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Newsletter No. 15 - July 2008

Links to previous Newsletters can be found here.

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CONTENTS 

1. Editorial

2. "Money From Thin Air" - Guardian online article, March 20 2008

3. Book Reviews

(1) Brian Hodgkinson, A NEW MODEL OF THE ECONOMY, Shepheard-Walwyn, 2008, 348pp, hardback

(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