Social Nirvana

Monetary Myths

2011-11-04T14:44:00.001-07:00

This is a Creative Commons licensed photo from wwarby's Flickr photostream

A message to monetary reformers: I get it. I understand your motivation. I was one of you until relatively recently. I still advocate some monetary reforms, but my study of money has led to me to the conclusion that most of the reforms you’ve been advocating would be ineffective at best and catastrophic at worst. It’s not all your fault, because mainstream economic theory gets money wrong too, and many monetary reformers who are otherwise critical of mainstream economics tend to take its theoretical underpinnings for granted. I’ve decided to clear up many of the common misconceptions about money that exist both in the economic mainstream and among the monetary reform crowd. I will also explain how the problems in banking and the monetary system can really be addressed.

Fractional Reserve Banking

In any economics textbook, you will find an explanation of the “money multiplier,” which explains how the fractional reserve system allows an initial deposit to grow several times over. The reserve ratio can be any number from 0 to 100, but they always choose a reserve ratio of 10 percent for the sake of simplicity. The theory goes like this: Suppose you deposit $100 in the bank. At a 10% reserve ratio, the bank can then lend out $90 of that $100. But the 90 dollars doesn’t come out of the hundred, but instead is added to it, so that a total of $190 now exists. They can then lend another $81 out of the $90, creating a total of $271, and so on. This theory should allow economists to predict the total amount of money in the economy based on the Fed’s monetary policy. Well, on April 12, 1992, the Fed set the reserve ratio at exactly the magic 10 percent that economics textbooks love so much, so we had a clear chance to test the assumptions of the money multiplier. Did the Fed hit its target when it set this ratio? No, it did not. The money multiplier theory, even using its most simplified example, failed to predict the money supply. That’s because the money supply has far more to do with fiscal policy rather than monetary policy.

The problem is that this view of money puts the cart before the horse. It assumes that loans come from deposits, when in reality, deposits come from loans. Banks don’t check their reserves before making a loan. Instead, when they find a credit-worthy borrower, they issue the loan and then borrow the reserves out of the money that has been created. Reserves, then, play hardly any role in how much credit banks can create. The mainstream theory assumes bank money is exogenous – that its quantity is determined on the supply side by monetary policy – when in fact it is endogenous, with the quantity of loans being driven primarily by the demand for loans. Those who seek to attack the power of banks by constricting the ability of banks to issue credit may be doing more to harm to borrowers than anyone else.

What’s more, the idea that banks “create money out of nothing” is a misunderstanding of the difference between money and credit. Suppose a car dealership sold you a car on a payment plan. You pay a certain amount each month until the car is paid off in full. Let’s suppose you also have to pay interest, so that the total amount you pay is more than if you bought the car outright on the spot. Would we say that the car dealer had “created money out of nothing”? No. We would say that they extended the payment over time. Now, what is the difference between this scenario and one in which a bank issues you a car loan for the same amount of money, with the same monthly payments and the same interest? The only thing that makes it seem like the bank is “creating money out of nothing” is that they aren’t directly selling you the product, but are instead selling you the liquidity with which to buy the product. As with the car dealer, it is simply a matter of time discounting.

What's more, bank money never actually enters the real economy. I know that sounds strange, but pay attention here. When banks issue a loan, they do it through double-entry book-keeping. The loan shows up as an asset for the bank and a liability for the borrower. The loan also creates a deposit, which is an asset for the depositor and a liability for the bank. All assets and liabilities add up to zero. This is why in Modern Monetary Theory, bank money is called "horizontal money." It is simply a matter of banks leveraging their positions. By contrast, when the government issues a check, that creates an asset without a corresponding liability. It becomes a reserve. Thus, government money is referred to as "vertical money." As we've already seen, reserve ratios do not affect the amount of credit creation banks engage in. What they are necessary for, rather, is meeting the liabilities banks have in the form of deposits. Thus, any time you cash a check or make a withdrawal, you are using government money, not bank money. Any credit creation banks engage in exists entirely within the banking system, and doesn't add a dime to the real economy.

Taxes and Deficits

There is a common belief that just as you or I need to get our money by working for it, government must get money by collecting taxes. This assumption pervades our everyday language about taxes and spending. We see highway signs that say “Your tax dollars at work,” or complain about government “Wasting taxpayer dollars.” This assumption is true with regard to state and local government, as they don’t have the power to issue money, but it turns out to be very different for the government that issues the money. When you’re the one issuing the money, you don’t need that money in order to spend it. In fact, you must spend it first before it can be given back to you.

So what are taxes for, then? Well, the right kind of tax, such as a land value tax, can do a lot of great things, but when it comes to spending, taxes play the role of controlling aggregate demand and giving money its value. When the government taxes someone, they get to say what currency gets used to pay that tax. Thus, the taxpayer will have a demand for that particular currency, and will be willing to produce goods and services in exchange for that currency. Even someone who is not taxed will seek out that currency in order to buy the services of someone who is. Many people, for various reasons, will want to save extra money in excess of their expenses. When they do so, they are withdrawing money out of circulation. So in order to make sure that there is enough money for people to pay taxes, the government must run a deficit which meets the net desired savings rate. Any deficit smaller than this will draw upon previous years’ savings until deflation occurs. A deficit above the net desired savings rate will cause inflation. Since the net desired savings rate cannot be known in advance, governments have to tinker with the deficit until they get price stability. A better alternative is to have tax the full unimproved value of land, which is self-adjusting to inflation and deflation.

But what about borrowing? Don’t all deficits have to be financed by government debt, thus mortgaging our children’s futures? Well, sort of. It is true that under current law, government has to “fund” its deficit spending through the sale of Treasury bonds, which is misleadingly referred to as “borrowing.” But as with taxes, spending comes before borrowing. Furthermore, these Treasury bonds are little more than savings accounts at the Fed, much like a savings account you might have at your local bank. The bonds can be paid off by simply crediting the account. The idea that the Treasury bonds could ever go bad would be like a football game in which it is announced that the stadium cannot award points for a field goal because they ran out of points. The issuer of money neither has money nor do they not have money. They are instead the scorekeeper that decides how the money gets allocated and the rules of exchange.

Now, this still doesn't excuse the fact that the current law mandates the issue of Treasury bonds whenever government wishes to spend. Such a law is based on a confused concept of money, and should be repealed. Treasury bonds can still serve a purpose, in that they provide a source of savings for the public, in a form that effectively functions as an investment in one’s own government. The Social Security Trust Fund is comprised of such bonds, and there is no reason that the government should be inhibited in issuing more of them to ensure that all citizens have a secure retirement. There is also no reason why it should be “funded” by a regressive payroll tax, which, as should be clear by now, doesn't really fund anything.

The function that Treasury bonds currently play in our monetary system is in allowing the Fed to hit its interest rate targets. When the government runs a deficit, it creates extra money in the economy which becomes savings for depositors and reserves for the banks. Banks don’t like having excess reserves, which don’t generate any interest, and instead prefer to buy interest-bearing bonds from the government. So the Fed sets the overnight interest rate and banks spend their excess reserves on buying up Treasury bonds at that rate. Yet the whole reasoning behind the Fed’s interest rate targeting is based on an exogenous view of money, the flaws of which I’ve already addressed, and the quantity theory of money, which I will debunk in the next section. Therefore, there is no reason for targeting such interest rates, and the overnight interest rate should be kept at its natural level: zero.

Inflation

A view which many people take as self-evident is the quantity theory of money, proposed by Irving Fisher. People who’ve never heard of Irving Fisher or even studied much economics tend to implicitly assume it to be obvious. The quantity theory of money states that prices are determined by the supply of money relative to the supply of goods, so that inflation is a result of “too much money chasing too few goods.” Essentially, it applies a simple supply-and-demand analysis to money.

Such analysis seems plausible enough until you add the element of time. The distinction between stocks and flows is lost in much economic analysis. Michał Kalecki once defined economics as “the science of confusing stocks and flows,” specifically when addressing the quantity theory of money. A stock is the quantity or value of a given commodity at any given point in time. Flow is the rate at which that commodity goes into and out of the economy, through what are called inflows and outflows. For bank money, inflow would be the creation of a loan and an outflow would be the repayment of that loan. For government money, the inflow would be the spending of money and the outflow would be taxation. To think of money purely in terms of its ratio to goods and services in the economy is to miss the fact that the supply of money is not constant. What is important, rather, is velocity of money as it changes hands between inflows and outflows.

Now, this doesn't mean that quantity plays no part. But it plays a part only insofar as it influences velocity. As I already pointed out, the size of the deficit matters when it comes to inflation or deflation. If the deficit is larger than the net desired savings rate, people will be quick to spend any extra money they have, and this “hot potato” effect will increase prices.

Often, when a major asset such as land gets bid up by speculators, this will raise the cost of living, which will show up in other prices. Government also plays a role in bidding up prices, since when it spends new money on commodities it needs, it sends a signal to the producers of those commodities that demand is going up, thus prompting them to raise the price, leading government to pay the new, higher price the next year. This is because the government purchases these items at a fixed quantity and a floating price – that is, whatever price the market sets. What government can do to counter this tendency is to purchase a buffer stock – a commodity which they buy at a fixed price and a floating quantity. In plain English, what this means is that the government chooses a commodity which it will offer to buy from anyone willing to sell it at a fixed price. The amount people are willing to sell may vary from year to year, but the price stays the same even when bought and sold on the private market, and other commodities are then valued relative to the buffer stock. The buffer stock should ideally be some major commodity central to the economy. Modern Monetary Theorists advocate using unskilled labor as a buffer stock, replacing minimum wage with an “employer of last resort” program that hires anyone willing and able to work for a given wage which will set the floor level for what other jobs pay. Since I believe Georgism offers a better full employment program, I would only advocate such a policy as a transitional measure toward a Georgist economy with high wages and full employment. Land value taxation in and of itself would help control inflation, since land values would automatically adjust to net desired savings, as well as putting the breaks on any speculative rise in prices. Once full employment in the private sector has been reached, a better buffer stock might be something related to energy. Or we might humor the goldbugs by using gold or silver as a buffer stock, even though this would be an inversion of the kind of gold standard they tend to idealize.

