Posted by: cjenscook | 04/12/2009

Towards an Economics of Common Sense

The first examination I ever failed was an Economics paper I took as part of an accountancy qualification. I could not understand the subject at all, as it seemed to bear no relationship to Reality as I experienced it. But since I needed a Pass, I learnt it all parrot-fashion, regurgitated it, duly passed, and mentally filed the subject in the bin.

However, in recent years, my work in that space where markets and the internet converge has led me to take a good look at the financial system, and to the subject of the Economics which provides a conceptual framework – and justification – for it.

I have come to realise that the problem lies in the metaphysical and epistemological basis of Economics – in other words, its relationship with the Reality which we experience. The assumptions, and definitions used are not only couched in language which might almost be designed to confuse, but are also crafted to suit the purposes of those who actually fund the academic development of the subject.

Factors of Production
Neo-Classical Economists in particular define Labour and Capital as the only Factors of Production, and take the anthropocentric view that the Sun of Capital orbits the Earth of Labour. From this we get the rhetoric of productivity and the assumption that when a factory is automated the sole remaining individual whose job it is to turn the factory on and off has magically become infinitely productive.

This is complete self serving bollocks, of course, the sole purpose of which is to justify taxation of Labour rather than Capital. Alternative Economics, such as the Binary Economics advocated by Kelso, Kurland and Shakespeare assume that both Capital and Labour are productive, but they have been largely ignored and otherwise ridiculed by mainstream academics and their cheer-leaders in the Fourth Estate.

However, if we go back into Economic History, we will see that there were previously three Factors of Production posited: Land, Labour and Capital. The reason for the conflation of Land and Capital – which Mason Gaffney describes as the Corruption of Economics – was the imperative need of the rich and privileged to discredit the ideas of the great US political economist Henry George.

Gaffney makes a very convincing case for Neo-Classical Economics as a Strategem against Henry George and the strategem was indeed successful in airbrushing both George -and his concept of a Single Tax on the use value of Land/Location – from Economic History.

The result of the development of Economics in the last 100 years or so has been to develop a bastard strain of Economics one of the principal purposes of which has been to justify the taxation of earned income – Labour, rather than the unearned income arising out of economic rents derived purely from the unearned privilege of private property in Commons such as Land.

The other principal purpose of Economics has been to rationalise the current system of Finance Capital, consisting of the Twin Peaks of Debt and Equity. Firstly, a monetary system based upon the creation of credit by credit institutions aka banks which has virtually no basis on the productive economy, and secondly, a system of absolute property rights – in particular the form of financial capital consisting of shares in a Joint Stock Limited Liability Corporation.

As Professor Michael Hudson has brilliantly demonstrated, the combination of compound interest on debt, and private property in land, has for thousands of years concentrated wealth in the hands of the few to the exclusion of the many. We are in the process of learning once again that this combination is simply unsustainable, and the brilliance of Alan Greenspan’s recent tenure at the US Federal Reserve Bank has been to bring forward this collapse by perhaps ten years.

Cleansing the Augean Stables
The cleansing of our Economic Augean Stables might begin with a new set of Factors of Production.

Location – three dimensional spatial location.

Energy – in the form of electricity, the energy value of fuels, and from other sources.

Knowledge – the accumulated knowledge, experience and talent of a human during his lifetime, or the imperishable and timeless patterns of recorded knowledge and cultural artifacts he leaves behind.

Each of these Factors of Production has a value in use, and each of them is independent of the other two, although all three must necessarily be deployed together when humans act individually, or collectively via a protocol as an enterprise.

Many would agree that each of these Factors (with the exception of an individual’s lifetime knowledge) is in fact a Commons – owned by and available to all – and I agree with Henry George that those who have exclusive rights of use of a Commons should compensate those they exclude.

The current economic crisis results from the fact that wealth has once again become concentrated in the hands of the privileged. We are now seeing massive government intervention, and on the face of it, there is now no shortage of credit available in our existing system. The insuperable problem – which may shortly be recognised as the next wave of defaults commences – is that there are no longer enough credit-worthy projects and individuals to whom to lend.

It will shortly become clear that the necessity is for some kind of systemic fiscal reform. I argue that this is impossible within a paradigm of money created as interest-bearing debt, and the current distribution of Wealth.

