holders back their dollars they could always print some up and give everyone their full amount. Of course that would result in instant hyperinflation the minute the investors started to try to buy real stuff with that money, but their bank accounts would at least have the right number in them. In Greece they're on the Euro standard which is one of the reasons for their woes. They can't repay the bonds they've issued because the only place for those euros to come from is taxes and the only way the economy could ever sustain such a tax take is if they were brilliant exporters to the rest of the Eurozone or, failing that, to anywhere else in the world. Needless to say, they are not. As a result of this Greek bond holders (not necessarily Greeks, people holding their bonds) have already had to take a "voluntary haircut" of 74%. That means that every single person who owned a Greek bond just before the bottom fell out has lost 74% of his money and that's despite the bailouts. Spanish, Portuguese, Italian, and other bond holders are on the same road, which is why recently they've started to edge away from those bonds, resulting in a spike in long-term bond yields:
So, to recap: you should never buy a bond because no government will ever pay it back in the long term. Even if you get your money back it's at the expense of some other sucker down the line, and even if he gets his money back in nominal terms its value will be so low he'll wish he hadn't. The eventual crisis is certain to come and when it does the economy of that country is going to tank. Do you want to be partly responsible for making that government's spending possible? Do you want to wear even a millionth part of the blame for lowering the interest rate on those bonds, which kept the state spending and made the eventual collapse worse? State issued bonds are simply a deferred stealth tax - a tax that deludes people into thinking it's an investment and produces a massive crisis when people snap out of it and realise they'll never see their money again. Now that you know, if you have a conscience or any compassion for your fellow man, don't buy a government bond. Not a single one. Not ever.

Economic fallacies abound at the UN

The recent United Nations High Level Meeting on Wellbeing and Happiness has shown how widespread certain economic fallacies are among the great and the good. Of course we knew this before, but it gives me a special chill every time some high level world leader opens his or her mouth and says something like:

The GDP-led development model that compels boundless growth on a planet with limited resources no longer makes economic sense. Within its framework, there lies no solution to the economic, ecological, social and security crises that plague the world today and threaten to consume humanity.

That was the Prime Minister of Bhutan, but lots of people feel the same way. GDP, unreliable measure that it is, tells us very little about what is actually happening in the economy. The raw aggregate tells us PQ (nominal GDP: the price level multiplied by total output) from which economists and statesticians attempt to extract Q (real output or "real GDP") which is supposed to measure how much stuff is being traded in the economy.

First of all, one of the primary fallacies of modern day environmental movements is that there are limits to the size of the economy. To understand why this is a fallacy, let's think a bit about what economic growth means in real terms. Typically it means that more stuff is being traded, or that the value of the stuff being traded increases. Less valuable resources are converted into more valuable ones using energy and human ingenuity. The limiting factors that control how much value is added are a) the amount of energy available for that process and b) how ingenious the process and product are. Energy is always finite, but there are no known limits to human ingenuity. We can always make what we're making more efficiently, and we can always find a way to make it more useful. Computers are an almost perfect example of this. They keep getting cheaper and more powerful, with no end in sight. Once we reach the limits of elemental semiconductors, we'll just move on to something even faster more efficient and just better in every way. What that is remains to be seen, but graphene, optical chips and quantum computing are all watchwords for the near-computing-future.

The same reasoning applies to all things. They can always be made more cheaply, of higher quality and greater utility. That fact means there are no currently known practical upper limits to the economy. And I very much doubt there ever will be. GDP for its own sake is stupid, but if the market is allowed to function, there are no limits to GDP, no limits to personal wealth.

We also cannot run out of natural resources. Every now and again you will hear the doom-mongers say that we only have 20 years left of silver or whatever. That's nonsense. They seem to miss the fundamental fact that after silver (for example) has been mined it doesn't actually disappear, it is made into goods. We therefore cannot "run out" of it - if we ever reach a point where all practically exploitable mines have been exhausted, we will just recycle the silver we've already mined into the most useful forms. The price system will take care of that automatically. This applies to all rare resources and yes, that includes oil, coal and the rest of the non renewable energy resources. We genuinely can "run out" of them but when we do we'll just make more any way we can from raw materials using some other form of energy. It's already been done.

We desperately need an economy that serves and nurtures the wellbeing of all sentient beings on earth and human happiness that comes from living life in harmony with the natural world, with our communities and with our inner selves. We need an economy that will serve humanity, not enslave it.

If there's one sure way of making people poor, its denying them the market. Goods sold on the market are sold because they help people's wellbeing in some way. They help serve people. Whether that is a function of producing things or just being useful to people in itself, all things are sold because people want them, and people want them because they are useful. In economic parlance, they "give ease". The reason we do not live in harmony with the natural world, whatever that means, is because a) few naturally produced resources are useful in their totally natural form and b) if we did then most people would have to die, because farming is unnatural and the level of population the earth can sustain without agriculture is extremely low. Living in harmony with nature is living in slavery, because no matter how ingenious a plan it cannot be implemented without changing nature in some way. You cannot build a house without annexing some ground that could have been used by nature for plants. All of this is to say that humans are meant to be masters of nature, the Bible even says so. This does not mean that we may destroy it, of course, but we may certainly change it so that it better serves us. That's what we have been doing ever since we began to exist, and nothing will ever stop us doing it. Mastery of nature is what provides us with wellbeing in terms of medicine, easy labour, high food production, comfortable living and work spaces, pleasing entertainment. If you want to give that up and live like a savage again feel free, but don't complain if no one else does.