Speaking of which…

Silver and Gold

There is a large group of people who claim that gold is “real money” or “sound money,” with the corresponding implication that paper money is worthless unless it’s “backed by” something of real value. As I mentioned earlier, taxes are what gives money its value, regardless of whether it’s paper, gold, or beaver pelts. When asked what makes gold sound money those goldbugs who aren’t simply falling victim to magical thinking and worshipping a shiny object will say that it is valuable because it is scarce. They’ll point to the rising value of gold as evidence that it’s “real money.” But a good investment does not a good currency make. Money is money precisely by virtue of its not being wealth, but rather as standing in for real wealth. Even goldbugs seem to have some implicit understanding of this, as most of them are fine with using paper money as long as it is “backed by” gold or silver.

What most goldbugs are unaware of is that there has never been a monetary system which was purely commodity-based in the way they imagine. Gold was originally used for coinage not because it was scarce(it was relatively abundant at the time), but rather because it was malleable and could be stamped easily. Furthermore, the value of the coin was the amount stamped on it by the authorities – the amount they accepted it for in payment of taxes or tribute – and not the commodity value. The commodity value of the coins only mattered when one went outside the jurisdiction of issuing government, as soldiers often did. David Graeber suggests that this dual value of coins – the fiat value and the commodity value – may have influenced the idea of the dualistic division between body and soul which developed during the Axial Age, when coinage became common.

When paper money came along, it was circulated as a certificate redeemable in a certain quantity of gold. But this did not mean that the value of gold determined the amount of paper money. Rather, there was simply a fixed exchange rate between a given denomination of currency and a given quantity of gold. Though the gold standard is no longer followed, fixed exchange rates still exist in certain countries that peg their currency to another currency in and attempt to achieve price stability. Fixed exchange rates do not have a very pleasant history, and countries that use it often have to go back to a floating exchange rate when there is an economic crisis. A better version of the gold standard, as I already mentioned, is the use of gold as a buffer stock.

The Debt Virus

Many monetary reformers believe they can explain both the business cycle as well as capitalism’s drive for unlimited growth in terms of an “impossible contract” of interest. The story goes something like this: Banks create the principal for the loans they issue, but not the interest, which has to come from somewhere else. That “somewhere else” means other loans. This means that new loans are required to pay the interest on old loans, meaning that debts pile up on top of one another, until the debts can no longer be serviced, and a crash ensues.

There are a couple problems with this. The first is that it ignores the distinction between stocks and flows. Even if new loans are needed to pay off existing loans, this does not require that the total stock of debt keep piling up. When lending is made efficiently toward more short-term projects with high capital turnover, there can be a steady flow of credit which allows for consistent and sustainable payment of debts. What causes debts to pile up is the extension of credit toward the bidding up of speculative assets like land, and the corresponding overextension of credit into long-term fixed capital with a relatively lower turnover rate. These things are part and parcel of what is known in economics as a “bubble.”

Another simpler problem with the “debt virus” theory is that it’s only looking at one side of the ledger. For every person paying interest, some shareholder in the bank is receiving interest. They can then use that money to buy goods and services from people who are paying interest. As with the principal, it all balances out to zero.

This is not to say that interest is of no consequence. Like rent, interest is a monopoly privilege. It is based on the artificial scarcity of capital, which in turn is rooted in the monopoly of land. As land is held out of productive use, or is underused, it pushes production onto marginal land, which restricts the formation of capital. What’s more, because land is used as collateral for loans, those who have the most valuable land also get easier credit, and thus capital flows disproportionately toward them. If land rents were captured, more capital would be produced, and it would be distributed more evenly, which would eliminate its artificial scarcity and bring real interest down to zero, resulting in what John Maynard Keynes referred to as the “euthanasia of the rentier.”

Proposals

I will now venture to make some recommendations as to what reforms should be done to improve the monetary system. One proposal of monetary reformers which does merit some consideration is to either nationalize the Fed or abolish it and put its functions under the control of the Treasury. Some like Ellen Brown have gone further and proposed the idea of state banks, which would allow for states to have greater control over their budgets. Ideally, I would suggest an even more radical proposal than this and suggest that local municipalities be given the power to issue money(still denominated in US dollars, of course), so long as they collect the rents from their expenditures. It doesn’t matter how distributed this monetary authority is, so long as the rent is recaptured, and I see no reason why the level at which these rents are collected should not also be the level at which money is issued. Since this would require a Constitutional amendment, however, perhaps for now it’s best to focus on reclaiming the authority now ceded to the Fed.

Attempts to curtail fractional reserve lending are hopelessly misguided, and considering that government spending generates excess reserves anyway, there is no reason to have any reserve requirements at all. People are right to be suspicious of the power of banks, but that power is ultimately rooted in the land. With the public capture of all land rents, and the elimination of the Fed’s interest rate targeting, interest would fall to zero, and banking would shift to a non-profit enterprise, presumably dominated by credit unions and the like. Under such a system, lending would become not so much a matter of turning a profit, but rather a form of mutual aid in which communities lend out credit amongst themselves to assist local farms, businesses, entrepreneurs, and other individuals and enterprises in need.

Money is indeed an important part of the economy, and ought not to be overlooked. However, those who focus on monetary reform tend to get it backwards when looking at money as the source of problems in the real economy. Rather, the problems in the monetary system derive largely from problems in the real economy, particularly land. The problems of money are relatively minor compared to the land problem, and solving the latter problem would cure most of the former. The power of the banks lies not in the “money power,” but in the land power. The only real money problem, aside from simply misunderstanding the nature of money, is the sovereignty of governments. Give local governments money sovereignty and capture land rents. The rest is commentary.

Corporations = Rentiers

2011-08-03T15:02:00.001-07:00

There are three factors of production: land, labor, and capital. Production that is more land-intensive will necessarily be less labor-intensive, and vice-versa. Capital-intensity can either support or inhibit labor-intensity depending on its rate of turnover. Long-term fixed capital tends to increase with rising land values, and therefore has a negative correlation with labor-intensity, while short-term circulating capital such as inventories can provide a continual source of employment for labor.

Now, the rise and concentration of huge, multi-national corporations tends to be seen by both their defenders and detractors as the natural operation of the free market. So-called "economies of scale" are usually brought up as an explanation for their growth and success. Yet, when you think about it, a larger firm will almost by definition be more land-intensive, and therefore less labor-intensive. Thus, with increasing scale, larger firms receive more and more of their income from rent, and less from production. This is why Thorstein Veblen observed that large firms are stores of value first and centers of production second.

The concentration of land by value increases with personal income, but corporate landowners are the biggest of them all. Some might actually think this isn't so bad, since ownership of corporate ownership is spread out among shareholders. However, someone who owns stock in one company will tend to own stock in several others, so it turns out stock ownership is extremely concentrated toward the top. The companies whose stock is worth the most will tend to receive a greater share of their profit from rent. As such, the richest stock-holders also tend to be the biggest rentiers, even if they personally own very little land of their own.

Small businesses, by contrast, are necessarily more labor-intensive. They have smaller spaces, which use less fixed capital, and rely more on inventories of circulating capital that turn over quickly. This is true of farmland as well. Factory farms are far more land-intensive, and use capital-intensive methods of fertilization and heavy amounts of pesticides. Organic farming, by contrast, is more labor-intensive, and more efficient for small farms. The factor of rent is what distorts the market towards the former method and away from the latter.

Economies of scale probably do exist to some extent. But whatever that proper scale is, it is most certainly distorted by the free lunch that is rent. Taxing the rent would help break up these large firms into more efficient, smaller units that use more labor and circulating capital, thus helping achieve full employment, while also eliminating the "too big to fail" problem. E.F. Schumacher was right: small is beautiful. It is also more efficient, and more just. And a market freed of this distorting influence will help achieve that beauty.

What Doth it Profit a Man?

2010-12-04T01:56:00.001-08:00

The profit motive is a cornerstone of capitalism. Adam Smith claimed that each individual’s pursuit of his own self-interest led to optimal social outcomes through what he called the “invisible hand” of the market. Capitalists have repeatedly had recourse to this argument against collectivists who denounce profit as a social evil.

We must, however, be careful about what we mean by “profit.” If we mean that the entrepreneur seeks financial compensation for their work, then of course profit is a positive thing. The problem with the profit motive is the tendency for capital to pursue unlimited growth. This was noticed by Marx in his equations of exchange. Exchange starts with barter, which may be represented as C –> C, where C represents a commodity. Commodities are exchanged for other commodities perceived to be of equivalent value. Money helps facilitate this exchange by standing in for other commodities and representing value. Thus, exchange becomes C –> M –> C, where M represents money. Marx noted that for the capitalist, this is reversed, such that we have M –> C –> M’, where money is invested in commodities in order to reap more money(represented by M’), thus earning a profit. The process goes on indefinitely to continually accumulate more and more profit.

