Monday, May 27, 2013

Steve Keen — Is Capitalism Inherently Unstable? (3)


But it does seem to decide the case in favour of the classicals for the real world: prices must be set by a mark-up on costs, rather than by the ‘twin blades’ supply and demand.
That’s the opinion I held, until a crucial step in generalising my model of Minsky’s Financial Instability Hypothesis implied that, at a macro level, the two models are identical. I’ll get on to that – and the role of prices in economic instability – in the next post in this series.

Steve Keen's Debtwatch

Is Capitalism Inherently Unstable? (3)
Steve Keen | Associate Professor of Economics & Finance at the University of Western Sydney

49 comments:

Unknown said...

Yes, if it is based on credit money since:

1) The repayment of credit debt destroys the principal. But that is deflation!

2) Interest costs tend to compound faster than real growth according to Dr. Michael Hudson and (wait for it!) Karl Denninger.

OTOH, common stock is an equity-based money form that:

1) Has no debt to repay.
and thus:
2) Requires no interest payments.

JK said...

F. Beard,

Can you link me to an intro on how Common Stock as money would work?

Seems credit, in some form, is as old as money.

Anonymous said...

Well, you have to define capitalism. If what the US has is capitalism, we have seen an extended period of stability between periods of instability.

There is also the question, by comparison with what? Communism? Socialism? Feudalism?

Unknown said...

@JK,

It's simple. The company issues new stock and buys assets or labor with it. In circuit terms that's the "source." But a "drain" is probably needed too so instead of paying dividends in another currency (dumb, since the purpose of a common stock company is to consolidate capital for economies of scale, not dissipate it) then the issuing company should redeem that common stock with the goods and services the company produces.

Companies could use common stock today as money except:

Why "share" when one can legally steal by borrowing from the counterfeiting cartel, the banks?

BTW, I'm not against purely private credit creation. If someone has some capital and thinks he can juggle assets and liabilities and make a profit then fine. But if he fails then he should lose capital. That's the way the game is SUPPOSED to be played.

Matt Franko said...

Keen, just like Reinhart and Rogoff, doesnt take into account the type of monetary system in the nations in which there exists entities which one could perhaps say are conducting Marx's so-called 'Capitalism' over time...

It matters.

Under a FFNC/state currency type monetary system, the govt as currency monopolist has (at least!) significant influence on prices via the govts ability to simply credit a bank account for provision...

We should hold Keen to the same standard as R&R... it's hypocritical not to do so.

rsp,

Unknown said...

Keen, just like Reinhart and Rogoff, doesnt take into account the type of monetary system in the nations ... Matt Franko

Huh? Steve Keen advocates a universal bailout with new fiat so I reckon he DOES understand monetary sovereignty.

Keen is also humble. How many economists would admit that they did not know accounting? (Keen has since quickly learned and transformed his models accordingly.)

Matt Franko said...

F,

What? He has a PhD in Economics so that precludes him from any criticism?

Where is he taking into account the govts role as 'price setter/ratifier' under a FFNC system here in this article? That is my point...

He may "know" that we are now under a FFNC system (post metals) but he has to include this in his analysis now too...

Here is Warren on the topic of prices (to paraphrase): 'prices are necessarily a function of what price the Govt agrees to pay for things and what prices it allows it's banks to lend against things..."

(I know you think banks are a "cartel" of some sort but I assert you are mistaken there... they are highly regulated entities and "public/private partnerships"...)

So Keen leads on here: "I’ll get on to that – and the role of prices in economic instability – in the next post in this series."

OK, I'll be very surprised (pleasantly) if he includes the MMT position on price 'ratification' by govt in his next piece he alludes to here... but I am not holding my breath..

rsp,

Ignacio said...

Matt how does the current monetary system make it less unstable? It doesn't, if anything it does less unstable (making leverage more possible).

Also, governments can only set lower bound or price floors, they cannot never ever (even if they try to, black market) set price caps on anything. Governments have limited 'price setting' capacity, and instability does not come from falling prices, but inherently from rising prices (bubbles).

Yeah, governments MAY (it's a political matter) be able to do something about it, preventing collapsing prices and balance sheet composition stabilizing, to palliate instability. But that's reactive, it's done because something happened.

Keen is right, capitalist by itself in inherently unstable, there are plenty of facts of that to deny it.

Unknown said...