The idea that the economy enslaves us is, again, a common fallacy. I stated in a previous entry on money that we are not serving Mammon but other people. The very division of labour that provides such bounty would allow someone to work only a few hours a week for all the food he needs. If that same person wanted to live off nature he would be forced to work constantly just to stay alive.

Prime Minister Thinley concluded by reminding the gathering that “business as usual cannot go on and tinkering with the existing system will not do… we need a fundamental transformation”.

A fundamental transformation. Well, yes I'd like to see free markets everywhere. That would be a great fundamental transformation. Time to get the State out of the way of commerce so that resources can be exploited more efficiently. I wonder what sort of fundamental transformation he has in mind, and whether it will be popularly demanded or simply imposed by force.

Learning mathematics needn't be hard

I've been mulling for a while now about the factors that make some people like maths and some people hate it, for some people it comes easily, for others every step is a struggle. I have come to believe that nearly all people are capable of mathematical thinking, but that external factors affect how well they can put this into practice.

Consider the following: a 16 year old student will be very familiar with basic addition and subtraction. What would happen if you assigned 100 problems of this very easy difficulty? Would he get a perfect score? I very much doubt that he would. I have often observed that highly capable students are prone to "silly mistakes", nearly all of which are incorrect addition or subtraction. In the past I put this down to a feeling of ease or simplicity - the student doesn't properly respect the need for vigilance in these simple matters because the difficulty is trivial. They assume they they will not make any mistakes, even though they often do and that these mistakes are just as damaging to the final answer as forgetting how to solve quadratic equations.
Recently I have broadened this conception and done a little research which has been most enlightening. Before I give you my full theory, let's consider a different problem.

The same student as before is not at all familiar with matrices. Now imagine he were asked, without much theory, but just enough to satisfy the teacher that he "should know" how to do it, to find the matrix inverse of a 3x3 matrix and multiply it by the original to produce the 3x3 identity matrix. Most people would not be able to do that even if all the correct theory were right in front of them. You must slowly be intriduced to the fundamentals of matrix multiplication, the meaning of the determinant, indentity matrix, matrix inverse and so on, and at that point he may be asked to combine all those pieces of knowlege to solve this particular problem. This is a perfect case of "too hard" - the problem is tractable but too much is expected of the student. He doesn't have the necessary framework and to ask him to develop the framework as he is answering the question will result in frustration, distraction, boredom and, if the task is difficult enough, the student will give up.

Now the third, "Goldilocks" case: the same student, having knowlege of trigonometry, is asked to determine the volume of, say, a tetrahedron in which the sides are length l. The student knows everything necessary to complete the problem, but has to apply it in a way he may not have done previously. He feels energised and confident that he can solve the problem, and does not become bored or frustrated but solves the problem flawlessly.

If you hate mathemathics the third scenario may seem remote or unrealistic, but I hope that what is to come will change your mind.

What struck me when I considered the above three situations is that it is very similar to a curve I had seen before - one to which I linked on this very blog. If you scroll down in that PDF you will see a curve that shows the relationship between speed and concentration. As you can see at low speeds performance is low, and it increases with speed up to a point, after which it declines again. The fundamental idea has been known in Psychology for about a century and is called the Yerkes-Dodson law, after the authors who developed the theory. Personally I believe that the curve should look like some sort of log-normal curve, but the essential thought is there. There is a zone of optimal stimulation or arousal (stop giggling) which produces the best performance, and movement of the stimulus either way will decrease performance. I believe the same is true for mathematics - if the problem is too easy or too hard, you won't learn much and your answers will often be wrong. If the problem is just the right difficulty, you will get the most correct answers and feel the most stimulated. You may even enjoy it. Believe it or not there are people who enjoy mathematics, and my model predicts that they will be skilled at knowing their "zone" and staying within it.

The general idea

So, now that we know this, how does it help us teach and learn mathematics? Firstly I am going to assume that the precise shape of the curve is immaterial. It is enough to know that the peak exists and that straying too far from it will impair learning.
The teacher's job, then, is to find out where the student's zone is and shepherd him in that direction. This is already practiced to a limited degree in the classroom - students who quickly grasp the current topic are placed in accelerated or advanced groups so that they don't get bored. Students who struggle with math are often placed in classes where the problems are easier. While there is some sense to this I believe it misguided. The assumption is that some students have a peak which is shifted more towards the "hard" end, and these are placed in the accelerated class, and some have a peak shifted to the "easy" end, and these are placed in the - well, let's face it - the dumbed down class.
However, this is not the teacher's only job. Current education models force the teacher to plough on with material even when significant portions of the class don't understand it. Separating the students by their ability is a bandaid fix for this situation. It would be far more beneficial if the underperforming students' peaks could be shifted to the right. I believe the way to accomplish that is not to teach them mathematics but logic and problem solving. These are mental tools essential for mathematical learning and yet few schools make any serious attempt to teach them. The results are obvious - some gifted students somehow end up with a decent logic and problem solving framework (perhaps those with high intelligence can simply work it out themselves without being taught?), and shoot ahead, while most of the others can barely add 2x + 2x.