Where did this extra money come from? Marx believed it came from the exploitation of labor. Labor, he thought, was creating all this value when applied to the machinery which the capitalist controlled. The only way, he thought, that this profit could emerge from the process, was to pay labor less than the value that they had created. The difference between what labor contributed and what they were paid was called “surplus value.” We needn’t think of “value” in any objective, metaphysical way to understand this. We need merely to see that the final product is valued at a certain price on the market, and that this price is greater than the value of the raw materials used to produce it. This added value comes from the application of labor to the raw materials to produce the finished product.

Silvio Gesell thought something was missing from Marx’s line of reasoning. Marx, it seems, had a fairly primitive view of money, thinking it to be simply another commodity to stand in for other commodities. He hadn’t noticed a notable difference between money and the commodities it buys. Commodities rot, rust, decay, or at lost have storage costs. Money, by contrast, maintains its value over time, giving it an edge over commodities. From this advantage comes the phenomenon of interest. Since the owner of money can withhold it without a loss, and the owner of a commodity cannot do likewise, he has the upper hand, and can demand tribute in exchange for lending out his money, thus creating interest. Thus, interest becomes an additional cost of production, creating a markup in the price of finished goods.

So there we have markup, but where is the profit? Obviously the lender has made a profit, but doesn’t the capitalist make one as well? Indeed, and this is because the capitalist is also a lender. He gives money to the worker in exchange for creating commodities to be sold on the market. Since the capitalist has the money, and can withhold it more longer than the worker can withhold his labor, the terms are in favor of the capitalist, and he, too, can exact a tribute, again in what Marx described as surplus value, by paying the workers less than their full contribution.

But wait a minute. If the only thing causing this imbalance of power is money, what’s to stop the workers from getting loans of their own to acquire their own capital and produce for themselves without being exploited, thus cutting out the middle man? Furthermore, if the capitalist can pay the worker less than they produce, what is the minimum amount that he can pay?

The answer to the first question obviously has something to do with collateral, but what is usually put up as collateral? The answer will give us insight into the second question. There is another commodity which, like money, does not rust or rot. In fact, more so than money, its value grows even as its owner sleeps at night. This commodity is land. As for that second question, a traditional answer has been the iron law of wages, which states that wages fall to the level of subsistence. However, given that even the legally mandated minimum wage often does not cover the cost of living, we must reject this view. Instead, we turn to Henry George’s theory of land, and particularly the margin of production.

As population centers develop, and wealth is produced, certain locations prove to be more profitable spots for business than others, by virtue of their proximity to other businesses, residences, and services. They therefore render a social surplus called rent, which is created by the society writ large, rather than by the owner. The least productive land yields no rent, and any capitalist operating on this land would have the least bargaining power with workers, thus having no choice but to pay them for the full product of their labor, with nothing left over for profit. For this very reason, capitalists tend to stay away from marginal land. On more valuable land, however, more value can be attained from the same application of labor.

The capitalist, however, owning valuable land and money, only needs to pay them what their labor would fetch at the margin of production, and can pocket the rest. What’s more, the owner of land, like the owner of money, can withhold his asset for a better deal, and thus can afford to refrain from using the land to its full productive potential. Leaving the land underused in this manner pushes the margin of production back, making the valuable land even more valuable, and increasing the concentration of rent, and therefore wealth. There is a point at which any higher level of production will yield less profit by cutting into the rental profits from leaving the land fallow. In a growing economy, rent continues to advance ahead of production until eventually the cost of living and the corresponding accumulation of debt becomes too great to support further production, thus resulting in a recession. The underuse of land from this conflict between production and rent means that there is a gap between the level of production and the level of demand. The result is unemployment, even during the strongest economic boom. Those who do have employment are exploited not only by this imbalance of bargaining power, but also by being taxed on their labor while rent and interest go relatively untaxed.

So, it is through rent that wealth initially accumulates. The rent then becomes collateralized when the landlord decides to become a capitalist and takes out a loan. With this loan, he buys physical capital such as tools and machinery, and hires labor at a cost determined by the margin of production. He uses the land for production up to the point where the returns of production and the rental profits from land are in equilibrium, such that any further increase in the former cuts into the latter. The combined surplus is counted as profit.

Now, then, what happens if we rid money and land of these competitive advantages? Suppose we tax all the rent from land and render it to public use. Then we can untax labor, and the landowner will be compelled to put his land to its most productive use. In this way, the capitalist will be as desperate to hire the worker as the worker is to find a job. The capitalist will then be compelled to pay labor as much as they can demand.

Suppose also that money is to be charged demurrage, so as to have the same negative interest rate as the goods whose exchange it facilitates. Then the capitalist will be all the more eager to pay handsome wages to his workers, lest that money rot in his own possession. The workers, then, will spend freely what they want, thus further stimulating commerce, and deposit the rest in banks. The banks will still owe them the amount of their ledger on demand, but will have to quickly lend out the money in order to ensure that the money they hold maintains its value. With so many deposits, however, they will have a lot of money that must be lent out. So they lower interest rates, until they have to lend it out at zero interest in order to keep up its value.

Who, then, will take these loans? Land is no longer a source of collateral, as its rental value is now rendered to the commons. So the loans will essentially be based on expected future production. This makes it much easier for the worker to become a capitalist in his own right, either going into business for himself, or collaborating with other workers to form cooperatives.

It may be the case that with profit as we know it taken out of the system, such cooperatives will be more practical than the normal capitalist business. It may also be the case that with the death of interest, for-profit banks will give way to credit unions. This is all to be welcomed, as it would lead to a new collaborative society. However, it needn’t be mandated. If capitalists and private bankers can still find a niche in this post-interest, post-rent society, they are welcome to do so. But they will be stripped of their coercive power, and will have to compete on even ground.

The Scale of Government

2010-10-10T22:20:00.001-07:00

The size and scope of government is one of the central issues of politics. President Obama is fond of quoting Lincoln in saying that the role of government is to do for the people what they cannot do as well or at all for themselves. Others take a more limited view, with some advocating a so-called “night watchman state,” in which the only legitimate role of government is to protect citizens from one another and from foreign aggressors. There are several factors people take account of in determining their view of the government’s role. What can the government do that the private sector cannot? How much can we trust the government to do its job efficiently? How can government benefit society, and how can it harm it?

It seems to me, however, that one of the most important issues for people is that they don’t want the government getting in the way of them living their life. They don’t want the government prying into their personal life, or taking their hard-earned money, or hampering putting bureaucratic red tape in the way of them going about their business. The majority of complaints about government seem to be about taxes and regulation. When it comes to spending, most people tend to be opposed to it in the abstract, but in favor of specific spending measures when they are presented to them. Most of the general opposition to spending tends to be based on fears about inflation, debt, and taxes.

This picture has been circulating the blogosphere lately:

It shows, in concrete terms, what expenses our tax dollars go towards. The first two items are considered “third rails” in politics – to touch them is political suicide. The third item enjoys a great deal of support as well. The fourth item is considered necessary, though as I’ve pointed out before, it really isn’t. Items commonly attacked by would-be deficit hawks, such as national parks or public housing, are relatively minor expenditures.

The deficit, however, really needn’t be a problem. As I’ve pointed out before, we can have a debt-free monetary system that frees us from the need to borrow altogether. This would get rid of the fourth item on that list right away, allowing for a dramatic reduction in the tax burden.

So what about taxes? One gripe people often have about spending is that it the government has to take the money from someone in order to give it to someone else. This sentiment particularly underlies hostility towards social spending for the underprivileged. “Redistribution of wealth” is associated in many people’s minds with socialism, and images of bread lines in the Soviet Union are evoked to scare people from the consequences of such policies. It is claimed that anti-poverty policies actually make the problem worse, because the taxes to pay for them are taken from those who create jobs.

The historical record does not appear to support this position, largely because it oversimplifies a much more complex phenomenon. It neglects the fact that low-income recipients of tend to spend most of their incomes, rather than save. It also neglects the amount of capital that comes from bank loans, which are driven by overall economic performance. This means that they create demand for the products that businesses create, thus helping business. Nonetheless, the logic behind the idea of taxes hurting business is sound, all other things being equal.

However, not all taxes are equal. John Stuart Mill pointed out that there is a difference between productive and unproductive labor, and pointed out that higher incomes are more likely to pay for the latter than the former. Thus, he said, progressive income taxes are not likely to interfere with production so long as they fall mainly on unproductive labor.

There is, however, another tax which takes only unearned income, which is not obtained by labor of any kind, whether productive or unproductive. That tax is a land value tax. I won’t go into too much detail about this fiscal policy, as much of the rest of this blog is devoted to it. I will simply point out how it undermines the arguments usually put forward against taxes.

An important aspect is its non-distortionary character. Unlike other taxes, it does not raise the price of the commodity that it taxes – in fact, it lowers the price. Not only does it tax only the unearned wealth derived from the community, but it also encourages production and wealth-creation by penalizing idle speculation. It also perfectly matches public expenditures on infrastructure, such that whatever government spends on the public, it gets back in taxes, without having to raise or lower the tax rate.

A land value tax could also be collected without the government prying into people’s private lives. There will be no need to account for people’s sources of income. All that will need to be done is periodic land value assessments, which can be performed without the slightest intrusion of privacy. People might be very protective of their jobs, investments, and other sources of income, but it hardly makes any difference who knows how much a piece of land costs. That information is attached to the land itself, which is in plain view for all to see, rather than to the individual owning it. This also makes it very difficult for people to evade the tax, and requires less overhead to collect.