The Systemic Fiscal Reform I advocate is neither a revolutionary appropriation by the State nor a redistribution of income. Instead I advocate a transition from the taxation of earned income (since there is no longer enough earned income left to tax) to the taxation of the privilege of exclusive use of Factors of Production.

(a) Location – a Land Value Tax, levied on the use value of location

(b) Energy – Taxation of the use of the Resource Commons, particularly a Carbon Tax; and

(c) Knowledge – a Limited Liability Tax levied on the gross revenues of the Corporation used to “enclose” Knowledge, through employment contracts and Intellectual Property.

There is no way that such systemic fiscal reform would ever be implemented by the institutions which currently exist. Turkeys do not vote for Christmas, and the privileged in control of the Institutions will not give up their privileges.

So what happens now? Will it be default, money destruction and Depression; or money creation, quantitative easing of the Rich, and Inflation?

I argue that it will not be either. The emergence of the direct Peer to Peer connections of the Internet are now enabling the veto of the Institutions to be by-passed through a process I refer to as Napsterisation – after the disruptive software which has changed the music industry for ever. To paraphrase John Gilmore once again…“The Internet interprets privilege as damage and routes around it.”

The architecture of a rational and consensual 21st Century Peer to Peer financial architecture -and a new Economics of Common Sense – may perhaps be based upon a new set of assumptions and definitions, and a new generation of partnership-based protocols linking together a networked society.

As J A Wheeler said….Reality is defined by the questions you put to it

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Responses

  1. Brilliant. Simply brilliant.

  2. I blush

  3. you are dead right my friend (mind you I’m biased – it was like reading my own mind / thoughts!)
    dc

  4. […] I have said on my blog, we should work Towards an Economics of Common Sense, and in my view this requires Economics to be […]

  5. I apologise if you have addressed this elsewhere but I have not had time to read all you great work.

    Since all of the “easy resources” have already been extracted , and this represents the vast majority of current wealth, do you see a way to apply your concepts retroactivly?

    It kind of looks like you are advocating a slow bleeding through taxing wealth?

    IMO this issue can not be easily dismissed by simply stating as others do,”lets not dwell on the past. lets look to the future.

    Greatly appreciate your good work on these issues.

    Cheers!

    • The answer is that we must make better use of the resources we have, while we have them, to transition to a sustainable economy.

      While the easy resources may have been extracted, it does not necessarily mean that they have all disappeared. A large part of their value has been embedded in productive assets which have a use value eg infrastructure, real property, machinery and so on.

      I think that the place to start is to reconfigure all of the debt – whether public or private – which is tied up in productive assets through the creation of new types of Equity. In this way we will release the development credit we need to make the transition, and do so without the long term debt obligation of having to repay capital which is what – combined with compound interest and private property – has been driving the booms and busts for thousands of years.

      Location, renewable energy, and knowledge all have in common the fact that they are wellsprings of “free” economic value. ie they have a value in use which costs the “owners” of these Commons nothing. The use value of these Commons should be more evenly shared in the future than they are now: there is no alternative, I believe.

  6. Thank you for your thoughtful response.

    I still believe there is a HUGE gap between the “here” and your “there” that is IMHO insurmountable unless confronted directly.

    I am not advocating revolution or anarchy per say.

    I am saying we should take it all the way back to the beginning. Calculating the amount of resources/energy that this planet has left, and/ or had started with is completely within the capability of mankind. Therefore it is possible to put a value to what ever we can come to agree on as the universal rate of exchange. Of course this would mean we would have to come to an agreement that all humanity are equal and that this rate would be adjusted by #1 population and #2 depletion. This concept is miss-defined or at best over simplified by economics as supply and demand.

    I personally don’t hold out much hope for this fundamental level of “commonsense” understanding to occur but I do love to “believe”.

  7. Thank you for your thoughtful response.

    I still believe there is a HUGE gap between the “here” and your “there” that is IMHO insurmountable unless confronted directly.

    I am not advocating revolution or anarchy per say.

    I am saying we should take it all the way back to the beginning. Calculating the amount of resources/energy that this planet has left, and/ or had started with is completely within the capability of mankind. Therefore it is possible to put a value to what ever we can come to agree on as the universal rate of exchange. Of course this would mean we would have to come to an agreement that all humanity are equal and that this rate would be adjusted by #1 population and #2 depletion. This concept is miss-defined or at best over simplified by economics as supply and demand.