To my mind this leads us back to Classical Education in which logic is taught before complex mathematics. Although most students cannot be redirected easily on to the different path that Classical Education takes, they can certainly be taught the basics of logic and problem solving required to learn and enjoy mathematics.

There's that unicorn again ...

Last time I found something totally rediculous written by an MMT theorist I remarked on facebook: "Modern Monetary Theory: one minute everything makes sense, next minute a unicorn is driving down a marshmallow freeway in a gold-plated Lamborghini with triangular wheels."

I haven't yet gotten around to creating that wonderful image, but I did see something that made me think of it again:

Inflation is caused by aggregate demand growing faster than real output capacity.

This is typical of the rubbish MMT comes up with. There is a grain of truth, but stated as it is it has no bearing on reality. It is impossible for "aggregate demand" to grow faster than "real output" in the truest sense, because everyone has to earn money before they can spend it. Saying demand grows faster than output is like saying that people are spending more money than they are earning. The only way that demand could possibly grow faster than output is if fiat money was being introduced into the system - then some people would be able to spend more money than they had earned. Who are those people? Well, they are the people who receive the new money first without producing anything in return for it - typically welfare recipients. In reality it's broader than that because new money goes everywhere bank loans and government spending go, so you cannot be definitive about it, but the fact remains that the government and banks are creating money, which is allowing some people, perhaps even most people, to spend more than they have "earned."
So the constant assertion by MMT theorists that expanding the money supply is not inflationary is simply false - it is inflationary and Friedman was quite correct when he said, "Inflation is always and everywhere a monetary phenomenon." It is a result of an increase in fiat money supplies. Government deficits are inflationary, even if bonds are issued. The only just way for a fiat money system to exist is under constant money supply conditions - no growth or reduction in the money supply at all by anyone.

MMT or Money Matters noT

I'm really very sorry to inflict this on my readers but I simply have to talk a little bit about this MMT stuff. I was reading an article today on BillyBlog and part of it nearly made me cough out my own uvula.

It starts well:

The essential idea is that the “money supply” in an “entrepreneurial economy” is demand-determined – as the demand for credit expands so does the money supply.

It goes on:

As credit is repaid the money supply shrinks. These flows are going on all the time and the stock measure we choose to call the money supply, say M3 (Currency plus bank current deposits of the private non-bank sector plus all other bank deposits from the private non-bank sector) is just an arbitrary reflection of the credit circuit.

OK, no problem with that so far ...

So the supply of money is determined endogenously by the level of GDP ...

Pardon my French but WHAT THE FUCK? MMT is constantly throwing up rubbish like this that just makes you think you've gone mad. He is arguing that the central bank does not determine the money supply, it is determined by the amount of credit lent out of banks. I actually have no beef with that as a statement of truth, I mean I hate it with a passion but it's still just as true. But the other real problem here is that he seems to be saying that the central bank does nothing that affects the money supply, which is plainly false and he must know it. The central bank determines interest rates for the entire economy, and thereby directly controls the amount of money that is lent out, since low interest rates will result in more lending (in the short term) and high interest rates less. The reason for that is that the interest rate it sets is fairly arbitrary, but whatever it is the economy can only support x number of dollars borrowed at some interest rate and it can support only fewer dollars lent out at a higher interest rate, since the only projects getting loans at the higher rate will be those that are forecast to provide a higher return, allowing the interest to be paid off. The actual number of dollars in bank reserves is irrelevant, only the interest rate those reserves produce is relevant.
So the money supply is determined by the interest rate, and the interest rate by the amount of bank reserves (rather, by the percentage change of those reserves), and the bank reserves are controlled by central bank ... so how is that not the central bank determining the money supply? Yeah it doesn't actually go, we need $5T this year, we'd better print it up, but it has every intention of changing the money supply when it changes interest rates, because it's targeting inflation, so why not call a spade a spade?

He also seems to assume that the amount of money in the economy is supposed to increase with GDP. This is one of the more pervasive myths of economics. The quantity theory of money says, broadly, that the money supply at one time t has some value x. It would have value x no matter what the total number of dollars actually was, since money's only function is to enable trade and it will serve that function whether a cent buys a paperclip or a nuclear power station. Decimalised currency can be divided into arbitrarily small units so we can always make change no matter what we buy. Bill seems to completely ignore that by assuming that the money supply should grow with the economy. In fact it does not have to, all that matters is how exactly it changes in size. If a market amount of labour is required to produce it then all is well. If the cost of producing it is way below its "value" in the economy, then the first spenders get by far the most benefit from its creation. The latter state is the current situation in every country on earth and is 90% of the reason we are in so much debt right now. Governments and banks create the money and they get the benefit.

Later he continues:

To repeat, bank lending is not “reserve constrained”. Banks lend to any credit worthy customer they can find and then worry about their reserve positions afterwards. If they are short of reserves (their reserve accounts have to be in positive balance each day and in some countries central banks require certain ratios to be maintained) then they borrow from each other in the interbank market or, ultimately, they will borrow from the central bank.

Again, no arguments there, but there is a little fly in the ointment called the interest rate. As I have argued previously, fewer people will be credit-worthy at a higher interest rate than at a lower one, so while banks are not technically reserve constrained they have to raise interest rates if their reserves are being persistently depleted, both in order to increase profits and to decrease the number of people making demands on their reserves. If they do not they will always have to borrow reserves and that is more expensive than having them in the form of demand deposits, their profits will fall relative to the other banks and they will be driven out of the market.

