Newsletter No. 15 - July 2008
Links to other Newsletters can be found here.
CONTENTS
1. Editorial
2. "Money
From Thin Air" - Guardian
online article, March 20 2008
3. Book Reviews
(2) Fred Harrison, THE
SILVER BULLET, the
IU, 2008, 220pp, paperback
4. "Changing
Games In The Global Casino" by Hazel Henderson
5. "Debt & Deception", Ron
Morrison's no-frills booklet on banking
reform
6. IMF Enquiry Into U.S. Financial System
7. A New Ecological Website from Sandy
Irvine and colleagues
1. EDITORIAL
Since February, prices of food and fossil
fuel energy have risen dramatically; growing
world demand for them is not matched by growing supply.
Both are connected with climate change,
for example by the conversion of food-growing land
to biodiesel and by unprecedented flooding, as in Iowa
in June - see
this article.
As these material threats have grown,
the crisis engulfing the world's "dematerialised",
electronically-based money system has been deepening
too. Could we be experiencing the early stages of a collapse
of interconnected natural, economic and social systems
that support our present way of life?
Perhaps not yet, but a worldwide
21st-century "downshift" to
a new long-term phase in human history is a real possibility.
What other peaks will accompany "peak oil" -
such as "peak food", "peak
trade and travel", "peak cities", "peak
population", and "peak money"?
How would this downshift come about, and with what outcomes?
The world community has not yet developed the
capacity or the will to respond to the challenges
that face us. Our inability to help people in countries
like Iraq, Palestine, Afghanistan, Myanmar (Burma),
Zimbabwe, and Sudan reflects a continuing legacy of
misunderstanding and mistrust which prevent the former
imperial peoples working together effectively with
those they dominated.
Recent events in Europe reflect a
further obstacle - a split, not just between different
nations, but between people who identify with centralised
big business, big government and the big professions,
and people who see themselves foremost as democratic
citizens. The only people - the Irish - given the opportunity
to vote on accepting or rejecting this year's Lisbon
Treaty on Europe's future decided clearly to reject it.
Now the main concern of their elites is how to nullify
that decision.
The way the money system works now
pervades economic life worldwide, rewarding some behaviours
and penalising others. It is systematically perverse,
rewarding much that should be penalised and vice versa. Reforming
the ways it works will be a necessary response to
the other challenges we face, even if not by
itself sufficient to deal with them.
2. "MONEY
FROM THIN AIR" - Guardian
online article, March 20 2008.
The full text of my paper (875 words)
of 20 March can be found
here, together with comments posted by readers in
the following three days. Here are a few quotations from
it.
"Once again, governments' failure to control
the greed of bankers is creating financial
disaster for many innocent people; and, once again,
officialdom has failed to ask the basic questions about
why this has happened, and answer in words that normal
citizens can understand.
"... The key question is
this:
did the banks' privilege of creating money to
lend to one another play a significant part in fuelling
the credit bonanza, subprime market and financial boom
that then went bust, leaving such a tangle of international
interbank indebtedness that central banks and other authorities
like the Financial Services Agency could not assess the
potential consequences if it unravelled? ...
"... The challenge is for
independent citizens outside
the mainstream political, economic, and financial complex
to .. press the Chancellor and others responsible for
managing our money system to tell us, in words we will
understand:
• Where did the billions of money come
from which fuelled the credit bonanza, subprime
market and associated financial boom? ...
• Where have those billions gone?
Where are they now? Who got them, and what
have they done with them? Have they "been laughing all the
way to a bank" with them? Is their bank
quietly laughing too?
• Or have the lost billions simply disappeared
into the thin air from which bankers originally
created them?
• If so, during their return
journey from and then back into thin air, roughly what proportion
of them will have enriched the bankers and other financial
operators who handled them on the way?"
Update: By July 2008 reported pickings
from the financial collapse by people responsible
for it in the UK include golden handshakes of £760,000
to Adam Applegarth, sacked Chief Executive
of Northern Rock, and £612,000 to Clive
Briault, senior Financial Services Authority
official who lost his job after failing to supervise
that bank effectively. Peanuts, no doubt, compared
to US handouts of $100 million to Chuck Prince of
Citigroup (who famously said , "As long as the
music is playing you've got to stay in the dance"),
and $161 million to Stan O'Neal of
Merrill Lynch, sacked as Chief Executives after their
banks' multi-billion dollar losses. But not
peanuts to the countless thousands of people
who have lost and will continue to lose jobs, houses
and money because of the incompetence and greed of
those richer people responsible for managing the money
system.