Here is Warren on the topic of prices (to paraphrase): 'prices are necessarily a function of what price the Govt agrees to pay for things and what prices it allows it's banks to lend against things..."
Matt Franko

How many more times must the banks screw us and how many more world wars can we survive till we say "Enough with the banks!"

"It's banks"?! What? The banks have been fully nationalized while I slept?

Warren assumes, like almost every one else, that we need government-backed banks for our so-called "free market economy." We don't.

If we go to a fully socialist society and tax the hell (literally?) out of even the moderately well-off, it will be because we stubbornly refuse to do capitalism ethically. And is socialism stable either? No, it isn't so we'd eventually go back to fascism (our current system), perhaps with a vengeance. That blood won't be on my hands, thank God.

So what's it going to be? Ethical "sharing" under a true free market or unethical forced sharing under bloody (literally) communists?

Dan Kervick said...

Common stock as the dominant form of money would be wildly unstable. It's a radical form of the "ownership society" in which even the simplest everyday sales transaction becomes a fraught and speculative investment choice. There would be as many different forms of money as there are publicly owned companies, and even running an ordinary accounts payable or accounts receivable operation would become an enormously complex and costly undertaking. Since companies experience business setbacks and fail routinely, widely held forms of money would suffer volatile swings in their exchange value, leading to constant defaults among people who held those forms of money.

Imagine selling a hedge trimmer at a mom and pop hardware store, and having to decide whether to accept payment with Apple bucks, GM bucks, Verizon bucks, Unilever laboratories bucks, Proctor & Gamble Bucks, or Random House bucks - the value of which fluctuate every day. Doing routine business would require endlessly monitoring the stock reports.

Unknown said...

I'm not saying common stock should be the ONLY private money form; I'm saying that if endogenous private money creation is necessary then common stock is an ethical option - as opposed to a fascist government-backed credit cartel.

As to the practically of common stock as private money, let's let the market decide that, eh?

And, of course, people could always choose to use fiat for all debts instead of just government ones.

My main point is that we DON'T need a government-backed credit cartel for endogenous private money creation since common stock is an ethical form of endogenous private money.

And I see nothing wrong with purely private credit. But it's harder to steal that way, no? And we all know that economic progress requires theft, deception and oppression, don't we?

Unknown said...

"Ownership society?"

Sure. In addition to a universal and equal bailout of the entire population with new fiat, let's redistribute the common stock of all large corporations equally to every US citizen.

Still think I'm a GWB clone?

paul meli said...

"How many more times must the banks screw us and how many more world wars can we survive till we say "Enough with the banks!" - F.Beard

Banks don't force us to borrow their money...and there are plenty of us that have done as little of it as possible.

People choose to be suckers...and when they do you blame the "banking cartel".

The problem stems mainly from banks gambling with the public trust in making bad loans...sound underwriting is their main responsibility...and we haven't held them accountable for not making sound lending decisions.

The problem with banks is the bankers, not the system.

It's a regulation problem not a system problem.

Credit is NOT the main source of demand in an economy...not by a long shot. That wad has been shot...and it can't be reloaded unless we start making 100-year 1% loans to people and/or ignore their ability to repay.

Unknown said...

Banks don't force us to borrow their money.. paul

Yes they do. If one doesn't borrow, he is very often priced out of the market by those who do borrow.

Government-backed credit creation is thus a form of economic extortion.

Unknown said...

Credit is NOT the main source of demand in an economy... paul

I doubt that, unless you are limiting the definition of "credit" to consumer credit and/or limiting the definition of "demand" to consumer products.

But even if true in a broad sense, we should not let the banking cartel survive to kill another day. And there's still the debt the cartel drove the population into to deal with.

Regulation?! Bah! How does one regulate theft? How much theft is too much?

paul meli said...

"Yes they do. If one doesn't borrow, he is very often priced out of the market by those who do borrow."

Why? It hasn't priced us out of anything. We bought our home with a mortgage, bought our cars via financing, yet we are debt-free…because we worked hard to pay them off quickly rather than refinance to fund consumer spending or buy lots of stuff we didn't need.

It was our choice. The banks had no say in it.

I don't have to have an iPad or a new car every three years. We keep ours until we have to walk away from them.

The problem is the banker is supposed to be the adult in the room when people try to make bad borrowing decisions…they weren't, and most of them knew what they were doing. They apparently didn't think the defaults would be this bad.