Additionally, land value taxation would streamline government spending. As I’ve pointed out previously, the increase in productivity from soaking up unearned income would increase wages, eliminate involuntary unemployment, and ultimately help end poverty as we know it. This is accomplished by the tax itself, regardless of how it is spent. This means that most of the social programs which conservatives and libertarians like to complain about would essentially become obsolete. Social security could furthermore be replaced by a citizen’s dividend, taken from a small percentage of the annual revenue.

Debt-free money would also decrease the cost of infrastructure by eliminating the interest on the debt. Demurrage would further lower that cost by giving money itself a negative interest. This would in turn lead to zero interest on loans, which would eliminate the “impossible contract” problem of ever-expanding interest. Without this problem of interest, we overcome the need for constant growth, which can help keep government and the private sector alike at a sustainable scale.

Furthermore, federalism can be restored by dividing the monetary power and the tax base between the federal and state levels. To the federal government belongs the money power. They should have the power to issue debt-free, negative-interest money for the funding of infrastructure. Much of this money can be allotted to the state governments to leave the infrastructure spending to their discretion. The states can then levy taxes on the land value which is bolstered by this infrastructure. The federal government can then tax a portion of this revenue from each state according to its total land value. This arrangement keeps taxes primarily at a local level, while the federal government provides the liquidity to support the states in these endeavors.

The relatively small percentage of tax revenue going directly to the federal government can go towards national expenditures such as a national healthcare system, where Medicare is made available to all. This may sound like “big government” to some, but we should understand that countries with national healthcare systems spend less, both publicly and privately, on their healthcare. Also, such a system would not preclude private insurance companies from providing additional or alternative insurance.

Another major cut that could of course be made would be in the military. America currently accounts for 54% of all the world’s military spending. That means that all the other countries combined still wouldn’t match our military expenditures. I don’t think I’m alone in finding that a bit excessive. Of course, even if we suppose that the world is dangerous enough to warrant this level of expenditure, there are other things we can do to reduce this danger and encourage peace.

One of them is to end our dependence on foreign oil. Easier said than done, obviously, but there are signs of hope. The military itself could be a leader in this effort, as victory on the battlefield necessitates that they make optimal use of resources. We can also create a smart, integrated power grid that efficiently distributes electricity where it is needed most. A feebate could be levied on automotive sales to encourage the most fuel-efficient vehicles in each size class that current technology allows. Taxing resource rents would further create disincentives for the waste of natural resources while incentivizing recycling and efficient use.

Eradicating global poverty would also eliminate much of the need for military intervention. Poverty eradication may sound like a big government project of its own, but when we understand the dynamics of globalization, it becomes clear that much of what needs to be done is simply to get out of the way. The IMF, World Bank, WTO, and several other international institutions have used debt to push poor countries into neoliberal policies which have been disastrous for their populations while benefiting Wall Street investors. There are, of course, reforms that such countries could and should make to their own economies, and we can lead them in doing so. But such leadership should come by example, not coercion.

So, to review, what cuts can we make to have a government that is small and efficient as well as responsive? By shifting the tax burden to land values and other rental income, we get rid of most government meddling in the private sector. Such tax policies also get rid of the poverty, reducing the need for social spending. A debt-free, negative interest monetary system would then get rid of the national debt and the interest we have to pay on it. The roles of taxation and money creation can be divided up in such a way as to restore federalism to the country. A smart environmental policy which gets incentives right and taxes resource rents would reduce our independence on oil and in the process reduce the need for military expenditures, as well as reducing the need for cleanup expenditures. The result is a government that is far more efficient and can do more with less. Government can be smaller and less intrusive while also being responsive to human needs.

Globalization Reconsidered

2010-09-28T14:36:00.001-07:00

If you take any introductory economics course, the instructor will explain to you a concept known as “comparative advantage.” The idea, famously described by David Ricardo in 1817, defends free trade on the grounds that even if one country is better at producing everything than another country, it is to both countries’ advantage to trade. Ricardo gives a hypothetical example involving England and Portugal, in which Portugal is able to produce both wine and cloth more efficiently than England. In England, it is harder to produce wine than cloth, while in Portugal it is easy to produce both. It is then cheaper still for Portugal to specialize in wine and import cloth, even though it is cheaper in absolute terms to produce cloth. This is because there is an opportunity cost to producing one product versus another.

There are several problems with this. First of all, as Herman Daly has pointed out, Ricardo was assuming the immobility of capital across borders. He believed that there was a “natural disinclination” among people to leave their country of origin to establish businesses abroad. He apparently could not have conceived of the globalized world today in which major corporations headquartered in the United States would outsource their manufacturing sites overseas to exploit cheap labor.

Additionally, the theory assumes that the state of comparative advantage is static. In reality, an underdog in a particular industry may end up overtaking the competition later on, as happened for the Japanese auto industry over the course of the twentieth century. This fact underlies the “infant industry” argument for protectionism. The issue is further complicated by transportation costs, transition costs, and the potentially destabilizing force of currency markets.

So, what has been the reality of globalization and so-called “free trade” agreements? The reality is that a small percentage of people have benefited enormously from it, but most people have not shared in its benefits, and many have been made worse off. GDP has risen in most countries, but that simply indicates that more economic activity has taken place, and does not say anything about the value of that activity or where the money is going. Much of the money is being siphoned out of the countries where production is taking place and into the hands of Western corporations. But even within the developed world, the gains from globalization are not being shared equally among the population. We see it in America, where manufacturing jobs have been outsourced, and unions broken in the process, pushing wages down.

This is all to say nothing of the environmental damage. Aside from cheap labor, another enticement which often brings multinational corporations to third world countries with weak governments is a combination of abundant resources and lack of environmental regulation. Frequently their projects for extracting resources cause considerable environmental damage, often poisoning the air and water, cutting down forests and destroying ecosystems.

Of course, let’s not pretend that so-called “free trade” really is what it claims to be. Free Trade agreements often revolve principally around intellectual property, which essentially means protecting legal monopolies abroad. Additionally, the IMF and World Bank have a history of enticing countries into debts they can’t pay off, and using the opportunity to restructure their economies in ways which benefit Wall Street, but often prove damaging to all but the most elite members of the countries in question.

Then there is the issue of transportation. To transport goods half-way around the world requires a lot of fuel, mainly from petroleum. The petroleum industry enjoys numerous government subsidies, especially from the United States. Without these subsidies, would it really be profitable to ship jobs overseas, produce them in a sweatshop on the other side of the world, and then ship back to one’s home country?

How, then, do we fix the problems of globalization? Can it be fixed? Or should we all turn to economic nationalism and widespread protectionism? Well, some degree of protectionism might be warranted as per the infant industry argument. But first let’s do a little acupuncture and look at where the process of international trade is not flowing right.

First of all, I mentioned earlier that the main flaw in Ricardo’s theory of comparative advantage is that it assumes the immobility of capital. The fact that capital is much more mobile today than he had anticipated is largely due to the rise of an entity of which there were few examples in his time: the multi-national corporation. In the 19th century, corporations were officially recognized as legal persons, with all the legal protections of the Fourteenth Amendment, but without the ability to be imprisoned for breaking the law, as a real person could be. They were given the right to free speech, the right to own property, and the right to buy and sell as they pleased. With all the benefits of personhood but none of the costs, corporate power expanded into the leviathan we see today, with tentacles stretching all across the globe, and profit margins larger than the gross national product of many of the countries in which they operate.

As all-powerful as they may seem, we know that corporations have an achilles heel: legal personhood. If we can take that away from them, then they easily brought back under the authority of the public that gives them their privileges in the first place. Corporations, after all, owe their existence to government-granted charters. Laws can then be passed requiring that any company wishing to incorporate in a country hire a certain percentage of its workforce in that country, limit its ratio of lowest to highest paid employees so as to ensure high wages for workers and prevent excessive CEO pay, and require that it abide by certain minimum environmental standards, regardless of the country in which it operates. This will ensure that differences in wages and regulation will not play a role in determining where corporations set up shop.

It is also essential that countries maintain sovereignty over their financial markets. Whatever benefits may accrue from opening a country’s markets to imports and exports of goods, there is no evidence of similar benefits from opening one’s capital market to foreign speculators. Every developing country that has done so has paid a steep price for it. Market volatility rises, and it becomes easy for Wall Street to manipulate the country into doing its bidding by financially punishing any country that does something they don’t like. In addition to keeping such markets closed to outside interference, it is incumbent upon the international community to pass a Tobin tax on the currency exchange market to protect countries from the destabilizing effects of currency speculation.

As I mentioned, much of the international trade agreements center around intellectual property. To make these part of trade agreements goes completely against the original purpose of intellectual property. Intellectual property is designed to grant a temporary monopoly so as to encourage the development of the arts and sciences. Making people in Africa pay higher prices for HIV medication has nothing to do with this purpose. Additionally, genetically modified crops have been used to extract rents from third-world farmers. At the very least, we have a litmus test for whether patents need protection abroad in order to encourage innovation. We should also be looking for alternatives to intellectual property, such as a prize system, in which the government gives financial incentives for certain discoveries, and then makes those discoveries public domain. A more comprehensive platform for intellectual property reform put forward by Dean Baker can be read here.

To prevent the exploitation of their natural resources, as well as keep the revenues within their own country, governments should have severance taxes for their resources, ensuring that the full social and environmental cost is paid by those extracting the resources. The revenues from these taxes, as well as land value taxes, can fund infrastructure which will allow the country to develop toward into a more technologically developed nation. They can then process their resources into manufactured goods, rather than confining their exports to raw materials.

