The Origin of Money

Markets are true democracies. The allocation of resources, capital and labour is achieved through the mechanism of spending, and so based on spending preferences. As money flows through the economy the popular grows and the unpopular shrinks.  Producers receive a signal to produce more or less based on spending preferences. Markets distribute power according to demand and productivity; the more you earn, the more power you accumulate to allocate resources, capital and labour. As the power to allocate resources (i.e. money) is widely desired, markets encourage the development of skills, talents and ideas.

Planned economies have a track record of failure, in my view because they do not have this democratic dimension. The state may claim to be “scientific”, but as Hayek conclusively illustrated, the lack of any real feedback mechanism has always led planned economies into hideous misallocations of resources, the most egregious example being the collectivisation of agriculture in both Maoist China and Soviet Russia that led to mass starvation and millions of deaths. The market’s resource allocation system is a complex, multi-dimensional process that blends together the skills, knowledge, and ideas of society, and for which there is no substitute. Socialism might claim to represent the wider interests of society, but in adopting a system based on economic planning, the wider interests and desires of society and the democratic market process are ignored.

This complex process begins with the designation of money, which is why the choice of the monetary medium is critical.

Like all democracies, markets can be corrupted.

Whoever creates the money holds a position of great power — the choice of how to allocate resources is in their hands. They choose who gets the money, and for what, and when. And they do this again and again and again.

Who should create the monetary medium? Today, money is designated by a central bank and allocated through the financial system via credit creation. Historically, in the days of commodity-money, money was initially allocated by digging it up out of the ground. Anyone with a shovel or a gold pan could create money. In the days of barter, a monetary medium was created even more simply, through producing things others were happy to swap or credit.

While central banks might claim that they have the nation’s best democratic interests at heart, evidence shows that since the world exited the gold exchange standard in 1971 (thus giving banks a monopoly over the allocation of money and credit), bank assets as a percentage of GDP have exploded (this data is from the United Kingdom, but there is a similar pattern around the world).

Clearly, some pigs are more equal than others:

Giving banks a monopoly over the allocation of capital has dramatically enriched banking interests. It is also correlated with a dramatic fall in total factor productivity, and a dramatic increase in income inequality.

Very simply, I believe that the present system is inherently undemocratic. Giving banks a monopoly over the initial allocation of credit and money enriches the banks at the expense of society. Banks and bankers — who produce nothing — allocate resources to their interests. The rest of society — including all the productive sectors — get crumbs from the table. The market mechanism is perverted, and bent in favour of the financial system. The financial system can subsidise incompetence and ineptitude through bailouts and helicopter drops.

Such a system is unsustainable. The subsidisation of incompetence breeds more incompetence, and weakens the system, whether it is government handing off corporate welfare to inept corporations, or whether it is the central bank bailing out inept financial institutions. The financial system never learned the lessons of 2008; MF Global and the London Whale illustrate that. Printing money to save broken systems just makes these systems more fragile and prone to collapse. Ignoring the market mechanism, and the interests of the wider society to subsidise the financial sector and well-connected corporations just makes society angry and disaffected.

Our monopoly will eventually discredit itself through the subsidisation of graft and incompetence. It is just a matter of time.

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The Beauty of America

Eric X. Li writes the most controversial piece of the year thus far, in which he concludes that democracy is a problem for the West:

Many have characterized the competition between [America and China] as a clash between democracy and authoritarianism. But this is false. America and China view their political systems in fundamentally different ways: whereas America sees democratic government as an end in itself, China sees its current form of government, or any political system for that matter, merely as a means to achieving larger national ends.

In the history of human governance, spanning thousands of years, there have been two major experiments in democracy. The first was Athens, which lasted a century and a half; the second is the modern West. If one defines democracy as one citizen one vote, American democracy is only 92 years old. In practice it is only 47 years old, if one begins counting after the Voting Rights Act of 1965 — far more ephemeral than all but a handful of China’s dynasties.

Why, then, do so many boldly claim they have discovered the ideal political system for all mankind and that its success is forever assured?

The answer lies in the source of the current democratic experiment. It began with the European Enlightenment. Two fundamental ideas were at its core: the individual is rational, and the individual is endowed with inalienable rights. These two beliefs formed the basis of a secular faith in modernity, of which the ultimate political manifestation is democracy.