More than anything else the MMT school totally ignores the movement of real wealth in the economy, which is the whole point of the thing. Economics is not just about making the numbers work, it's about real people trading real things for real benefits. The MMT model places the central bank and the government firmly in control of the economy, and as such is really another form of statism, which all economic models are at some level apart from the laissez faire Austrian school. In a way it is the worst because it understands the full implications of state control of the money system. It encourages the state to use its power for good but never questions whether the state ought to have the power at all, which I believe with all my heart it should not.

We must bring back market money. It has been totally abandoned and we are blessed with the collapse of our economy as a result. We must bring back sound money, sane interest rates determined by the market, end fractional reserve banking forever, and abandon the idolatry of a government solution to every private problem.

You saw it here first

It seems very much as if a Japanese company has gone and taken my idea: you can now buy a Geiger counter attachment for your phone. If you recall just about a year ago I said that radiation detection could be part of an expanded sensor suite in smartphones.

Yeah it's not on board but close enough

Most people don't know but all camera phones are equipped to detect radiation already - their camera sensor. Another enterprising programmer uses this fact to turn the stock iPhone into a radiation detector - albeit not a very good one. Simply stick some black tape over the lens to block out the flood of visible light and bam, instant Geiger counter. In the article the software provider clearly likes my vision of smart phones too:

The team behind the app plans to develop a tool that uses data gathered from various users to generate a map showing radiation levels in different locations - hence the wiki prefix. With the ultimate vision of developing a platform that uses a network of devices - particularly smartphones - as a sensor network to measure various aspects of environmental quality, the company also has plans to develop apps to measure Wi-Fi waves, relay antenna waves, magnetic fields, earthquakes, greenhouse gases, UVA/UVB light, oxygen and temperature.

UV, check. Temperature, check. I like the way they think!

In other news, the Geneve Motor Show is showing off a few extended range electric cars, which you no doubt recall me praising back in November. I won't claim originality for that one, but really, the motor show has gone electric-mad. Infiniti paraded their sports coupe and even Tata waded in with a frankly astonishing effort. Naturally many other manufacturers are there with pure electric cars - no one will want them now guys - but frankly electric cars are a bith 19th century now. Petrol-electric, or for the pure-as-the-driven-snow eco mentalists, diesel-electric, will rule the road from now on. Batteries are too limiting and the fuel cell car is really still a pipe dream in terms of costs. We have petrol stations now, the technology works now, the price is within reach now. Hyrdogen has none out of three on that score, and pure electric? Don't make me laugh. No one with the choice of buying only one car will have an electric, since you can never go on a road trip as the Top Gear team showed with amusing results last year. In the words of Clarkson: "You just have to hope that [your girlfriend] doesn't live at the other end of the country."

STOP PRESS Scientist announces results of experiment without using a control group

A recent article in The Conversation has me wondering what Linda Weiss did to become a scientist. She argues that all economies benefit from the interaction of the State, and that some how the evidence for this is that all contries have experienced government interference in their economy:

State “guidance” of the economy, in the broadest sense, is the shared history of all countries that have successfully industrialised.
... It is not that one set of countries practise “free-market capitalism” while another set practise “state-guided capitalism”. It is closer to the truth to point to the differing ways in which all economies – whether emerging or advanced – draw on state involvement in guiding and shaping development. It is recognition of this point that is long overdue in mainstream economic and political thinking.
... it has been the rapid rise of China and other emerging giants, India and Brazil – the so-called BICs — that has done more to challenge the Washington Consensus idea that state activism is always inimical to economic prosperity.

So, all countries have experienced state guidance of industry, their industry has grown, and this means that state guidance is a good thing. That's like saying that all people die, people are a good thing, therefore death is a good thing. All cats have four legs; my dog has four legs, therefore my dog is a cat.

I hope that by now you are getting the picture: she has taken a sample of all cubes and says there's no such thing as a circle. You must have a control group in any experiment - in this case it would involve looking at economies that were not controlled by the state. Since no such economy has ever lasted long, at least not recently, we have no data on that front. However, the Adam Smith Institute has an article that examines the next best thing - plotting economic prosperity against state interference in the economy, and it tells a rather different story:
As you can see there is definitely a correlation there, and it doesn't come down in favour of state interference. I'm not going to call that a clinching argument - clearly there are other factors at play since for a freedom rating of 7, for example, there is a wide variance of GDP per capita, but it strongly supports the case that government interference is killing the economy, not helping it.

Can we get rid of Money?

No.


But in case you want more detail than that, let me start at the beginning: a site which has disappointed me far more than it promised: the conversation, specifically an article published yesterday about the possibilities of living in a Money-free society. I think I am just going to have to Fisk it. Full marks for being non-mainstream (I'm totally joking, this is fairly mainstream now: capitalism is what is on the margin these days), but I'm not convinced.

But the ten contributors to a new book I co-edited, Life Without Money: Building Fair and Sustainable Economies, offer strong, radical responses to defenders of capitalism and the so-called “free world”. They set out money-free models of community-based governance and collective sufficiency, arguing that production for trade contorts and destroys humane and natural values.