The need for protectionism would be greatly reduced by these measures, although it still may be needed for some developing countries to develop infant industries. The problem in today’s world is that protectionism is practiced by the developed countries, who then interfere with developing countries protecting their industries. Joseph Stiglitz has suggested that future trade agreements allow countries to put up tariffs against more developed countries, while opening their markets to less developed countries. For example, a country like Egypt could put up tariffs against the European Union, but would have to open its markets to Mozambique. This helps countries develop their infant industries while providing clear and concise guidelines for market liberalization.

However, there is a deeper, more existential problem with globalization. In relying so much on foreign trade, civilization has lost its connection to its local surroundings. There was a time when buildings were built from local materials, and food was locally grown. In a hyper-globalized world, this is becoming increasingly rare. On a practical level, this is unsustainable. It requires much larger amounts of fuel to transport goods and materials across oceans than it does to grow them at home. Access to oil is running out, and while there are promising alternatives out there, none of them can do the job oil does without complementary gains in fuel efficiency.

On a deeper - dare I say “spiritual” – level, there is a sort of illness of the human soul when it is disconnected from its environment. We have become alienated from our food sources, and thus have turned a blind eye to how it is produced, including the pesticides and genetic modification, as well as the cruel conditions on factory farms. We have created houses and communities that are carbon copies of houses and communities throughout the world, rather than paying attention to the ecological demands of the local climate and environment.

To remedy this problem, we really do need to start thinking more locally. The increasing scarcity of fuel may force us to this point, but we can get there more smoothly through local planning. We can furthermore reduce and eventually eliminate subsidies for oil, sending a market signal to localize our economies, without the sudden shock of the fuel supply running out. In the meantime, we need to rediscover local wisdom, and sustainable living. This should become an educational priority for training architects, engineers, and city planners. With the right price signal and the right education, we can start moving toward a more local, sustainable economy.

Where, then, does that leave trade? Should we not trade at all? No, that would be silly. There is much to be gained from international commerce. What we should do is produce what we can locally, import those things which it is uneconomical to produce, and export surpluses of local goods. Most of all, we should have free trade in ideas. Information is the ultimate public good. It can be multiplied indefinitely, and make everyone better off. This reinforces the fact that we must seek alternatives to intellectual property, so that information can be shared as freely as possible.

Through a globalization of information, we can become a world community. If we localize economies, we then become a community of communities. The right balance must be struck between the local and the global, with neither overwhelming the other. Then we can move beyond the Information Age and into the Wisdom Age.

A Matter of Interest

2010-09-26T16:53:00.001-07:00

It’s been a while since my last post, but I thought I’d throw out another interesting idea I’ve been studying. I’ve made posts about monetary reform here, and talked about the idea of debt-free money, as advocated by the American Monetary Institute. However, while that proposal tackles the debt problem, it still takes interest as a given. It’s come to my attention recently that interest needn’t be an essential part of the monetary system.

Under the current monetary system, most of the money supply is created as debt. When banks create loans, they take a fraction of their deposits to loan out. But after they loan the money out, that money stays in their ledger as money to lend out further. Essentially, that money has been duplicated – created out of nothing but debt. But banks only create the principal for the loan, while charging interest on it. Where does the money come from to pay off the interest? It has to come from other loans. Thus, we have a game of musical chairs in which debt must be paid off with more debt. So long as the music keeps playing, the cycle can continue. But if a shock occurs in the system, as it inevitably does with the 18-year land cycle, money is literally destroyed as people default on their debts. Wealth is then transferred to the lenders as people who default on their debts have their wealth repossessed.

Furthermore, the system requires unlimited growth in order to sustain itself. More and more debt means more and more consumption of natural resources. It means ever-increasing throughput. As Herman Daly has correctly pointed out, the economy is a subsystem within a larger system called the biosphere, and a subsystem cannot outgrow the larger system. The biosphere has natural limits to how big it can get. Logically, so must the economy. Yet current economic theory necessitates that the economy continue to grow in perpetuity.

Debt-free money solves the first problem. Unlike bank credit, debt-free money does not get destroyed from systemic shocks. It also solves the false dilemma between the need for economic stimulus and the need for deficit reduction, while lowering the cost of infrastructure and allowing for the government to be more responsive to public needs.

However, the problem of interest remains. Banks will no longer have the ability to create money out of debt, but they will still charge interest. The money to pay off the interest, instead of coming from more debt, will instead have to come from government. There are two problems with this. First of all, money is used not only for the exchange of goods and services, but also for savings. It is difficult to determine the proper amount of money when it is split between these two functions. Second, we still have the problem of an economy that continues to require growth. New money is spent on wealth-creating infrastructure, and a portion of that money goes to pay off the interest on debts. But the continuation of interest means that new debts require the further increase of money and therefore the further expansion of economic activity. Thus, we still run the risk of running up against ecological limits.

A major part of the problem comes from money’s dual purpose. As the German economist Silvio Gesell noted in his book The Natural Economic Order, the function of money as a means of exchange and a means of savings contradict one another. To hold money out of circulation as savings means that it can’t be used for the exchange of goods and services. When people and institutions feel financially insecure, they will hold onto money rather than spend it. However, when everyone is holding onto their money, this reduction in demand causes the economy to further contract, as businesses are no longer able to find consumers for their products. John Maynard Keynes referred to this as the paradox of thrift. Demand is shifted to liquidity preference, and effectively reduces the money supply in the real economy.

Another issue is that money doesn’t really behave like the goods and services for which it is exchanged. Real goods, for the most part, have a negative interest rate. They don’t grow in value. Instead, as physical entities, they are subject to entropy. Food rots, machines break down, and even durable goods have a cost of storage. Services may not seem entropic, but they are performed by people who need to eat, sleep, and pay their bills. In other words, goods and services have a cost when they are not put to use. Money, on the other hand, earns interest when it is held out of use. The difference is compensated for by vendors by including the cost of maintenance into the price of goods. Thus, prices are artificially inflated by a hidden interest rate.
Those who say we should return to the gold standard have it exactly backwards: They assume that a good monetary system is one defined by scarcity and appreciation of value. In this, they mistake a good investment with a good money system. Money should behave like the goods and services that it purchases. It should have a cost associated with holding onto it. This would plug the leak in the economy in which circulating money gets caught in a liquidity trap.

Keynes believed that maintaining a modest level of inflation would be effective in keeping the money circulating. However, such inflation is insufficient for this purpose because it affects circulating and saved money alike. It also fails to put hoarded money into circulation since hoarding works against inflation. If hoarded money is suddenly spent, then it can mean that the money supply exceeds the planned amount, resulting in excess inflation.

Gesell proposed an alternative idea known as demurrage. In his system, currency would have to be periodically given a stamp worth a certain percentage of its value. The stamp might be required weekly, monthly, or annually, but the point is that it would enact a cost associated with holding onto that money, and encourage its holder to spend it, lest they be stuck with the cost of the stamp. They could still keep it in the bank as before, but the bank would have an incentive to continue circulating the money through loans. One way or another, the money would continue circulating. Since the money would have a negative interest rate, the banks would have an incentive to lend it out at zero interest.

Given that most money today is digital and therefore cannot actually have a physical stamp applied to it, but the principle is sound. Perhaps there could be a way to apply a sort of “digital stamp” to bank ledgers, or a kind of monthly tax on banks for holding onto money that they should be lending. Banks often charge their customers an inactivity fee, so why not do the same to banks?

Some may be concerned that demurrage would exacerbate the rampant consumerism we see today. But that would only be true if the supply of money is kept above the level of demand. With high-velocity money, the actual amount of money needed would be greatly reduced. When its function as a means of savings is eliminated, money becomes the embodiment of demand. Whatever the demand for goods and services, there should be a corresponding amount of money in circulation. Those who wish to maintain economic security through savings can instead invest their money, preferably in companies with long-term potential, but also in precious metals like gold and silver.

However, such fears for the future would be much ado about nothing in such an economy. With land value taxation to prevent the rise of speculative bubbles, and high-velocity money preventing liquidity traps, the likelihood of financial collapse would be largely eliminated. A few more tweaks in taxes and regulation to further reduce other forms of speculation would ensure a stable, sustainable economy.

Money and Taxes

2009-04-17T15:32:00.000-07:00

One of the principle arguments leveled against Georgism is the allegation that land values would not be a sufficient tax base to raise the revenue needed for the functions of government. While this argument in itself is questionable, it misses a much bigger point. The government has spent more than it takes in for a long time. Of course, under our current system, this is cause for concern. We worry about all the debt we are incurring, which is in fact an inevitable consequence of our current monetary system. The federal income tax was actually initially passed alongside the Federal Reserve Act as a means to pay off the interest on our national debt. The portion of tax revenue devoted to paying off this interest has grown continually since then. If we keep going down this path, it will eventually eat up our entire federal budget.

However, there is another way. If we simply nationalize the Federal Reserve, the government can then issue its own debt-free money for use on wealth-creating public projects. So long as the wealth created is equal to the money created, there is no inflation. Government could theoretically finance all of its functions in this way without having to take a single dime in taxes. It would not be mortgaging our children's future with more debt, but would simply be providing money for the production of goods and services.

Of course, this scenario is unlikely, because not every investment pays off equally, and therefore some government spending will end up being inflationary. Therefore, some mechanism has to be in place to monitor and control inflation. Taxes can fill this role by recycling money through the system and removing some of it from circulation when necessary. But what is important is that under such a system, the primary role of taxes is not to raise revenue, but rather to control inflation.