    I personally don’t hold out much hope for this fundamental level of “commonsense” understanding to occur but I do love to “believe” its possible..

  8. I agree that we have to get “there” from “here” and that this requires the attribution of value to something which has to date been undervalued.

    In my opinion that first requires that we use an “Energy Standard”, which is a fixed amount of energy to be used as a Unit of measure. The name I use for this is a “petro”, but any other name – “electro” or “energy dollar”- would do just as well. Both the name, and the fixed amount has to be one that people are able to relate to in every day use.

    So maybe 10 Kilo Watt Hours or the energy from combustion of 1 litre of n-octane at 20 deg C would be appropriate. Whatever works.

    This gives us the basis of a system of “energy accounting” whereby we may account for transactions in a meaningful way.

    Energy is related to location by the amount of energy embedded in (eg in cement or fertiliser) or stored in that location.

    Energy is related to individuals because we consume and produce energy (manpower or unqualified labour) in our everyday lives: our true value lies in the knowledge and experience we have gained – or is embedded in the tools we use – and which allows us to put energy to best effect.

    But this unit of measure is only a means to an end.

    We must urgently raise the price of carbon-based energy to a level which reflects its current and potential scarcity. But if we do so, this has certain economic consequences within our conventional financial system which result in a massive transfer of wealth from the consumer to the producer and to the intermediaries between producer and consumer.

    That is why the “enterprise model” or legal and financial framework, is so important, and why I advocate not only a partnership framework – within which the surplus is shared between all participants – but also the “unitisation” or monetisation of energy which is what allows us then to finance the transition within this framework.

    In simple terms – and by way of example – I advocate raising the US price of gasoline in steps to (say) $10.00 per gallon. I would issue enough Units redeemable in gasoline to avoid revolution, and consumers would then have the choice of using their valuable Units in payment for profligate use of gasoline or of saving fuel in every way possible (and inventing new ways) and exchanging their valuable Units for something else they value.

    A “pool” of ($) funds would then become available which would be loaned/invested interest-free in the future production of renewable energy projects (Mega Watts) and the future savings of energy saving projects (Nega Watts). The loans would be denominated in energy (hence the need for an energy standard) and repaid out of production or from savings, respectively.

    In this way the transition from non-renewables is achieved, because what we are doing is creating and issuing Units with intrinsic value in exchange which it will cost us nothing to redeem.

    So, to finally answer your point, the problem is not finding a universal rate of exchange, but rather:

    (a) a universal benchmark – IMHO an energy standard;

    (b) a sustainable market price for energy such as to allow us to finance the transition;

    (c) a Formula eg the Wade Formula
    for equitably dividing the resulting surplus within a partnership framework.

    Not only do I believe that this possible, but I believe the process to achieve it is already pretty much irreversible, since it is a consequence of the direct “Peer to Peer” connections of the Interent.

  9. Chris, your Wade Formula link doesn’t work.

    Can you expand a bit upon the Wade Formula?

    Regards
    Alan

    • Alan

      This link works

      http://armelopost.wordpress.com/2008/04/10/the-wade-formula-pt-29qtst/

      Basically, Wade is saying that the surplus value from oil/product sales should be shared more equitably between the producers; the intermediaries; and the ultimate consumers – particularly since in Africa at least it is the poorest who are disprortionately affected.

      His formula is an attempt to define and share that surplus.

      Chris

  10. I feel the analysis lacks one important factor, an important and valuable source of energy we must begin to employ and recognize as such is manual labor.

    • Thanks for the response, Chrys.

      Maybe I was not clear enough on this, but I see classical economic ‘Labour’ as consisting of:

      (a) Energy – ie manpower, or Keynes’ Unqualified Labour; and

      (b) Knowledge – ie everything between our ears and maybe even hard wired into our bodies.

      So a Man Hour is in fact a Unit of energy, and quite possibly the basis of a universally fungible currency. The use value of Subjective Knowledge, which dies with us, may well be a multiple of the use value of our basic energy value or unqualified Labour.

  11. […] https://nordicenterprisetrust.wordpress.com/2009/04/12/towards-an-economics-of-common-sense/ […]

  12. Excellent work Chris, I hope it is recognised.

  13. […] Originally published here. […]


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