3. BOOK REVIEWS
(1) Brian Hodgkinson, A NEW
MODEL OF THE ECONOMY, Shepheard-Walwyn,
2008, 348pp, hardback. The publisher, Anthony Werner,
is kindly offering the book to readers of this Newsletter
at a special reduced price of £22.50 (instead
of £30.00) plus postage. To order it, click
here.
I judge this to be a very important book -
by Adam Smith's standard in The Theory of Moral Sentiments
(Part I, Section I, Chapter V, 10):
"When a critic examines a work
..., he may sometimes examine it by an idea of perfection,
in his own mind, which neither that nor any other human
work will ever come up to; and as long as he compares
it with this standard, he can see nothing in it but
faults and imperfections.
"But when he comes to consider the rank
which it ought to hold among other works of the same
kind, he necessarily compares it with a very different
standard, the common degree of excellence which is
usually attained in this particular art; and when he
judges of it by this new measure, it may often appear
to deserve the highest applause, upon account of its
approaching much nearer to perfection than the greater
part of those works which can be brought into competition
with it."
Hodgkinson's new model of the economy
is much more relevant
to the present state of real-world economies than
the models offered by most economics textbooks.
On that account, I applaud his book and
recommend it unreservedly to readers with
a serious interest in the subject - and I give
quite a lengthy account of it here.
As he explains in his preface of November 2007,
"This book is the outcome of many
years study of Economics from two rather different
standpoints. On the one hand, my study of modern academic
Economics began at Balliol College, Oxford, and continued
through a long career of teaching the subject and editing
an economics journal. On the other hand, I have studied
and taught for almost as long at the School of Economic
Science in London and Oxford, where the fundamental
principles of the subject, rather than its ever-changing
theories and multitudinous empirical facts and statistics,
have been the central issue.
"An analogy may help to put these two
standpoints into perspective. Building a house requires
both firm foundations and a well designed, aesthetically
pleasing superstructure. Modern academic Economics
provides the latter, but not, in my view, the former.
It is a fine house, built upon foundations which are
askew. Hence it leans dangerously, and might even collapse
in a welter of broken theories and dubious ‘facts’.
One hopes that the real economies which it purports
to explain do not similarly come to grief. Cracks are
certainly appearing at the time this book is published.
Over half a century of research and teaching by the
School of Economic Science, however, has yielded a
set of principles revealed by reason and by careful
examination of economic thinkers in the tradition of
natural law. Upon the foundation of these principles
this book attempts to construct a new house of Economics
from the materials offered by modern analysis.
"A growing awareness of the inadequacy
of existing economic orthodoxy is evident from a number
of books and articles that have appeared in recent years,
such as A Guide
to What’s Wrong with Economics (ed. E. Fulbrook,
Anthem Press, 2004). It is in response to this need
for a new kind of economic model that this book is
offered. The model presented is not mathematical; it
is rather an amendment of the present framework of
micro and macro economic analysis by changing the assumptions.
In particular, it removes the ‘flat-earth’ assumption of
homogenous land. As Eaton and Lipsey – two economists
who have realised the importance of land in economic
theory – have written, ‘many phenomena that
appear inexplicable when inserted into a spaceless model
are explicable in a spatial model’ (On the
Foundations of Monopolistic Competition and Economic
Geography, Edward Elgar, 1997). The New Model
of the Economy hopes to restore the spatial model
that the founders of Economics, such as Ricardo, had
in mind."
There is a fuller introduction
on the publisher's
web page:
"This book offers a radical revision
of modern economic theory. Its starting point is
the existing body of both micro and macroeconomics,
as developed in such textbooks as Economics by Begg, Fischer
and Dombusch and Positive Economics by Lipsey
and Chrystal. Following a similar framework to these
books, it adjusts the whole range of theory by introducing
some new concepts and other earlier ones that have been
much neglected in the economic thought of the past century.
These are related especially to the fundamental part
played by land, in its proper sense of all natural resources
available on the earth, the significance of credit, especially
through the banking system, and the crucial impact of
the method of taxation.
"The resulting analysis yields a thoroughly
revised version of the contemporary model of a capitalist
economy, so that a genuine ‘third way’ is
revealed. This is not a mere modification of the present
system of absentee ownership confronting a market for
labour, with all the attendant evils of unemployment,
monopoly and maldistribution of wealth and income.
Rather it is a system based upon natural law, exhibiting
economic security for all, fair distribution of output
and, above all, the opportunity for self-fulfilment
through work.