'Radical' and 'strong' responses, good, we need ideas. 'So called "free world"', good, we are definitely not in one nor is virtually anyone on the planet. OK money-free governance. Where to start, really. Firstly for the whole of human history the rise of civilised society has always been associated with the rise of money. We have been scrambling for a good form of it since, well, forever. The minute you want to stop growing wheat and start doing something else and trade that for your grain, you need money to know what things are worth and whether you're getting a good bargain. Production for trade creates peace, because it's cheaper to trade than to sieze - it's a better use of your time. Production for trade improves quality because all things are produced by experts, except the very cheapest, and even with them experts have helped make them as cheap as possible. Production for trade improves efficiency because everything has value.

They offer strategies for undercutting capitalism by refusing to deal in money, arguing that we need to replace monetary values and relationships by accounting directly in social and environmental values.

How do we know what these hypothetical values are, and how much value should be assigned? The price system automatically values things according to their scarcity, utility and so on - who is in charge of valuation in this money free society?

... capitalists and workers alike fear more and worse instability in global financial markets.

Ahhh yes, I do agree with that. Financial instability is a serious problem, and one that didn't exist when the market was allowed to provide money. Now that money is created on the whim of politicians and bankers, the market has little say on its production. That uncertainty alone is worth noting, but fractional reserve banking has done far more to ruin the market than any mere currency manipulation. By periodically expanding then contracting the money supply, fractional reserve banking gives rise to the business cycle, in other words it causes recessions. So they do have a bit of a point about this money system being no good, but I maintain that even with its evils it is billions of times better than having no money at all.

Even those of us who are not managers or workers are intimately integrated into the monetary system; everyone’s fortunes depend on satiating Mammon.

For the wealthy north, overconsumption is a very real sustainability-cum-economic challenge: if everyone decided to live modestly capitalism would disintegrate. Growth is capitalism’s achilles’ heel. While overconsumption in the north demands that we develop less materialistic ways of living, it is simply impossible to imagine either individual entrepreneurs or national GDP “degrowing” without a planned economy, at which point we have only two options.

That's not in fact true. People's fortunes depend on satiatin other people! Isn't that wonderful? A person's earnings are commensurate with how well they serve other people. There are exceptions of course, but this is the rule. What exactly is overconsumption? Throwing away newly made LCD TVs? Yeah, but no one does that. Built into the term overconsumption is an ideology that believes there can be too much wealth, that people can be too prosperous. That is simply false. There is no such thing as being too wealthy, there is only being too poor. Too poor to live. Everything above that level is wealth beyond the dreams of the 100 billions who have gone before us.

Materialism is another loaded term. We worship stuff. We see an ad, we buy its product. We are mindless consumers, endlessly throwing away our old stuff when we see the new. No one in the real world acts like that all the time. Do you? Are you therefore the only thinking person in the world where everyone else is a mindless spendaholic? Some people act like that some of the time about some things, but usually it is impossible for a product to become really popular unless it is really good. Consumers demand quality and they demand it cheap. They don't demand something that needs to be replaced every five minutes, and if a company tries to sell it to them they will fail.

Yes, we have a lot of stuff and yes, it's a lot more than many people have, but the fact that they don't have it is not our fault, and certainly not because we have stolen their reseources and there's nothing left for them. Africa is awash with natural resources, so is South America, Asia, the middle east. They have more stuff than they know how to use, but aren't as wealthy as us. The reason for that is simply that we have had a better currency system for longer, meaning we have had greater division of labour and therefore better experts making better stuff for cheaper, for hundreds of years, but most especially the last couple of centuries. Money makes us wealthy.

There's more. If everyone decided to live modestly there would be no significant difference. People would work, producing much higher quality goods that would be much more expensive. That's pretty much it. It does rather depend on your definition of modestly. If you mean giving stuff away then no, not everyone can do it or you're back to where you started. If you mean saving more and investing that will only grow the economy faster. If you simply mean working a lot less then people would find something else to do with their time.

There is the option of state-planned economies, which are out of favour among the left and right alike. The problem with planned economies is working out how everyone gets a say in what is produced. If distribution is more on the basis of need, it would appear money has little function. If we were to have less we would be very concerned to make sure we had enough and the kinds of things we feel we need, or badly want.

Production is not about what we need. We have filled every need by 9:30 AM. If we only produced what we needed we'd go home and, I dunno, probably just have quite a lot of sex all day. Actually, we wouldn't. We'd make other stuff - art, literature, science, travel, philosophy. Humans are made to produce! We produce, non-stop, all day. In the old days all we could do in a day was grow enough food to feed ourselves. Nowadays we can produce vastly more. If you sent everyone home after an hour's work (to pay their food bills), they'd start new companies and create new stuff because people don't like to be idle, they value their time and their labour, and they use it to improve their lives. So what would happen if you stopped people working at work is they'd go home and work. So if everyone's physical needs are met with an hour's labour, what are the rest of the hours for? They meet the needs of other people, and other people in turn meet their needs. How do they know what to do, what people want? The price system. The price system gives everyone a say in what they want, because if they want something they'll exchange some of their hard-earned for it, if not, they won't and no one can make them. That's why it's a free market. There is no other way to efficiently organise an economy, because there are too many variables. By reducing everyone's wants to one signal - the price - money serves the indispensable function of telling people what other people want. An enterprise is profitable if people want what it has, and it fails if they do not. There is no choice but to serve the customer.

On the other hand, non-market forms have the distinct benefit of offering individuals and neighbourhoods economic democracy.

As I was saying, price is the ultimate democracy. What somone is willing to pay for something is their vote. You cannot have prices without money.