Thus, one of the biggest arguments against Georgism is defeated. It doesn't matter if land value taxes are a sufficient tax base, because the very concept of a tax base is rendered irrelevant, at least at the federal level. At the state level, taxes would still be needed for collecting revenue, with federal earmarks subsidizing them. And of course, land value taxation is the ideal tax for the state level. At this level, its efficacy is demonstrated by New Hampshire, which has no state income tax or sales tax, and relies almost entirely on property taxes to raise revenue.

The federal government could then abolish the income tax and turn to a power which was written into the Constitution long before the Sixteenth amendment: apportionment from the states. The amount to be apportioned would be rather small, as it would not be necessary for raising revenue. It would be just enough to control inflation, which would be closely monitored by the Federal Reserve, just as they do today. When inflation is spotted, a corresponding amount of money would be removed from circulation, thus achieving price stability.

There would, of course, be other purposes for taxes, aside from controlling inflation. The land value tax would still be an excellent idea because of its many utilitarian benefits, such as reducing in inequality, enhancing productivity, and discouraging speculation. Other incentive-based taxes such as a carbon tax would also serve a purpose. But the revenue these taxes bring in would all be irrelevant for the federal government. Instead of spending what it gets, the government would get what it spends.

The Abundant Society

2009-03-15T18:28:00.000-07:00

There are few words in economics more feared than unemployment. The irony is that many who fear unemployment also hate their jobs. What they really fear is not unemployment, but poverty. The fact that the two are so closely linked often leads to what I call "work fetishism," the valuing of jobs and work as an ends in themselves, rather than means to an end, namely prosperity. Consider, for example, those who decry labor-saving machinery. Such machinery can increase productivity and thus create more wealth. Yet it is feared by the workers, because it might cost them their job. It will, of course, increase the demand for mechanics and engineers to operate and maintain the machinery, but the unskilled laborers are out of luck.

But what if it was in everyone's interest to look after society's well-being instead of just their own? What if the two were one in the same? Suppose society itself were a publicly traded stock, in which each of us had an equal share, that paid dividends?

What if every citizen received a guaranteed income from the government? A guaranteed minimum income isn't as heterodox as it seems. A surprising number of mainstream economists support a negative income tax as a replacement for the current tax system. A negative income tax is a flat tax with a fixed rebate that makes the tax progressive in practice. The rebate acts a guaranteed minimum income.

But suppose this guaranteed income, rather than being a fixed amount, was instead a dividend of the total socially produced wealth. This social wealth, or rent, is found mostly in land values. It the value of living or doing business in a given location as a result of inter-subjective social relations. It is not produced by any one individual, but rather by the aggregate value of social and commercial activity. Thus, it rightly belongs to society as a whole. Land value taxation, therefore, would essentially be a society's investment in itself.

And why shouldn't that investment pay dividends, like so many stocks do? It would give us all an equal share in the overall well-being of our society. The amount of the dividend should be at least at the level of subsistence, but could be far greater. The consumption of both consumer and capital goods would increase the rent by approximately the amount spent, so the government would actually get back most if not all of the money spent on the dividend, and would not have to choose between dividend payments and social expenditures.

The worker whose job is threatened by labor-saving machinery would actually profit from that machinery, as technology tends to advance rents. So what if they get laid off? The dividend should be able to support them while they look for better opportunities, while the machinery that caused them to get laid off would also increase that same dividend. While being sustained by the dividend as they're out of the job, they can spend their time going to school and learning new marketable schools. Or perhaps this worker has an artistic side that they never get the chance to express. They could spend their time painting or writing that novel they always wanted to write, and not have to deal with the anxiety that comes with being a "starving artist." Their artistic work would also enrich society, and make us all better off.

But what if they decided to do nothing? This is what some people fear from a guaranteed minimum income. It's why many of those who do support it believe that it should be below the level of subsistence. In many ways, this coincides with attitudes towards welfare recipients under our current system. But the difference is that under a land value tax regiment, the guaranteed income would be a social dividend which is not earned by any individual but is rather the equal right of every citizen. The fact that economists talk about a natural level of unemployment indicates that there is a surplus of labor. Therefore, we don't need everyone working.

In fact, many people at the top of the economic ladder do not produce goods and services for society, but rather engage in idle speculation that is useless at best, and poisonous to society at worst. There are also those whose job is to lobby Congress to create laws that are preferential to their employer. In addition, a great deal of marketing dollars go towards creating demand where there would otherwise be none. We would likely be better off as a society paying such people to do nothing rather than their current jobs.

Some may worry about certain jobs not getting done. But this will simply mean that those jobs will have to offer higher pay to attract people to those jobs. They could also try to create better working conditions, which can be as much if not more of a motivator than higher pay. It would also increase the demand for labor-saving machinery, creating greater incentive for innovation. We could eventually do away with most if not all unskilled jobs, and we'd all be richer for it.

People would be all the more motivated to pursue an education, to innovate, and to explore their talents. They would have greater access to capital, and therefore could start their own business. Self-employment would become far more commonplace, and could eventually become the norm. Volunteerism would also likely increase, as people who didn't have to worry about earning a paycheck could instead devote their time to serving the community.

The idea is not to eliminate work, but to eliminate needless toil. In a more prosperous, technologically advanced society, free of the need for thankless wage labor, people would be able to find the kind of work that best matches their talent and ability, without having to worry about their livelihood. Such a society would foster not just employment, or growth, or capital formation, or any of those indicators with which economists are so concerned, but rather that greatest value of all: happiness.

The False Dilemma

2009-02-06T20:48:00.000-08:00

Most credible economists today agree that America needs a stimulus package. It appears as if we will get a watered-down version of one very soon. The package needs to be a lot bigger than it is. But, critics cry, what kind of debt will we be leaving our children? What happens when China stops buying up our debt? Debt is indeed a serious concern, but not as great as the looming threat of another Great Depression.

But this is a false dilemma. It is possible to solve both problems in one fell swoop. The problem lies in our monetary system. Ever wondered why our government has to borrow its own money at interest? The power to create money is a power as great as any branch of government, and sometimes greater than all three branches combined. Therefore, by having our central bank partially privatized, as is the case with the Federal Reserve, the government has abdicated this power to the bankers, and allowed itself to be held hostage by this power.

The power of the Fed has often been criticized by Austrian economists, libertarians, and other gold bugs. Unfortunately, the alternative they offer is no better. They favor commodity-based currency which would arbitrarily hold back our money supply at times when more spending is needed, such as our current crisis. This is in line with the dogmatic belief of these groups that government is bad, and must be as small as possible. They believe, against overwhelming evidence to the contrary, that government intervention never works, and only causes economic problems, rather than solving them.

I do not mean to say that government intervention is always good. However, it tends to be worse when it is mixed with private interests. That is the dilemma we face with the Federal Reserve system right now. Ironically, defenders of this system appeal to the same distrust of government as its main opponents. They argue that government can't be trusted with its own money supply because it would become too politicized. But it has already become politicized. It serves the interests of the bankers, rather than the voters, as the government is supposed to do. There are current models for fully nationalized central banks, such as The Bank of England. While such models do not work perfectly, they are a step in the right direction.

Nationalizing the Federal Reserve is simply the first step toward a more perfect monetary policy. The next is to end fractional reserve banking. This is best done gently, by converting past monetized credit into US government money. This may sound inflationary at first, but it's not changing the amount of money in circulation at all. It's simply converting credit into currency. At this point, banks should lend out only the money they have in their deposits: what people think they do now.

The third step is the most crucial, but requires the first two. Once the power to create money has been reclaimed from the banks, the government can then spend money directly into existence, rather than borrowing it into existence at debt-producing interest. They can start with the $1.6 trillion that the American Society of Engineers estimate is needed to repair our existing infrastructure. Then they can use it for education, health care, and other projects which benefit the people, not the banks. Without having to pay interest on borrowed money, the projects on which the money is spent become cheaper, as there is no debt to pay off.

Some will deride this plan with fears of inflation. But infrastructure spending would not be inflationary because real wealth would be created in the process. Granted, not all spending would necessarily have such a return on investment, and in such cases, the little inflation they cause would serve as warnings of their ineffectiveness. In any case, this system would be considerably less inflationary than our current one, and would not leave us with the debt trap that we currently face.

Land value taxation forms the final piece of this plan. The value of the infrastructure spending would end up in land values as rent. With a comprehensive rent-based tax structure, this value can be recovered without hurting production or adding any burdens to taxpayers. Additionally, it can dampen any inflation that occurs by taxing it back out of the system.

By following this plan, we can have an economic system which is strong, sustainable, and debt-free. No longer will we have to weigh short-term economic concerns against long-term concerns about our national debt. Despite the dogmatic contentions of mainstream economics, there is such a thing as a free lunch.

Further reading: The American Monetary Institute

We Were Warned

2008-04-25T11:15:00.000-07:00

All I hear about these days is the housing crisis and the resulting recession. I can only listen to this for so long before I have to speak up. The fact is that we were warned about this long ago. Not by Alan Greenspan or any number of top economists today. No, I’m talking 130 years ago, when an economist named Henry George wrote his magnum opus, Progress and Poverty. In it, he explained the crucial and underappreciated role that land plays in the economy. In a time when we have such a serious housing crisis, it would serve us to take heed.