So much for adults in the room.

You seem to want to legislate borrowing into illegality…that's just never going to happen.

As long as the government spends adequately on public purpose, borrowers should always be able to make their payments.

The total level of private debt is self-limiting… somewhere near 10x the amount of net spending that can be applied towards debt service once savings desires are satisfied.

Dan Kervick said...

F. Beard, before you said that companies would issue their stock and use it to buy goods and services. I assumed that was the mechanism by which this stock would enter the economy as a medium of exchange.

But now you seem to be suggesting the ownership of companies should be socialized and their stock distributed equally to all US citizens - in which case the companies do not use the initial issue of stock to buy goods and services. That is an entirely different sort of system, but it leaves the processes of capital development and investment shrouded in mystery.

A society needs a neutral and stable medium of exchange that is not itself either a commodity that can be consumed or that has a fluctuating value, or an ownership claim in something else that has a fluctuating value, but serves simply to facilitate the exchange of other goods and services. Ideally, fluctuations in prices of non-monetary goods and services should all be due to changes in the relative prices of those goods and services among themselves, rather than to changes in the non-exchange value of the monetary medium itself. Moving to commodity money or stock money is a step backward toward barter.

I see no reason to think that "the free market" will give us the kind of stable and well-regulated monetary exchange system we want. Free-banking, private monies, etc. might be a libertarian dream. But for most of us the results will likely be anxiety-ridden and destabilizing.

Unknown said...

In typical backwards austrian fashion, the democracy-hating Pinochet-supporting Friedrich von Hayek believed that the self-interest of banksters was solution to all our economic problems:

“In a world governed by the pressure of organised interests, the important truth to keep in mind is that we cannot count on intelligence or understanding but only on sheer self-interest to give us the institutions we need. Blessed indeed will be the day when it will no longer be from the benevolence of the government that we expect good money but from the regard of the banks for their own interest".

(Denationalisation of Money, p.131)

"Blessed indeed" will be the day when Wall Street has complete control over our currency, according to Hayek.

As such, he advocated removing all legal obstacles standing in the way of banksters having complete control over our monetary system:

"What is now urgently required is not the construction of a new system but the prompt removal of all the legal obstacles which have for two thousand years blocked the way for an evolution which is bound to throw up beneficial results which we cannot now foresee.”

According to von Hayek we mustn't try to be intelligent, nor should we try to understand - we must simply *believe* in the wonders of Wall Street’s self-interest and the "blessed" banksters (doing God's work, no doubt) will make everything alright.

Dan Kervick said...

Here's a basic question about the morality of credit:

Suppose you raise apples and want to exchange some of them for candles. You have two options: you can take the candles you want now, or you can instead accept a promise for some quantity of candles to be delivered a year from now.

For a fixed given amount of apples that you are prepared to exchange, do you believe it is just for you to demand a somewhat greater quantity of candles if you agree to accept only the promise now and get the delivery of the candles next year?

Matt Franko said...

F.,

We're going to have instability when the people we have in positions to regulate these systems dont even know what the hell is going on....

Here is the Federal Reserve Act:

http://www.federalreserve.gov/aboutthefed/section4.htm

Section 4 here authorizes the establishments of banks in the FRS... this is not a cartel, this system is authorized by law and highly regulated... which is not the same thing as saying they have been WELL regulated, this is perhaps to your point that things have not been running well... but this in not a private cartel in any way...

The govt is the "money monopolist", this is how we get public enterprise funded... govt spends $NFA for public provision... THEN collects the taxes...

We need interest rates to be lower permanently, taxes to be lower, regulation for anti-fraud, etc..

But the bottom line is we need better people in positions of authority who know what the hell is really going on to regulate the system imo...

And step 1 in understanding what is really going on is to recognize at all times that we are no longer under the metallic standards (FFNC) and what this means for us economically...

Keen leaves this out here imo...

So why do we want to study "price data" like we are studying weather patterns or something when we have people in authority of a FFNC system that dont even know what the hell is going on?

rsp,





Unknown said...

> Why? It hasn't priced us out of anything. We bought our home with a mortgage, ... paul

Huh? You make my point. You were extorted into borrowing yourself!

Now if you had said "Why? It hasn't priced us out of anything. We bought our home by saving for it,..." you'd have a point.