But the economic infrastructure of a world in which we could all have a say in how we live our lives is sketched out in the final chapter of Life Without Money, which offers a model of a “compact society”. “Compact” because all the main relationships and structures would be based on legally enforceable voluntary agreements, rather than monetary contracts.
Instead of establishing tiny self-sufficient households, we’d work collectively, with a range of connected local households occupying a basic unit of a neighbourhood, the size of which would be flexible and dependent on the local ecology. Local collective sufficiency would be the key aim of every neighbourhood, sourcing materials for, and making, food, clothing and shelter as well as other basic needs, through appropriate technology.

Wow - by working together people can have more than if each worked by himself! If only we could apply that to the whole world, imagine what we could do! Or rather, forget what we ever though we couldn't do! We could conquer the galaxy! But how can we work together efficiently? I know, let's use something rare and long lasting to trade with. We could strike it into coins and call it - I dunno - Monay ... Monet ... Minno ... Money!! Some people wouldn't even have to farm for a living they could spend all their time inventing cool stuff to make our lives even better!!11@!@!!!!!!ONE

Of course, there are likely to be needs or wants that people could not source or create locally. Ideally, these would be obtained from a neighbouring area or through the least environmentally and socially expensive option available at the time.

Hmm yeah, good idea. Let's trade using a universal system of account. It so happens I already invented a name for it: Money (C) [TM]

Establishing and maintaining collective sufficiency would require every individual to work out what they would need over a year, assessing local potential, planning how to meet the needs listed, working out how surpluses might be generated, and negotiating with other units to fulfil their needs. The internet facilitates this kind of collective research, planning and negotiation, which would involve numerous compacts.

That sounds like a lot of hard work. How do you know what things are worth? No one can know everything! Oh, phew, they don't need to, they only need to know the price. Well that's a relief. Oh, wait, you want to do this without money accounting? Crap. Crap! CRAP!!!

Valentine's Day Special

Good evening, World. Allow me first to apologize for this interruption. I do, like many of you, appreciate the delights of love, the security of a familiar companion, the tranquility of relationship. I enjoy them as much as any bloke. But in the spirit of wisdom - whereby those important ideas of the past, usually associated with someone's death or the end of some awful bloody struggle, are celebrated with a nice book or memory - I thought we could mark this February the fourteenth, a day that is sadly no longer serving its proper purpose, by taking some time out of our daily lives to sit down and have a little chat.
There are, of course, those who do not want us to speak. I suspect even now minds are clanging shut and hardening their ideological defences. Why? Because while ignorance may replace wisdom, ideas will always retain their power. Ideas offer the means to thought and for those who will listen, the very power of truth. And the truth is, there is something terribly wrong with love, isn't there?
Cruelty and injustice ... intolerance and oppression. And where once you had the freedom to love with permanence and potence, you now have doubt and transience, coercing your conformity and soliciting your submission. How did this happen? Who's to blame? Well certainly there are those who are more responsible than others, and they will be held accountable. But again, truth be told ... if you're looking for the guilty, you need only look into a mirror.
I know why you did it. I know you were afraid. Who wouldn't be? Fear. Hatred. Abuse. There were a myriad of problems which conspired to corrupt your reason and rob you of your common sense. Fear got the best of you and in your panic, you turned to dating. It promised you choice. It promised you pleasure. And all it demanded in return was your silent, obedient consent.
Tonight, I seek end that silence. Tonight I put out this message to remind this generation of what it has forgotten. It was not Hallmark or Lindt that wished embed the fourteenth of February forever in our memory. The hope was to remind the world that selflessness, love, and fidelity are more than words - they are imperatives. So if you've seen nothing, if the horrors of impermanent affection remain unknown to you, then I would suggest that you allow the fourteenth of February to pass with chocolate and hearts as it always has. But if you see what I see, if you feel as I feel, and if you would seek as I seek ... then I ask you to set aside your pride and master your will, and together we will return love to its true meaning, a permanent and unbreakable bond built on action, not feelings, and together we will give the fourteenth of February over to a celebration not of mere ephemeral emotion but of union that endures all things with which this life can test it.

My bid for the Wolfson prize.

A few days ago was the last call for entries to the Wolfson economics Prize. I'd quite like to have entered but I didn't really find out about it in time to put together a decent offering. So here's the short version of my plan for how you can unwind the Euro.

With all the problems faced by the country and financial contraction, capital flowing out, all of those very damaging things, the Greek economy will soon be an inch from death. The way to reverse that trend is to make Greece suddenly the best place in the world to do business. Austerity will do the exact opposite of that (even the IMF, which insisted on austerity in the first place, is saying that), as will the flight of the Greek people out of Greece. If Greece simply adopts its own currency then there will be a run on that currency as every Greek moves his or her money out of the country to keep it safe from inflation. The inevitable result is hyperinflation, according to the theory I put forth in earlier blog posts. There is a way around all of this and it's going to sound really weird to most economists. You don't actually have to abolish the Euro at all. That brings me neatly to my plan of action.

