The political economy of Natural Money |
30 September 2021
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Economics is often politics
Politics and economics are interrelated. Political economy was the name for economics until economists began using mathematical models and promoting economics as a science. Mathematical models can be helpful in understanding supposed relationships between variables like aggregate demand and employment. Nevertheless, political affiliations affect models economists choose to use. Liberals (in the US, they are called conservatives) on the right prefer to leave more to the markets, while social democrats (in the US, they are called liberals) on the left more often advocate government intervention.
Despite the political nature of economics, a few things are beyond dispute. For instance, incentives to produce goods and services do matter. Socialist economies face shortages of necessities and sometimes even outright famine. Market economies and capitalism have problems too that may turn out to be as bad. To keep capital profitable, we must buy more, even when we do not need more. That is where the advertisement industry comes in. That puts us on a trajectory to ecological disaster. And capitalism makes a few people very rich while many others remain poor. How to deal with these issues is a political question.
Presumably, there is a global capital or savings surplus or a lack of consumption. The money and capital markets fail to balance because interest rates cannot go below zero. The current way of dealing with the issue is governments going into debt and central banks printing money to prop up demand. The financial system is unstable because of leverage and interest charges. The current solution is central banks managing the financial system via money supply and interest rates. A better alternative would be to allow interest rates to go negative and implement a maximum interest rate of zero.
Engineering is a craft
Natural Money is an economic research project. Its aim is to evaluate whether it is feasible to have an interest-free financial system. This research explores existing theories and develops some new ideas in the process. If the benefits of negative interest rates exceed the drawbacks, we should deal with the consequences rather than meddling with the design itself. Natural Money comes with a set of prescriptions and outcomes. Some of them appeal to the left, while others appeal to the right. And some might appeal to neither side.
For instance, banning interest means that poor people may not be able to borrow. The left might think it is 'unfair' that the poor have no access to credit, while the right might object to credit markets not being 'free'. The measure can improve the financial position of the poor. They may need to postpone their consumption to avoid borrowing at usurious rates. And if poor people need credit, it is better that they get help or can borrow interest-free.
It may become harder to get a mortgage. Consequently, homeownership might decline. Borrowers may have to bring in more capital to get a mortgage. On the other hand, people with money in the bank may use this money to invest in real estate. The outcome is deleveraging, but perhaps this is undesirable as people who pay rent do not build their capital. Governments may have to step in to encourage homeownership, for instance, by providing guarantees, discouraging buying homes to rent them out, limiting rents or increasing the supply of homes with the help of building societies.
Scientists try to establish relationships between phenomena. Engineers use these relationships, for instance, to design a bridge. Natural Money is a design of an interest-free financial system with the help of a wide range of existing monetary and economic theories. When an engineered system is operational, issues may come to light. For instance, new versions of computer software often fix bugs in previous versions. Economics as science may have failed as the evidence for many theories is questionable. From an engineering perspective, this is less problematic but it may mean more fixes.
Natural Money aims to be a comprehensive engineering design for the financial system. You cannot cherry-pick parts and then your selection to work. Likewise, you cannot select a few car parts, screw them together, and use them to drive to your destination. If politicians, lobbyists or activists interfere with the design, whether it is under the guise of freedom or fairness, you can expect it to go downhill from there. There are no free or fair cars either. If the basic design is good, problems that arise could be issues that we can fix or drawbacks that we should accept.
This project explores the feasibility of a negative-interest-rate-only financial system. This goal is ambitious while the available resources for this project are negligible. This research is thus abstract and without detail. Natural Money could be the best long-term solution for the global financial system. Economists are ignoring it. And so, exploring this void may turn out to be fruitful in a time when many economists research questions with little or no practical value.
Natural Money and politics
With Natural Money, political choices remain, including questions of freedom and fairness. We may need to reformulate these questions. With Natural Money, the economy may do well by itself, so governments and central banks may not need to manage the economy via government spending and interest rates. Economic and financial policymaking may need to shift towards sustainable development goals and reducing poverty. On the other hand, negative interest rates can help make the economy sustainable and redistribute income so that these objectives may require less government interference.
Wealth and power are concentrated. The world's billionaires own more wealth than the poorest half of the world population. The top 500 corporations represent one-third of the world economy. Natural Money does not solve these issues, but it may help reduce further wealth concentration by allowing lower yields on capital. There is a case for taxing billionaires at extraordinarily high rates and breaking up corporations as long as this does not entail capital destruction. And there is a case for taxing large corporations more than smaller businesses to counter the trend of wealth and power concentration.
A collapse may be imminent. We now need two times the resources this planet can sustain. If we are ever to deal with this issue in a civilised manner, it may require a significant reduction in the living standards of the wealthy. Economies may not grow and even contract. Natural Money can provide functional financial markets in adverse conditions, as is explained in Permanent Liquidity. And so, it may be possible to implement drastic measures without causing economic collapse.
Declining interest rates are a consequence of capital formation and, to some extent, low taxes on capital. Low taxes on wealth benefit the rich. Supply-side economics claims that lowering taxes on the rich promotes capital formation and wealth to trickle down. As a result, wealth inequality increased, but prices and interest rates may be lower than they otherwise would have been. Taxing wealth and using the proceeds for consumption may reduce available productive assets and cause interest rates to rise, cancelling the effect of the wealth tax to some extent.
Wealthy people save and invest more, and in doing so, they help to create productive assets. If you are rich, you have more money to save and invest, but you can also become rich by saving and investing. Hence, there is a case for not taxing productive assets too heavily. Taxing wealth may prompt people to hide their wealth in unproductive assets like art or gold, promoting a reduction in available capital and rising interest rates. Instead, we may need to reduce resource-consuming frivolous consumption and direct investments to more urgent needs. It entails the neutering of property rights by reducing the options to consume or invest.
If governments can borrow at negative interest rates, they can tap into surplus wealth without directly taxing it. And so, Natural Money itself does not require taxing or confiscating wealth. There may still be reasons to tax or confiscate wealth, most notably if it is ill-gotten, excessive, or causes power concentration, for instance, when billionaires can bribe politicians or judges. Capitalism and markets have been like a religion. It was a religion with an inverse morality extolling greed. We may have to deal with the consequences. What to do, is a political question and beyond the scope of this research.