This is an interesting article. It takes a very Post-Keynesian monetary position which sees the intermediation of a treasury as void in a modern monetary context. I find it a convincing argument, as it goes back to the credit theory of money, or money as debt. Within this postmodern framework, the ability to issue debt, in the form of stocks, allows stakeholders and businesses to create lasting economic relations in the community and region. Thus it leads to reduction in financial economies of scale as well as democratising financial practices via decentralised markets. (by the blog author)
by Chris Cook
Following the recent upsurge in interest in Modern Monetary Theory (MMT) I was rash enough to make the comment that the central insight of MMT – that modern ‘fiat’ money is a credit instrument ultimately based upon the government’s power to tax – is muddied by disputes as to what the proper basis for taxation actually is, or indeed, whether there should be any taxation at all.
FT Alphaville invited me to contribute a post on the ‘Modern Fiscal Theory’ I suggested. But I decided to go further and document my view that in a world of direct connections a Treasury is no more necessary as a credit intermediary than is a Bank.
Post-Modern Fiscal Theory looks to the networked, de-centralised and dis-intermediated economy emerging rapidly from the post October 2008 wreckage.
Zen and the Art of Economics
What is Value anyway? As J A Wheeler put it, “Reality is defined by the questions you put to it”.
Value is in my view definable only in relative terms, by reference to a standard unit of measure for value or unit of account. This standard unit is akin to a metre as a standard unit of measure for length, and a kilogramme as a standard unit for weight.
What are the sources or bases of Value? My analysis is as follows:
- Location – 3D Space – an immaterial, effectively finite and rivalrous resource;
- Energy – material and immaterial, static or dynamic – a mix of finite (non-renewable) and effectively infinite (renewable) rivalrous resources;
- Intellect – (i) subjective – ie what is between our ears including knowledge, skills, experience, intuition, contacts, gumption and so on; and (ii) objective – energetic patterns or records, independent of location, and above all… infinite and non-rivalrous resource.
Location, Energy and objective Intellect are productive assets subject to rights of ownership and use. Since slavery was abolished, productive individuals cannot be owned, but they can enter into obligations such as debt. More to the point, they may contract the use of their Manpower (energy – or unqualified Labour) and the use value of the subjective Intellect (qualified Labour) with which they put their energy to best use.
Back to the Future
The financial instrument which will underpin what Gillian Tett calls a ‘Flight to Simplicity’ goes back many hundreds if not thousands of years. Its very existence underpins the MMT case, and it has been airbrushed from economic history for over 100 years.
For some 500 years sovereigns financed their expenditure through issuing ‘Stock’ to suppliers and investors in exchange for value received. This stock — which took the form of half of a wooden tally stick — was returnable to the Exchequer in settlement of tax obligations. It was not a receipt for (say) gold held in custody, or for value received: stock was and still is (gilt-edged stock is a dated credit instrument) an IOU or credit instrument.
The very phrase ‘rate of return’ derives from the rate at which stock may be returned to the issuer, and that rate depends upon the existence and rate of the value flow. By creating a new generation of stock from the flows of value derived from productive people and from productive assets, such as rental value, or energy value, we may completely re-base credit and currency and enable direct ‘Peer to Asset’ investment and ‘Peer to Peer’ credit.
As Minsky said: “Any economic unit can emit currency. The serious problem is in getting it accepted.”
Law is Code
A new generation of legal code is now emerging: or rather, ancient code is re-emerging in modern form. Prescriptive one-way agreements imposed under the Anglo Saxon ‘Rule of Law’ to manage conflicted relationships are replaced by simple consensual agreements to a common purpose. This is normal practice East of Suez: the joke is that there are as many Sumo wrestlers in the US as there are attorneys in Japan.
The issue and acceptance of a new generation of Stock or currency requires such consensual agreements — frameworks of trust — within which the various stakeholders will interact. One of the key outcomes is that intermediaries will transition to a new role as service providers.
For sceptics, I point out firstly, that dis-intermediation is already happening. One of the reasons for the current bubble in commodity prices is that banks no longer have the capital to intermediate market risk and have convinced risk averse investors to do so on a massive scale. Banks make juicy returns on minimal capital, demonstrating that dis-intermediation is actually in their financial interests.
Secondly, P & I Clubs based in London have long mutually insured and pooled risks which insurance intermediaries are unwilling or unable to take, and for 135 years a service provider, Thomas Miller, has managed these clubs and the risk.
An Energy Standard
While we will in future see people-based credit and asset-based currencies, the question remains as to what standard unit of account should be used to price exchanges of value.
A unit of energy is the only absolute, and in the same way that carpets are not measured in light years or angstrom units, the ‘Energy Standard Unit’ should be relevant to everyday experience, eg the energy equivalent of 10 Kilo Watt Hours. Note that this unit of account is not the same as the varied units of energy-based currency which may evolve and be exchanged by reference to the standard.
I foresee two great parallel trends.
Firstly, resolution of unsustainable mortgage (land-based) debt into a new generation of stock based upon rental values in a debt/equity swap on a massive scale.
Secondly, transition to a sustainable economy through direct ‘energy stock’ investment and the Big Trade of the 21st Century will be the exchange of intellectual value for the value of energy saved: Nega Watts and Nega Barrels.
Adoption of an Energy Standard leads to a new calculus forming the basis of all economic decisions. Dollar Economics becomes Energy Economics.