Phase 1: Introduce competition
Currency competition, that is. The only reason the Euro is used at all is that it's illegal to use anything else. If you lifted that restriction without providing an alternative then the market would bring in gold and silver money. This is the reverse mode of Gresham's Law. I don't even mind if they use the exact same trimetallic system I talked about in an earlier post. This money would not require legal tender status because everyone would accept it without government fiat. The process of adoption could be greatly accelerated by waiving taxes on transactions using any currency other than the Euro, although I doubt this incentive would be needed. The market will take care of all minting, changing of coin operated machines of all kinds and so on without any need for government money. The parallel currency would soften the transition away from the Euro because of the buffer effect of the limits of the rate of flow of new money into Greece. The equipment to mint the large number of coins required for commerce would not spring up overnight, and the rate of minting is also limited by how quickly gold and silver may be transported into Greece. Due to the popularity of the new money it would greatly increase the prices of gold and silver in Greece with respect to the Euro, and thereby in the rest of the world through international trade. Euros would flow out and precious metals in, supplanting the supply of Euros in a seamless transition while commerce suffers no negative effects.

Phase 2: Bonds
The spike in gold price caused by its restoration to money status will make early adopters immensely wealthy, increasing the adoption of gold as currency and flushing the Euro out of the country. The government would know all this and should therefore start with a substantial gold position, selling it to the populace in exchange for their Euros. The rise of gold price will allow the government to sell at ever greater prices and extract enough Euros out of the Greeks to pay down the bonds. Again this will not interfere in commerce in a negative sense. The government would buy back all Euro denominated bonds issued in the market and simply cancel those held by the central bank, thus eliminating its foreign debt. The brief was to have all parties happy, but this is simply impossible. Currently banks and stock markets are living off the hard work of ordinary people, and this has to stop. It necessitates a transfer of capital from the inflated stockmarkets, bloated government balance sheets, and other bubble assets back to the average citizen - capital which rightfully belongs to those that earn it. However this will no doubt enrage those for whom the party is over and whose speculation has to find avenues in less enlightened countries. Those institutions that benefited under the debt monetisation fraud must necessarily suffer the most when such schemes are unwound. That is simply justice.
Government finance during Phase 2
The initial gold position of the Greek government is crucial for maintaining solvency throughout the most turbulent transitions of phase two. The Euros they obtain by selling gold to the Greek people will serve not only to buy more gold on foreign exchange and eliminate the bonds but to enable the continuity of certain government services, namely police and infrastructure. This period of probably half a year must be funded entirely by the appreciation in the price of gold with respect to the Euro, so the government should act shrewdly in when it chooses to start selling its gold. By the end it should have no permanent store of gold but for an emergency fund of gold currency and that required for the day to day running of government business, funded entirely by tax revenue. Its revenue must then remain neutral.

Phase 3: The Greek Euro
Phase three will happen naturally. Either the Greek government will see reason and end parity with other Euro currency or the governments of all other nations will stop accepting Greek currency at parity. The latter is more likely given the Greek government's incentive to keep the currency at parity to allow rapid debt payment. At this point the Greek Euro will experience a rapid drop in value. Hyperinflation of the Greek Euro will occur, but this time it won't hurt anyone since most people will already be using specie currency. The economy will be intact. On the same day that parity is canceled, the Greek government would start requiring taxes in the new specie currency. Its tax rate would be very low to begin with, say 5% flat income tax, in order to promote growth. Most of the non essential government staff would have left the public sector because their Greek Euro denominated salaries would have been losing value.

Phase 4: Exit the Euro
Yep, it really is that simple. Once the specie money has pretty well totally displaced the old Euro currency, all that is left is for the Greek government and central bank to say, well, we tried but the people didn't want the Euro, sorry, and stop issuing it. They can then munch up all the old currency in shredders and save a few notes to sell to collectors some years on to remind everyone of the bad old days.


Impact on other Eurozone countries

Phase 1 will lead to some substantial appreciation of the price of gold and silver as the Greek people stop accepting Euros so they don't have to pay tax. The Euro money supply of Greece will disperse into neighbouring countries if they are still accepting the Greek currency, and be absorbed by Greek banks if not. Germany, China, US, India and other countries with large gold positions would gain substantial boosts to their wealth as gold returned to its monetary use in Greece. Needless to say, this effect would be compounded multiply if many countries went a similar way.

Phase 2 would have a slight negative effect on banks but as it will be relatively gradual the effect would be time dissipated. Bond buybacks would continue throughout the initial adjustment period. Most Greek bonds are held by banks, central or otherwise, which can absorb the drop in the value of those bonds. Greece herself would be unaffected by the huge spike in yield because she would no longer be issuing any new bonds. In fact, the yield spike would make it all the easier to buy the debt. Some pension funds also hold Euro denominated Greek debt, and as a result some people would suffer loss there but it is a relatively small amount. If a country such as the US decided to return to the PM standard in this way many investors would be wiped out as US Treasuries fell in value. This is an unfortunate but unavoidable step in the move back to sound money. It cannot be guaranteed that all those that benefited from inflation will suffer in deflation, as would justly be the case.

During Phase 3 the transition will be largely complete and there will be no one left to complain of hyperinflation. Taxes would begin to flow back to a public sector composed of only very few people. With the econonmy back in balance and very likely booming hugely the government could return to the business of providing a police force and certain utilities.

Phase 4 would have minimal effects, it is merely a technical end to the Euro era for Greece.