In its early days, democratic ideas in political governance facilitated the industrial revolution and ushered in a period of unprecedented economic prosperity and military power in the Western world. Yet at the very beginning, some of those who led this drive were aware of the fatal flaw embedded in this experiment and sought to contain it.

The American Federalists made it clear they were establishing a republic, not a democracy, and designed myriad means to constrain the popular will. But as in any religion, faith would prove stronger than rules.

The West’s current competition with China is therefore not a face-off between democracy and authoritarianism, but rather the clash of two fundamentally different political outlooks. The modern West sees democracy and human rights as the pinnacle of human development. It is a belief premised on an absolute faith.

China is on a different path. Its leaders are prepared to allow greater popular participation in political decisions if and when it is conducive to economic development and favorable to the country’s national interests, as they have done in the past 10 years.

However, China’s leaders would not hesitate to curtail those freedoms if the conditions and the needs of the nation changed.

The fundamental difference between Washington’s view and Beijing’s is whether political rights are considered God-given and therefore absolute or whether they should be seen as privileges to be negotiated based on the needs and conditions of the nation.

Li has made a staggering error: he has conflated individual rights with democracy. These are actually two separate ideas. In fact, the two notions can sometimes be opposed: in a pure democracy, 51% of the population could successfully vote to cook and eat the other 49%. That is where the notion of individual liberty and creator-endowed rights come in: while some democracy is tenable, the actions of a democracy that would be damaging to an individual’s liberty are deemed to be unconstitutional. This was the shape of America’s constitution after the revolution.

So Li is correct — America was not at its birth a democracy. America was set up as a constitutional republic. Its constitution was designed to protect individual liberty (even if it has not always been entirely successful at doing so). The Constitution is written very simply and beautifully. Here’s the First Amendment:

Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.

Simple, specific, categorical. No ifs, no buts. Other nations have paid lip-service to fundamental human freedoms, but they always wrapped themselves up in fineries. Here’s Europe’s attempt:

Everyone has the right of freedom of expression. This right shall include freedom to hold opinions and to receive and impart information and ideas without inference by public authority and regardless of frontiers. This Article shall not prevent States from requiring the licensing of broadcasting, television or cinema enterprises.

The exercise of these freedoms, since it carries with it duties and responsibilities, may be subject to such formalities, conditions, restrictions or penalties as are prescribed by law and are necessary in a democratic society, in the interests of national security, territorial integrity or public safety, for the prevention of disorder or crime, for the protection of health or morals, for the protection of the reputation or rights of others, for preventing the disclosure of information received in confidence, or for maintaining the authority and impartiality of the judiciary.

In Europe, you have a right to free expression at the discretion of the democratically-elected authorities. And that’s not really a right at all. It’s a semi-right; a right with a whole lot of strings. You have the right to life — so long as the other 51% don’t vote to cook and eat you. 

But America’s constitutional republic is a long-gone ideal. America’s Congress pumps out a wealth of legislation not specifically authorised by the Constitution. The first breaches were done with the best of intentions: the Fourteenth Amendment applied the Bill of Rights to the states, albeit shredding the Ninth and Tenth Amendments. The Civil Rights Act gave racial minorities equal accessto public and private facilities, thereby ending the right of property owners to discriminate against whomever they chose. I am broadly supportive of those measures. But later breaches have been much more dangerous.

Corporations are now routinely bailed out, destroying the market mechanism and creating an aristocracy of “systemically important” corporations with access to Uncle Sam’s chequebook. The power to coin money has been delegated from the Treasury to a private cartel known as the Federal Reserve, allowing the private bankers to create massive and dangerous credit bubbles. The PATRIOT Act, and the NDAA of 2011 shredded the Fourth Amendment and ended the ancient right to Habeas Corpus. Presidents since the Second World War have routinely gone to war without an express declaration authorised by Congress. Obamacare has created a healthcare mandate, compelling American citizens to buy a commercial product — health insurance. Even the First Amendment has been turned upside down — corporations (who are not people) can spend limitless money on political campaigns, while political protestors (who are definitely people) are now confined to caged “free speech zones”. And that’s just from the top of my head.

So it is important to remember that criticisms of America today are criticisms of the present politics of America, and not of the ideals of constitutionalism, or of individual liberty.

It is certain that America today is in dire straits: deeply indebted to the rest of the world, heightened unemployment, the world’s largest prison population, a broken and zombified financial system stripped of the market mechanism, a huge swathe of citizens without access to medical treatment, tent cities.