"The 'new model' draws upon the masters
of economic thought from Smith and Ricardo to Marshall,
Schumpeter and Keynes, by highlighting concepts often
omitted from current studies of their works; such as
Ricardo’s analysis of scarcity and differential
elements of rent, Schumpeter’s view of the role
of banking and Keynes’s hints at a labour theory
of value. Indeed this far-reaching revision makes bold
advances upon the Marshallian theory of the firm and
the Keynesian theory of national income determination,
thus providing new insights into both micro and macro
theory. It remains faithful, however to the tradition
of these latter thinkers in explaining matters fully
in words, and resorting to mathematics mainly through
the use of diagrams intelligible to anyone with an
elementary grasp of the subject.
"Whilst the book strives to avoid value
judgements in the interests of social science, it undoubtedly
carries strong implications about economic policy.
These are bound up with the central notions of free
land and free credit, which have been singularly ignored
by policy-makers since a few valiant attempts to introduce
them in the early twentieth century. Hence the ‘new model’ is
offered to both theorists and practitioners of economics,
to politicians and public servants, but particularly
to those who, like the author, truly seek a new vision
of the subject."
The immediate importance of this book
is that, with professional economists' conceptual outlook
and language, it corrects serious failings in
conventional economic analysis. It should therefore
help to correct some of its worst practical outcomes. In
the longer-term, "A New Model of the Economy" could help
to clear the way for an even more radical reappraisal of
the economics discipline.
It does however have, in Adam Smith's words, some "faults
and imperfections".
First, there are some points of detail.
For instance, the references to cheques in the chapter
on "Money,
Credit and Interest" appear to ignore that electronics
has now replaced paper as the main vehicle for creating,
storing and transmitting money. But that does
not affect Hodgkinson's basic understanding that "banks
are not just relending deposits when they give advances;
they are creating money. ... Schumpeter puts it pithily
when he says that banks create purchasing power out of
nothing. The overlooking of this crucial point cripples
economists' ability to see the real potential of a banking
system".
Second, an apparent failure to see the connection
between taxing the site-value of land and taxing other
environmental resources is more serious. Although
Hodgkinson accepts (p13) that economic analysis should
define "land" to include our whole natural
environment, he then suggests (p18) that, since air,
water and sunshine "are free goods, effectively
in infinite supply, a more useful definition would
limit land to the surface of the earth and finite natural
resources above and below it, like minerals and, perhaps,
air space."
The fact is that air and water
are no
longer in infinite supply, because of rising
local, national and global demand for fresh water,
and for the productive resources of the seas and oceans,
and their use - and the atmosphere's use - as sinks
for wastes and pollution (eg carbon). The money
value of using them has risen well above zero and
can be taxed (or traded). The case for capturing
it as public revenue - global, national or
local - is the same as for capturing land site-value:
people and organisations, who have not themselves created
those values but benefit monetarily from them or deprive
others from benefiting, should pay for them - and enable
existing inefficient and unjust taxes to be reduced.
Third is a vital question about language and
definition. Like most supporters of land value
tax, Hodgkinson relies on Adam Smith's and Ricardo's
esoteric classical concept of "economic rent".
That differs from the normal meaning of "rent" as
payment to a landlord, and is not easily applied to
environmental taxation. So it obscures the rationale
for these taxes in the public mind. It is more convincingly
explained as making people pay for the value they take
from common resources.
Fourth, the term "free land" could
mislead people into thinking that land with a capital
value of zero - because its annual value is paid over
to the state - will become freely accessible to all.
Similarly "free credit" might
seem to mean that credit will become another free good,
effectively in infinite supply and available to all at
no cost. Although monetary reform will benefit most people
in other important ways, that would not be one of its
outcomes. These key questions of definition and terminology
need further practical clarification, along with the
concepts of "capital", "profit", "wealth", "risk",
etc, which are dealt with in the book.
Finally, Hodgkinson says he has striven "to
avoid value judgements in the interests of social science".
But his emphasis on recognising natural law as essential
to a well-founded science of economics that understands
work, land, co-operation, capital, credit, and surplus
as a basis for freedom and justice, surely
reflects a value judgement.
Since economics declared its independence from moral
philosophy as an academic discipline about a hundred
years ago, it has claimed to be an objective science. That
was always a spurious claim. Economics is a
body of understanding and analysis based on a calculus
of values (money); and that has been developed over the
centuries to serve the interests of powerful and wealthy
men. How could it possibly be an objective science? It
needs to be recognised for what it is for: to investigate
what should be done. And that requires value judgements.
"Don't confuse economics with ethics",
as economics students are instructed, reflects "the
lie in the soul" of today's economics discipline. "A
New Model of the Economy" is an important step toward
a more radical reappraisal.
(2) Fred Harrison, THE SILVER
BULLET: There's Only One Way to Kill Poverty,
the IU, 2008, 220pp, paperback. For prices and a
5-star review by Dave Wetzel at Amazon, click
here.