In summary, this method of exiting a debt monetised fiat currency is most likely the only way of smoothly transitioning out of such a currency, or as smooth as a currency transition can be. There is no way of making such a massive change without short changing some people along the way, but my favoured method is to allow the market to clear, withdraw government influence from currency, and all of Austrian theory says that the result will be the most equitable transition possible. The new currency is in fact a by-product of allowing people to choose how they buy and sell, and what they use to buy and sell. This makes it the most liberal of all possible schemes, and where liberty and justice thrive, wealth is sure to follow.

Unemployment theory

No, don't "turn over", you'll like it.

Recently I've been thinking about the causes of unemployment. I don't know a lot about the Austrian perspective on it, but no doubt there has been someone who has developed it. I want to come up with some ideas and see how they stack up.

The modern economists view inflation and unemployment as irreconcilable goals, since they believe that lowering inflation will increase uneployment and vice versa. Whether or not this is true under MMT I leave to other more capable minds than mine, but it does sort of make sense that if interest rates are high to keep inflation low then there is less money available for discretionary purchases and so you could see some short term unemployment shock.

Before we get into the details of what causes unemployment, however, it is enlightening to examine what situation would result in full employment. Firstly, I will consider such an economy as has a market money system, so forget about central banks and fractional reserves.
In a market economy everyone acts as an entrepreneur in every market transaction. All people are considering whether if they engage in a certain trade they will end up with more wealth than before. If the answer is yes, they trade, if not, they don't. Whether they have acted as a good entrepreneur is answered by whether they actually do end up with more wealth after the exchange than before. As I have mentioned previously, wealth is highly subjective and cannot be measured, so the only person who can know this is the one who made the trade. Money profit is easier to measure but it's only a small part of the picture. People donate money to charity not because they think they will receive something of cash value in return but because they have compassion for the needs of others and they feel better about being wealthy when others are not if they give some away.
In the same way, whenever someone is looking for work they are also acting as an entrepreneur. All people always want more goods and services, so it is impossible that there are simply no jobs available in the economy. It is simply foolish to say that jobs are "created" or "destroyed". Demand for labour flows from one region of the economy to another, but there is always infinite demand for labour and only a finite supply, and all regions of the economy always have infinite demand for it, so the prices for the labour control where it goes. When someone looks for work they are proposing to trade their labour for some price. If the utility of their labour is expected to be in some way low then they will usually get a low price for it. If it is high then they may demand high wages.

Now that we have some grip of the basics we can start to talk about unemployment. Firstly, unemployment is theoretically impossible. That is to say, there is always infinite demand for labour so how is it that anyone would ever be unemployed?

If the expected utility of someone's labour is very low then they might not be able to command wages even as low as the minimum wage, so in that case unemployment is the result of the minimum wage price control. So we have fact number one:

1. Minimum wage laws produce unemployment.

Now let us say that the Austrian view of the business cycle is broadly correct. In this case, when the economy shifts from high gear to low gear, there is a sudden drop in relative demand for labour in certain sectors of the economy, formerly booming. As a result those workers have to take a large drop in salary because the utility of their labour has become low, or there have to be layoffs. Fortunately for those driven below the breadline or the minimum wage line, there is always infinite demand for labour so they can move into other sectors of the economy. But now we have a problem, you see, because those people who were formerly skilled are now unskilled, so they have a low utility of labour and consequently low wages. Some might be only prepared to accept the same wages as before, until they capitulate, and this will also result in unemployment. Further, some jobs require years of training and this is usually chosen because of expected future demand in that sector. If someone trains as a civil engineer and an economic downturn puts construction on hold they will not be able to break into that labour market. As a result we can say that business cycles are responsible for unemployment, and since they in turn are caused by interest rate manipulation, we can say:

2. Interest rate manipulation causes unemployment.

We're not quite done with interest rates either, since there's something very few people know about them: they are a tax. Consider what the central bank in any country does if inflation is getting high: they increase interest rates. They way they do this is by decreasing availability of bank reserves by some boring way you needn't bother about. When they do this the cost of lending goes up for banks and the money creating process slows. In turn, banks increase their interest rates to encourage people to save and to make sure they stay profitable. There's one big fly in the ointment, though, and it's variable rate home loans. When interest rates go up these people's disposable income goes down, since more is needed to pay the bank because the banks costs have been increased by the central bank. As a result of this process, money is extracted from home loan payers and goes to the central bank, where the profit is sent to the government. In other words, interest rate changes are changes in a tax rate.

What has this to do with unemployment, I hear you ask? Well I am glad you asked because I now come to the third cause of unemployment. Any tax on the income of a business will cause that business to have to grow more slowly. Slower growth by definition means that it will be able to employ people only at a slower rate. This reduction in the rate of employee uptake can also cause people to stop working or move to sectors where they have little skill. Furthermore, individual income tax also reduces the rate of growth of business because it removes money available for discretionary spending that might have been spent on consumer goods. Thus we come to number three:

3. Taxes cause unemployment.

In fact, anything that distorts the economy, makes it hard to predict or extracts wealth from it will cause unemployment in some measure. And let's not forget what happens to the wealth extracted from the economy: a large part of it is given to the unemployed. This might seem like a great thing but in fact it lessens their desire to get a job again. This disincentive to work is at the heart of number four:

4. Unemployment benefits cause unemployment.

These four things - where do they come from? Are they produced by the market? Well, no. All of these are laws, functions or impositions of government, by government, for government. So we can create a new statement zero about unemployment:

0. State interference in the market causes unemployment.

Still think Obama's jobs plan might have worked?