And it is also certain that America’s welfarism has contributed to its debt. But that is more the fault of large corporations, farmers, and the military industrial complex who suck up subsidies and then call it “profit”, than it is the poor who without subsidies probably could not eat. But certainly all the subsidies have come out of America’s newfound democratic status. Give people the ability to vote for more free stuff (and lobbyists the ability to lobby for more free stuff) and more often than not they’ll take that chance. After all, who doesn’t love a free lunch?

But it is totally foolish to blame these problems on “too much liberty”.

In fact, right now it is China that seems more libertarian — at least in purely economic terms. As I wrote last month, China’s economy consists of just 20% of federal government spending, whereas America’s consists of 37%. China is more of a market economy, while America is more statist. So while China’s leaders might have taken a more “flexible” approach to individual liberties, at least when it comes to economic liberty, they are practically way ahead of America. And maybe that’s why China is doing so well economically — the freedom to do business, to create, to produce.

When it comes to social and cultural freedom, America is way ahead of China — and unsurprisingly, America is still the world’s cultural powerhouse.

What if this little thing known as liberty — and these little things known as unalienable rights are far more important than Li recognises? What if they are the driving energy that underpins innovation, that underpins economic prosperity, that underpins a robust economic system?

America was once the richest and most productive nation on the planet (and by certain measures she still is). This was a direct product of a system of cultural and economic freedom. People were free to think differently, to act differently, to create new businesses, new products, new techniques and this ultimately led to the greatest sustained period of wealth creation in history. They didn’t have to ask the permission of a feudal lord or monarch or commissar. They didn’t have to kowtow to an aristocracy. Only now — since America has adopted statism and bureaucracy — has America begun to fall behind.

So Li’s conclusion is right, but only in a twisted and roundabout way:

The West seems incapable of becoming less democratic even when its survival may depend on such a shift. In this sense, America today is similar to the old Soviet Union, which also viewed its political system as the ultimate end.

History does not bode well for the American way. Indeed, faith-based ideological hubris may soon drive democracy over the cliff.

Yes — ideological and faith-based hubris may soon drive America off a cliff. But that ideological and faith-based hubris that we find today in American government and in the American intellectual elite is not for America’s constitution, nor for individual liberty. Instead it is for statism, for big government, for surveillance, for authoritarianism, for central planning, for endless war and imperialism. The zeal that will drive America off a cliff is exactly what Li advocates more of.

Post-Industrial Decline in England

Today, I want to give a short virtual tour of the city in which I grew up, Stoke-on-Trent. Stoke-on-Trent grew up around the pottery industry. From Wikipedia:

Since the 17th century, the area has been almost exclusively known for its industrial-scale pottery manufacturing, with such world renowned names as Royal DoultonDudson Ltd, Spode (founded by Josiah Spode), Wedgwood (founded by Josiah Wedgwood) and Minton (founded by Thomas Minton) being born and based there. The presence locally of abundant supplies of coal and of suitable clay for earthenware production led to the early but at first limited development of the local pottery industry. The construction of the Trent and Mersey Canal enabled the import of china clay from Cornwall together with other materials and facilitated the production of creamware and bone china. Stoke-on-Trent is a world centre for fine ceramics – a skilled design trade established in the area since at least the 12th century. But in the late-1980s & 1990s Stoke-on-Trent was hit hard by the general decline in the British manufacturing sector. Numerous factories, steelworkscollieries, and potteries were closed. This resulted in a sharp rise in unemployment.

Of course, Stoke is by no means typical, but it does typify some problems that are found in many cities across the Western world: the loss of manufacturing jobs, and a subsequent decline into mass unemployment, drug abuse and social and economic degeneration. This is a tough cycle to break because there are no jobs for welfare recipients to take. So — without a serious regeneration budget — the state has little choice but to leave much of the city welfare-dependent and festering. What I really want to get across is the depth of the post-industrial decline and dereliction in such cities. When they lost their manufacturing sector to cheaper overseas competition, many of these cities lost their reason to exist. They just left an angry, workless and disaffected concentration of population tightly bundled together. Being deprived of capital and investment means that infrastructure, housing and social welfare grossly declined:

The City Centre

Boarded-Up Housing

Dereliction

Former Industrial Glory

Broken Wasteland

Panorama