Natural economic order

Economics Economics Questions
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61

You are dodging the issue. You said it yourself, what is important is what it does! Blood does something, it is a medium of exchange. Not amongst humans, but amongst muscles. What is exchanged is oxygen. Oxygen enables glycosis in order to provide a muscle with energi. No energy, no action. Muscles can store some of the energy in the form of glycogen. What you are proposing is a Natural Blood Type were the muscle must pay some of its stored energy for the privilege of receiving oxygen, because apparently it is hoarding too much energy for you liking.

For a person maintaining a cash balance is to store, not energy, but to provide the person with means. No means, no action. You are proposing a hoarding fee on this person. What matters is not his personal means. Instead you want to siphon off some of his stored means, so that it can be borrowed to someone, who lacks the means. This is not a bad thing you say! Because while someone else is borrowing the means, the owner does not need to pay the hoarding fee, and so he profits when his means are returned. Isn’t this exactly what you propose? If not, why not?

62

The only way to ensure non-inflation is redeemability. For a monetary system of Natural Money to work you must first assume: Non-redeemability. Otherwise no one would hold Natural Money.

Hence, we can infer that Natural Money would inherently be prone to inflation. Unless of course if we assume pure benevolent monetary managers.

63

Why shouldn’t it be?

No, there aren’t. The assumption is, that a homogeneous good is preferred now as opposed to later. If my needs shift, the good is no longer homogeneous, precisely because it is no longer of equal serviceability.

For the last time, loanable funds are not money, even if they are represented by it. A supply at a fixed price is still a supply, though. Interest is not the price of money.

You mean borrowers. Then the lender erred in his assumption and will be penalized with losses.

Or maybe the solution is to simply allow people to trade freely.

-Jon

64

Money is a commodity only as long as it can be used as it is. Paper money isn’t a commodity, since the face value is a lot higher than the possible use of its paper.

But gold is a commodity and gold money (or paper money 100% redeemable in gold) would make a good currency especially because one barters gold for other commodities.

65

Right, but it’s always an economic good, which was my point.

-Jon

66

In the example the natural money is redeemable but then they had to pay an extra fee which is just a bit higher than the tax.

The money supply did not change so there was zero inflation. There was no strong incentive for printing extra units, because the money was coming back to the city in spades.

Benevolent monetary managers is the weak spot of the system. This system works only when people know what they are doing. At least the system is simple to oversee because there is no financial engineering. If you handle all the money in bank accounts, it is becoming even more simple to check.

67

The blood example was just an analogy to make a point. It is not to borrow to someone who lacks the means. Only the best borrowers are getting money at 0 interest. But because the money is flowing in the system, people become enabled to participate in the economy. The hoarding fee serves no other purpose than to circulate the money so everybody is enabled to be engaged in economic activity.

68

If people choose natural money, they choose for a concept, which includes money should not be capital.

Please don’t be annoyed.

Therefore a lender is obliged to check the borrowers and pick the best.

69

I’m not annoyed. I just feel that I am not getting something through to you, namely that interest has nothing to do with money. BTW, money cannot but be a good, whatever form it takes. There’s no avoiding it. And as far as I am concerned, natural money will be any form of money chosen by the market.

Now, another thing: you complain that the least credible borrowers are penalized on the market by higher interest rates but you also do not want these individuals accessing the loanable funds market. What on earth, then, is the point of an interest rate of zero? Untrustworthy (not necessarily poor) individuals will face higher interest rates, deterring them from gaining access to these funds. So from this POV, an interest rate of zero seems unsound.

-Jon

70

I will answer the loanable funds question now, because I think I understand now what you mean. When you bring money to the bank, and you make a time deposit, it is not money to you anymore. It is capital and therefore it should pay interest.

I will try to be practical and try not to get into a theoretical twilight zone.

First of all, avoiding the money tax is a kind of interest on this capital. Secondly, when someone is borrowing the money, the loanable fund becomes money again, and therefore should not be charged with interest. As you cannot create interest out of thin air, it should be this way.

71

To me, interest is a return on capital. Maybe we do agree on that.

Maybe it is just a question of definition. Personally, I do not find fiat money to be a good, as it is backed by nothing. Fiat money is just a concept. Fiat money is an evolution of markets interacting with government choices or something like that. The money selection process is a process that not only involves markets but also choices that humans make deliberately.

To me it is a process of human thinking combined with market processes. If a human invents a money that is rejected by the market, it is a failure anyway.

I do not complain, but only observe the fact that it destabilising the system, if you see it like a system like I try to do.

To me it zero interest is very sound, because an untrustworthy individual is not deterred by higher interest rates.

72

But you’re not being sufficiently subjectivist. Anything can be a good, provided it is seen by an economic agent as a means to an end. Even fiat money conforms to this definition, even if it is forced upon individuals and other monies outlawed. At any rate, economic analysis pertaining to money is an extension of the analysis of goods and can be applied to fiat money too, even if it’s a poor form of money.

I’d replace “invents” with “proposes” but otherwise I agree.

Perhaps in the present, what with moral hazard and all, institutionalized by central banking, but ordinarily if a lender judges poorly, they lose their money and if they do so repeatedly they’re ousted from the market, and in this sense it is self-correcting. An interest rate of zero is what’d be inherently destabilizing as it allows no room for adjusting the rate to the borrower’s credit-worthiness.

Then they certainly will not be deterred by one of zero.

-Jon

73

Maybe the most fundamental cause for moral hazard to exist, is the existence of interest on money. This is just my point of view.

Natural money was not invented by Silvio Gesell. It existed for thousands of years. I have some interesting stories to tell, which might show how natural money can be. This is also added to the naturalmoney site today.