So what is this land connection? To understand that, we must first understand what in economics is known as rent. This may prove somewhat difficult, as the economic definition is different from the way we commonly use the term. The difficulty is further compounded by the fact that neoclassical economists have expanded the meaning of the term from what it originally meant(largely in an attempt to obscure Henry George's ideas). As it was originally understood, rent meant the economic return of land to the landowner, just as wages were the return of labor, and interest the return of capital. What is unique about rent is that it requires no effort on the part of the landowner to increase in value, but rather is determined by activity of society as a whole. We all understand this, which is why homeownership is considered such a good investment. If a new park is built nearby, the land value goes up. If a new grocery store opens nearby, the land value goes up. Of course, if there is an increase in crime or pollution, the land value goes down. In fact, land value is a great economic indicator of just how prosperous and well-functioning a particular area is. Any money the government spends on public works mysteriously ends up in land values.

Knowing this, several people like to speculate in land. This is how Donald Trump got most of his fortune. This can often create patches of underdeveloped or underused land in the middle of urban areas, leading to sprawl, and causing the land values to rise due to expectation of future returns. For reasons too complex to explain in this article, this speculative advance of land values lowers the return of labor and capital, reducing productivity. I will suffice to say that the return of land is inversely proportional to the return of labor and capital. Eventually, the advance of rent presses on wages and interest beyond the point where production can continue to grow. Eventually, the bubble bursts, and land values come crashing down.

During housing crises like our current one, we tend to hear a lot about banks and predatory lending. I do not mean to discount the relevance of these practices, but the truth is that the problem is much more fundamental than mere banking practices. We have all bought into the idea of homeownership as the perfect investment, and yet that promise proves empty in times like this. Make no mistake about it: housing crises are inevitable so long as land speculation exists.

So what is the solution? For this, we once again turn to Henry George. The solution he proposed was to render the land rent as common property through land value taxation. Essentially, this would mean a modified property tax in which the burden of taxation is shifted entirely onto the land value and away from the value of improvements on the land. A nearly 100% land value tax, shocking though that may sound, would ultimately cost us less than our current tax system, especially when used to replace other taxes such as income and sales tax. Such a tax would not make land more expensive, but would simply shift the cost of land from private hands to the public coffers. As I mentioned earlier, government expenditures end up capitalized in land values, so by collecting the revenues from those land values, the government could recycle the money they spend, rather than shifting the cost onto the lower and middle class through sales taxes. The economy would become self-sustaining, and we would not have to worry about housing crises or recessions. Then we can get to other pressing issues.

Solar Entrepreneurship

2008-03-11T21:20:00.000-07:00

Here in America, we are rightfully proud of our free market system. We won out over the Communist menace that threatened the word, and free enterprise prevailed. The world recognized the justice and sanctity of private property, and we have upheld it everywhere, from land to natural resources to ideas. But an unspoken socialist threat still lingers beneath the surface. Or, should I say, up in the sky. Yes, the sun glares down upon our free soil, mocking us with collective ownership. How is it that in a society that recognizes that natural resources are best left in private hands that we could be so foolish as to leave such an important celestial object to the commons?

Well, enough of it! I intend to put this socialist nightmare to an abrupt end. I, Jonathan Cobb, intend to claim my personal ownership of the sun. Our brightest economists insist that it is best for society that all natural resources remain in private hands, to prevent a tragedy of the commons, and as a good capitalist American, I feel it is my civic duty to right this wrong. To seal the deal, I can assure you that a satellite carrying a flag with my name on it is headed straight for the sun, and as soon as it is planted on the sun(or is incinerated, which still counts), I will officially be the sun's owner.

I shall be a just and fair sunlord. I will not deny its access to anyone who pays the rent. How much is rent? Well, I think $1,000 a month should be more than fair, considering its numerous benefits. For less money than a loft in upper Manhattan, you can grow crops, stay warm, and get daily doses of vitamin D. Of course, I shall have to charge extra for those who have solar panels on their roof or somehow use solar energy. It's only fair that the biggest consumers pay more.

Naturally, there will be some who cannot afford to pay this rent. Very well, then. They can come work for me. I will need some people's services to ensure that others pay their rent. I can put some of them to work building space ships with which to evict people from the solar system who refuse to pay their rent. These enforcers and builders will have the rent taken out of their wages. The unskilled laborers can farm my personal fields and bring me fine wine, exotic foods, and luxuries to pay off their debt.

America, beacon of freedom that it is, will surely use its vast military resources to enforce my property rights and financial interests abroad, as it has faithfully done for its captains of industry in the past. What politician would dare risk losing my favor in an election? Surely they must understand all that is owed to me, and should they dare try to socialize that which is rightfully mine, their eviction shall be swift, and rightly so. We cannot afford to revert to such Communistic thinking.

I shall bring us forth into a new era. The "ownership society" of our great president's vision will finally be realized. Other entrepreneurs may go on to buy other planets like Mercury or Venus, provided they compensate me for the solar benefits those planets enjoy as well. Eventually, every star, every planet, every asteroid in the universe shall be in private hands, and finally the American dream will be complete. God Bless America!

The Law of Rent and You

2008-02-04T20:32:00.000-08:00

Economics has always been rather esoteric for most people. Most people's knowledge of the subject is limited to the law of supply and demand, of which they have the most vague understanding. Any understanding beyond that is usually aligned with their political ideology. If they're conservative, they follow the supply side theory that lowering taxes create more jobs and helps the economy. If they're liberal, they follow the Keynesian idea that government spending projects can stimulate the economy. But there's one important economic principle that even economists today have long forgotten or ignored, at the expense of their discipline. That principle is the law of rent.

Before I lay out the law of rent, it bears mention that "rent" in the economic sense is not the same as what is meant in its common usage. We commonly apply the term to apartments, cars, videos, and various other commodities. In economics, its focus is more narrow. It is applied mostly to land, though it can also be applied to things like natural resources or the radio spectrum. Rent is the difference between what a factor of production is paid and what it would need to be paid to remain in current use. Applied to land, it essentially refers to the profit to be gained by virtue of its ownership. Essentially, land rent is equivalent to land value.

Now that we have laid out what rent is, lets examine the law of rent. This law, formulated by David Ricardo in 1809, states that the rent of a piece of land is equal to the economic advantage of putting that piece of land to its optimum productive use compared to the same application application of labor to marginal, or rent-free, land. In other words, the same inputs of capital and labor yield different results on different land, and in places where one gets greater results from the same input, the difference in output is rent.

To most people, this would seem to make sense for farmland, but they have trouble seeing how it would apply to urban land. And yet, urban land has a much higher rental value than farmland. How is this so? Farmland is easy to understand because its value is largely tied to its fertility. But land in general has a more common source of value, and it is one of the top rules in real estate: location, location, location. Consider a supermarket. Where do you think it would generate more revenue: in the middle of a busy street downtown, or in a small suburb on the outskirts of town? If you guessed the former, you'd be correct. The downtown location would yield a higher rent. Now what about residential property? Since it is not used for commercial activity(unless, like me, you own a home business), it may be confusing to hear that residential land also yields rent. But consider that one's residence also contributes to one's productivity. If you live in upper Manhattan, you have access to the commercial center of America. The job opportunities are much greater than in rural Alabama. This is not to say that job opportunities are the only factor. Crime rate, education, public services, and many other factors come into play. I think you get the general idea.

Now let's get to why you should care about this. One of the most important implications of the law of rent is its effect on wages. It means that wages are set not by the productivity of labor anywhere, but rather by its productivity on marginal land. Thus, as land values rise, wages tend to fall. As development extends further, labor is forced onto more marginal land, bringing down wages for everyone, and increasing unemployment. This downward tendency is further accelerated by land speculation which keeps more valuable land out of use.

This speculation doesn't just mess things up for the lower class. It screws up the economy. The "business cycle," as it's called today in economics, can largely be linked to the buildup of land values. As land rent and speculation increase, there is a smaller portion of the land being used for production. After a while, the ability to maintain that land reaches its breaking point, resulting in housing crises like we're seeing today.

It's common to point the blame for these kind of crises at banks(particularly the Federal Reserve) and their "predatory lending" practices. While there may be some merit to this, the real blame lies in our system of land tenure itself. Only when the land rent is rendered common property will these problems be resolved. To do this, the rent should be the source of public revenue, while harmful taxes on wages and interest are removed. In this way, our economy can run better than ever, free of the social injustices of poverty and unemployment, and the imbalance of the business cycle.

Poverty

2007-12-11T15:16:00.000-08:00

We've all seen the scenes of bony-looking children in some desert surrounded by makeshift huts that we wouldn't dream of living in, accompanied by some announcer's appeal to our sense of guilt. "For just $1 a day you can sponsor a child like this," they say. While such philanthropy may give us peace of mind with the sense that we're doing something about the problem, such gestures of kindness do little to address the wider causes of poverty and hunger. This individual child you sponsor may gain a competitive advantage over his peers, but he will still live in a poverty-stricken area, and his peers will be no better off.

So what is the cause of poverty? In the conservative mindset, poverty is the fault of those living in it. Many a cynic has implored that these poor hungry people might have a chance for success if only they would stop having so many children. In our own country, they claim that they are "lazy" and simply don't want to work. Sometimes they will claim that our welfare system has made them dependent and given them a disincentive to work. Without completely discounting all of these explanations, suffice to say they do not explain sufficiently the extent of poverty that exists in the world, nor its distribution.

Liberals, on the other hand, often take a conspiratorial view of poverty. They say it is caused by racism, by greedy corporations, or exploitation. Some take a zero-sum view of wealth and claim that other countries are poor because we are rich. Most who are educated in economics will understand the fallacy of the latter explanation. The other explanations may have some truth in them, but again, they do not reveal the whole picture.