This book, published by the International Union for
Land Value Taxation, is an excellent practical
companion to A New Model of the Economy. Warmly
recommended.
It supports "social capitalism".
That would not be “a hybrid (a pastiche of existing
political doctrines), but a unique philosophy
of social organisation designed to liberate
the individual and protect the common good”. It
would be based on making people pay for what
they take from the value of common resources, instead
of on what they themselves contribute to the
common wealth.
The Silver Bullet very interestingly applies
the message of Harrison's other recent books to the ex-colonial
countries of South America, Asia and Africa.
Among the comments in my
longer review,
in Land & Liberty, Spring
2008, pages 22-23, I repeat that "making
people pay for what they take from the
value of common resources" states the argument
for land and environmental taxes today more clearly than
does the classical concept of "economic rent".
4. "CHANGING GAMES IN THE GLOBAL CASINO"
That is the title of an
article of 17
June 2008 by Hazel Henderson - author
of Ethical Markets: Growing The Green Economy;
president of the independent Ethical Markets Media, LLC;
and co-creator of the Calvert-Henderson
Quality of Life Indicators.
Here are some extracts from it.
"At last, the world is seeing the difference between
money and real wealth, between “demand” in
markets and the real needs of people without money.
"... The games of traders, speculators,
hedge funds, private equity and even pension funds
and charitable foundation and university portfolio
managers, driving up prices of oil and food, invoke
increasing outrage and demands for reform. The
recent FAO Summit in Rome called for $10 billion more
to pay these higher food prices. Yet, without financial
reforms, this money will fatten players in the global
casino.
"The flaws of laissez-faire economics
are again evident in the latest set of financial debacles,
with $100 billion written down from faulty risk models
and collapsed hedge funds to speculation in oil and
commodities. Despite
the efforts of socially-responsible investors and asset
managers to impose transparency, better corporate governance
and true-cost pricing, little progress has been made
to internalize social and environmental costs into risk-analyses,
company balance sheets and national GDP accounting. These
huge, mounting costs: from pollution to global climate
change, ignored for decades by financiers, accountants
and most official statistics, now feed the suspicions
of millions that global finance is indeed a casino
with rules rigged by the insiders."
You can download the complete text of this Trendspotting
article in Ethical Markets from here.
5. "DEBT & DECEPTION"
Ron Morrison's "short, no frills
booklet" describes how "the banking system
has come to dominate the life of Joe Public and his democratic
government. Here is a core proposal for banking reform
at a time when the present system is in disarray – perhaps
terminally so."
For
the text of the booklet, go to www.scottishmonetaryreform.org.uk.
Then click on ‘Read the
Booklet’.
I strongly recommend it as an
introduction to monetary reform and a starting point
for discussion about some of its details.
6. IMF ENQUIRY
INTO U.S. FINANCIAL SYSTEM
As enquiries by national financial authorities examine
how to prevent the next credit boom and crunch, the International
Monetary Fund's (IMF's) board of directors "has
ruled that a so-called Financial Sector Assessment Program
(FSAP) is to be carried out in the United States. It
is nothing less than an X-ray of the entire US financial
system". This is the first time the US
has had to accept this treatment. "When the final
report on the risks of the US financial system is released
in 2010 .... it is likely to cause a stir internationally."
Reported in Der
Spiegel (26
June), let's hope that, when the report eventually
appears, it gets to grips with fundamental
faults in the US money system and is comprehensible
to concerned citizens in the US and other "democratic" countries.
7. A NEW ECOLOGICAL
WEBSITE
www.ecological-sustainability.info
It is well worth taking a look at this
website from Sandy Irvine and his colleagues, and its "About
Us" section. It "promotes the
cause of ecological sustainability. By that, we mean
that the conservation of environmental systems, biodiversity
and bioregional human cultures must be society’s
overriding goal. We are committed to a politics for life
on earth, all life not just its human form. This politics
is founded on an ethos of 'enoughness',
sharing the Earth’s bounty, rather than the avaricious
'moreness' that
dominates contemporary culture".
While radically "green", it stresses that
building the necessary social forces for change will
be helped by not making marginal social proposals that
pointlessly alienate potential support, like the decriminalisation
of cannabis. "Such politics really are an infantile
disorder. We need to stick to bare essentials that address
the really urgent challenges of today".
STOP PRESS
The updated
German edition of Joseph Huber's & James
Robertson's "Creating
New Money: A Monetary Reform for the Information Age" (2000)
has just been
published. Go to www.sozialoekonomie.de
and click on ALLGEMEINES PROGRAMM to see details.
James Robertson
10th July 2008
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