Using the concept of natural money, I will try to explain some historic facts, which puzzled historians for a long time. Some intriguing historic questions are:

  1. How could Western Europe become so powerful during the middle ages? They were backwards at the beginning, annihilated by Black Death, and still came out on top.
  2. How could the Egyptians build pyramids? This required a great wealth and a great organisation.
  3. Why did Rome collapse? They had the greatest civilisation and military organisation at the time.

Although the explanation is speculative, and not proven, there is some logic in it.

The rise of Europe
When the Roman Empire collapsed, Europe fell back into a dark period, called the middle ages. Money ceased to exist, because gold and silver disappeared out of circulation. Europe was very fragmented and in general there was no central power structure. Local lords issued stamp scrip currencies. Those currencies were valid for a limited period of time. After that period, the people holding the currency, had to return it to the ruler and a tax was levied. If you had 10 units, you got 9 new units in return. Those new units were also valid for a limited period of time. The actual value of the unit decreased slowly during the period and was the lowest just before the tax was due. People holding the currency, were inclined to spend it.

If we assume this was a kind of Worgl situation, we may assume that Europe was building capital at maximum speed using full employment. Europe had to start at a very low level. Also, the local lords waged many wars that were destroying capital. But wealth steadily increased, faster than on any other part of the planet. When the crusades started, there was so much wealth to spend on a useless war, that Europeans could battle the Muslims for centuries on their own ground, keeping long supply lines, while the conquered land was not profitable. After that, Black Death annihilated about one third of the population, but only one century later, the exploration and exploitation of the rest of the world by Europe had begun.

The building of the pyramids
In the bible there is a story about a pharaoh having a bad dream about seven fat cows being eaten by seven lean cows. This dream was explained to the pharaoh. He was told seven good years would come and after that seven bad years would follow. Joseph advised the Egyptians to store food on a large scale. They built storehouses for food. Farmers bringing in the food, got receipts for corn. Bakers who wanted to make bread, brought in the receipts, which could be exchanged for corn. It did not take long before the receipts where generally accepted as money. Because of the degradation of the corn and mice eating it, the value of the receipts was steadily decreasing. This enticed people to spend the money fast.

The grain receipt system lasted for many centuries. It made sense to store food to provide for hard times. If we assume this was a kind of Worgl situation, we can assume that also Egypt was building capital at maximum speed using full employment. At some point, irrigation systems were in place, houses were built, and there was nothing left to do. Because there was no limit on the ego of pharaohs, and they were worshipped like gods, the pharaohs could use this wealth to build pyramids. The people building the pyramids were probably no slaves but economically free men. The Egyptian civilization lasted for more than 2000 years, far longer than any civilization ever.

The fall of Rome
Rome lasted only 700 years. The money system was based on gold and silver. In the beginning Rome was able to expand, and therefore capital could grow faster than interest charges. But after 400 years the expansion was over, and slowly growing debt was becoming a drag on the economy. The government was permanently short of funds. The value of money was therefore constantly devaluated. The military was also badly funded, and therefore other people could invade Roman lands. Debt was destroying Rome.

74

Sorry, bad font choice. I do not know how to change this.

75

Interest is merely the discount applied to future goods when valued presently, given the fact of positive time preference, and is the price the lender charges. The lender charges interest in order to insure what they get back is not worth less to them than the money at present. That’s all there is to it. Nothing is created out of thin air (unless one is speaking of a fiat FRB system), but rather money lent at present is more valuable to the lender than an equal amount of money returned to them, so they require something extra, to compensate for the lower future value that money has to them. And money is merely the means used to acquire other goods. Saying there should be no interest rate because a medium of exchange is used to facilitate trade is beyond bizarre, and focusses too much on an intermediate aspect of the whole transaction. Avoiding the money tax is a cost, but not necessarily a form of interest.

-Jon

76

It is quite philosophical. Being a systems engineer, I am not in a position to argue with that.

Being a systems engineer I do not agree. If a borrower is not creditworthy he should not get a loan at all. When you are creating a greater margin for error, and that is what you do by allowing bad borrowers to borrow at higher interest rates, you are destabilising the system. Also, when doing this you are pressing the weakest points of the system the hardest. People that cannot afford the loan, pay also the highest interest rates, which makes them even less creditworthy than they were.

This is true. But in a natural money system they will not get a loan anyway.

77

They pay higher amounts precisely in order to account for the fact that they might default on the loan. There is no instability because lenders who cannot estimate well go out of business and individuals, faced with high interest rates, will be reluctant to borrow. Now, it’s perfectly fine if you want to do business only with banks that refuse to give out loans to risky individuals, and in fact maybe you can even join a society where this is the norm.

-Jon

78

It at least works this way in the current money system. That is for sure. But in natural money this works not this way.

Going back to the example when being in a natural money system, no interest should be charged to the borrower. If the lender than demands interest, this is impossible. Natural money should not be created out of thin air.

I can only say that this is not the case in a natural money system.

It sounds bizarre at first. But if the economy is doing better this way, you might just give it a try. If you are desperate, just like the mayor of Worgl, you will try even the most bizarre scheme. And in the case of Worgl it worked very well. The credit crisis is just in its beginning. I don’t know how desperate people will get, so they will try it for sure.

And if it works (and that is the only criterium) it will spread like wildfire.

79

Maybe we are too much going into theory. You can keep it in mind as a plan B. If all else fails, this is just a plan you can try. You now know it exists. It might save your life and that of your community.

80

I suggest you give Rothbard’s Man, Economy and State a read. I think it’ll explain these concepts in more depth than I am willing to go into here and should give you an understanding of some of the problems in prohibiting interest or visualizing it as being created “out of nothing”.

-Jon