In short, the conservative sees poverty as being caused internally, while the liberal sees it as external. There is truth in both views. An individual can elevate their socioeconomic status with the right tools available to them. However, poverty as a social phenomenon has social causes. Thus, in order to address poverty in a practical manner, we will have to view it as a social phenomenon, not an individual one.

Overpopulation

Let's start with overpopulation. The claim, as mentioned before, is that people go hungry because they have too many children. So why in God's name would they do such a thing? It boggles the mind what kind irrational person would starve themselves for the sake of having a large family. The fact is, however, that this line of reasoning is flawed. Because we live in a modern, post-industrial society, we tend to think of children as an economic burden. We have to feed them, clothe them, send them to school, pay for their college, get them medical care, and so on. But think about how the things on that list that a person in a third world country would not concern themselves with. Few people in such societies can get an education, so paying for books or college tuition is a non-issue. Health care, if it is available at all, would come from aid workers or a local herbalist. As for clothing, we wouldn't expect them to wear the expensive Nike sneakers or name-brand jeans that Westerners would wear, so this is also not a big expense for them. The one expense they really have to worry about is food. But then we are once again left with the question: why so many mouths to feed?

To understand this, we have to also understand that these countries have neither child labor laws nor social security. A child can be sent to work on the fields or in factories at a very young age, and thus, can be an economic asset after only a couple years of providing for them. Since some children will not survive to adulthood, families will have multiple children to ensure that some will survive to provide for them, especially in old age when they are unable to care for themselves, and have no pension or social security on which to survive.

The fact is that a lower fertility rate tends to follow economic development, rather than precede it. As people find themselves well fed and able to send their children to school, they find that they do not need to have so many children. As such, we cannot address poverty by addressing overpopulation. We must instead address overpopulation by addressing poverty.

The very term "overpopulation" tends to obscure the problem. People believe the world simply does not have enough resources to sustain the current population, or that it will soon reach that point. However, fertility rates around the world are already dropping, and current UN estimates say the world population will peak in 2050 at 9.36 billion, and stabilize thereafter. This is well within most experts' estimations of earth's carrying capacity. It should also be noted that future population projections seem to fall over time, so we may not even see that kind of population.

Exploitation

So what of the liberal charge that world poverty is our fault, or the fault of multi-national corporations? As we will see, there is some truth in this, but not in the same way that the Left generally thinks of it. They will often point to the low wages paid to third world factory workers by Western corporations. If the workers unionize or appeal for better wages, the company will simply set up a factory elsewhere. Liberals have proposed solutions such as global unionization or boycotting products from certain international corporations. There is much to be said for these approaches, but they fail to understand the economic cause of low wages.

Conservatives and libertarians are quick to point out that the wages offered by these companies are competitive for the areas in which they are located. The wages are low by our standards but not by their local standards. Otherwise, why would people work there instead of somewhere else? Wages will rise, they claim, as the country becomes more economically developed. However, a study of recent history shows that economic development in such countries is frequently lopsided, especially with the presence of export processing zones, which give foreign companies an advantage over domestic ones.*

The Key

So what is the cause of this uneven growth? What is the key to understanding the cause of poverty? You're standing on it. That's right: land. There is a finite supply of land on Earth, and only a fraction of that is economically valuable. Wealthy landowners buy up the most productive land and see their profits rise as others are forced onto less productive land. We see this in our own society with the housing bubble, but the situation is much worse in poorer countries. In Brazil, this phenomenon drives rainforest deforestation as a small group of wealthy landlords own much of the productive farmland, forcing poor farmers to cut down rainforest and use its poor soil to grow their crops until the soil is depleted, when they must cut down more forest to continue farming. Claims that there is not enough food to feed the population are undermined by the large amounts of productive farmland held out of use or underused by landowners in order to increase their land value. Thus, we see socioeconomic injustice and environmental injustice intimately connected.

But don't think that this is just an agrarian problem. It is every bit as much an urban dilemma, if not more so. Land values are much higher in urban centers than in rural areas, and as such, they attract even more land speculation. Owners often hold onto abandoned and underused buildings, anticipating a higher selling price. When the government provides services such as police and fire protection, or road and sewer maintenance, the value of these services gets capitalized into land values, essentially subsidizing these landlords. These vacant or underused force development to move outwards, contributing to sprawl, which further increases their land value, which in turn fuels more speculation, and so on. Meanwhile, in order to fund these services, the government implements confiscatory taxes, which drive businesses away, leading to more abandoned lots for land speculators. With a smaller tax base, the government has to raise taxes even more in order to keep its funding going.

The result is massive suburban sprawl and the degradation of the inner city. Crime runs rampant within the city, which lacks the tax base to improve law enforcement. Those with money usually live in the suburbs and commute to whatever good jobs there are in the city. Often cities will appeal for state or federal aid in order to stop the decay.

The Solution

The fact is that cities, rural areas, and even third world countries all have the resources to fix these problems. The problem is that those resources are kept out of reach for most people due to their heavy concentration in the hands of the wealthy few. Some are tempted to look to socialism to solve this problem, but socialism redistributes earned wealth as well as unearned wealth. At its worst, socialism gets rid of the market completely, which is essential for the efficient distribution of those resources. More moderate forms of socialism use heavy progressive taxation to redistribute wealth. However, as mentioned earlier, heavy taxation often drives business away, leading to fewer jobs, and thus a smaller tax base.

So how do we achieve a more efficient distribution of resources? To understand this, we must first understand that it is not all forms of wealth which require redistribution. Some wealth is produced through an individual's investment of time, effort, and capital. There is no reason to redistribute the wealth that an individual has produced. They should be entitled to all of it, and to do otherwise would be a disincentive for them to produce in the first place.

Recall that land is the key to all of this. It is the gifts of nature which should be evenly distributed among the population. So how do we do this? Land reform is often given a bad name by countries where this redistribution is done on the basis of political alliances rather than for the good of the people. For this and other reasons, the government should not take an active role in redistributing the land. Rather, they should reform the tax system such that it rewards efficient use of the land and penalizes land speculation.

How is this to be done? A 19th century social philosopher named Henry George proposed just such a solution. It is called the land value tax, a modified property tax. A normal property tax is really two taxes in one. It taxes the unimproved value of the land, or site value, as well as the improvements upon the land, such as buildings. When we tax improvements, that discourages efficient use of the land, as people are penalized for making better use of it. The land value tax would get rid of this aspect of the property tax. If taxing improvements is a disincentive for those improvements, does taxing land give a disincentive for owning land? Well, sort of. We all need land in order to live and to work, so we won't exactly see people stop using land. The real disincentive would be for land speculation, leading people to own only as much land as they need, and putting the rest up on the market. Thus, the land value tax would promote the most efficient distribution of land.

What I am proposing here is not a new tax to be added to numerous others. Instead, like Henry George, I support replacing all other taxes with a tax on nearly 100% of the rental value of land. This is bound to raise some questions and objections, and I will try to address some of the bigger ones in as little space as possible. To address them fully would require a full book on the subject.

Questions and Objections

First, how is the unimproved value of land determined? Real estate agents do this all the time. They have a simple expression to explain it: "location, location, location." A beach-front property in San Diego will be much more expensive than an equally sized property in rural Georgia. Proximity to schools, jobs, and services will all contribute to the land value. In other words, the unimproved value of land is determined by its utility relative to other plots of land. In order to ensure that land values are properly determined, there should be surveying committees who make land value surveys on some regular basis, such as every five years. The results of the surveys should be kept a matter of public record with easy access. This is another advantage of the land value tax: With an income tax, people's sources of income cannot be made public without an extreme violation of privacy. Land value, on the other hand, can be determined without any violation of privacy, and furthermore, it cannot be hidden.

Another objection is that the land value tax would raise the price of land, thus keeping poor people even further cut off from land ownership. This would seem to make sense, as other taxes raise the price of goods. When cigarettes are taxed, their price goes up in order to pay the tax. However, price is determined by supply and demand. Cigarette companies can change the supply of cigarettes to compensate for the added costs. However, land is in fixed supply. No one's making any more or less of it. So what of the demand? As we have discussed, the land value tax would discourage speculation, but would otherwise allow for more widespread land ownership. So the price of land would either stay the same or decline slightly in response to a land value tax. More to the point, the cost of land would be shifted from its sale price into the tax. Thus, the initial cost of buying land would be virtually nothing, and it would be in keeping the land that one's costs would be focused. Of course, this decrease in the price of land would only apply to new sales of land, and this would be problematic for existing landowners, for whom this would be an additional cost to the mortgage they are already paying. Consequently, any land value tax initiative should ideally have some sort of compensation for current landowners, either in the form of a rebate, or by only taxing further increases in their land value.

So what happens when we need to raise taxes? That's the beauty of the land value tax: the tax revenue grows automatically with society's needs and with increased public service. You will recall that I mentioned earlier how the value contributed by public services gets capitalized into land value. With a land value tax, this value can be retrieved. As a result, governments can fund public services with the land value they create. Of course, this is only true of those services which contribute to the public good. As such, the land value tax can be a good litmus test of other policies. If they can sustain themselves with the land value they produce, then they are sound policies. If not, we can consider it wasteful spending. This is an excellent tool for fostering better government.

Organic Policy

Maybe I'm just too much of a hippie, but I like to think of land value taxation as an organic tax. Not only is it related to nature, but fosters a more natural, organic relation between society and nature, between citizens and government, and between people within society. It restores our relationship to the earth as stewards rather than overlords. It creates a positive feedback loop between society and government, and truly helps government become an expression of society, as it is meant to be. By alleviating poverty and competition over resources, it improves human relations. It puts society into the same kind of balance which we find in nature itself.