And supposed you were deemed "non-creditworthy" such as blacks were before "redlining" was outlawed? Nevertheless, the prices you'd have to pay would be bidded up by those who were deemed "creditworthy." Is that just?

Credit creation should be an entirely private matter. Otherwise, some are using government privilege to screw the non-privileged. Then where is "equal protection under the law?"

Look. If you want full fledged socialism for all then advocate for that. That's a lot more honest than socialism for only some.

Unknown said...

Dan, your example isn't really relevant to F. Beard's argument. What he finds immoral is the banking system's ability, in effect, to create the money it lends with a keystroke.

This is different to growing apples and selling them for a premium in exchange for deferred payment.

Matt Franko said...

F,

It takes thousands of man-hours to build a house, how do we get people in homes if we dont figure out a way to advance the balances to the home-buyer?

Then they can pay it back over time... as long as interest rates are low (ie the natural rate of interest is zero) they can pay it back over time and society has the house asset to fall back on if the buyer has to back out of it for some reason...

rsp,

Matt Franko said...

What would Keen have to complain about if banks would loan at near 0%?

Would "debt" then still be a big problem for him?

rsp,

Tom Hickey said...

@ y

The Hayek quotes you provided are the basis of the market state that Alan Greenspan and Ben Bernanke bought into. Even when the FBI was warning of massive fraud in the mortgage market, Alan and then Ben shrugged it off, assuming that bankers would not kill the goose that lays the golden egg.

That would only be true, possibly, if banks were not back-stopped by government. But the reason they are is traceable to the Panic of 1909, when the banking system failed, which resulted in adoption of the Federal Reserve Act of 1913.

That did not prevent another massive failure in 1929, the outcome of which was tighter regulation and deposit insurance.

Subsequent to the Reagan "revolution" banks were deregulated while leaving moral hazard in place. That led the massive financial crisis of 2008, which wiped out the investment banks and they had to be brought under the government's wing. However, unlike the period subsequent to 1929-1932, no comparable investigation was conducted, no comparable reforms were instituted, and the problem was magnified by further bank consolidation and increased systemic risk and moral hazard.

There is good reason to think that under managerial capitalism — not the recent non-even at JPM over Jamie Dimon — that the situation is intractable and that banking should be nationalized, as Bill Mitchell has proposed at least considering.

The market is not omniscient as Hayek thought, and the market state is corruptible. What the solution is may not be clear as yet, but it is sure on the evidence that the "market state" is not it, for it is a cross between the corporate state (fascism) and the Mafia state (corruption). And eliminating the state, as some advocate, would result in chaos in a world in which collective consciousness is too low for government without institutions.

However, recognizing reality, probably the best one could hope for practically is something like the reforms that Warren has proposed. But given the institutional power of banking and finance, that may not be possible politically either.

Unknown said...

Matt,

"how do we get people in homes if we dont figure out a way to advance the balances to the home-buyer?"

I don't think he's against lending per se, just against government support for the banking sector via the central bank, deposit insurance, etc.

Dan Kervick said...

y, it's no different. The money banks create consists in bank debt: liabilities of the banks to their depositors. That bank debt is readily exchanged in our economy for most goods and services, and therefore has value, and the banks that issue it are therefore able to exchange it for promissory notes from borrowers.

The face value of the promissory notes is greater than the face value of the bank liabilities themselves. And that's the rub. What Beard is complaining about, as far as I can tell, is "usury": the fact that this money enters the economy by being loaned into circulation at interest.

People seem to be dazzled by the phenomenon of interest when one of the goods involved is money. But interest can be present in any kind of credit transaction: any transaction that is not a spot transaction, that is, any transaction in which at least one of the parties to the exchange performs delivery at some point in the future rather than on the spot.

Even in a barter transaction, this can obtain. If the future price of apples in candles is greater than the spot price of apples in candles, the difference represents interest. Similarly, it makes no sense to engage in a spot exchange of apples for (the same type of) apples. The result would be a meaningless swap of apples at par. But it does make sense to swap, for example, 1000 apples today for a promise of 1100 apples a year from now. The interest rate on that exchange is 10%.

Similarly, it makes no sense to swap dollars for dollars on the spot, since the result would be a meaningless exchange of dollars at par. But it would make sense to swap $1000 now for $1100 a year from now. The interest on that exchange would also be 10%.

The use of "out of thin air" language invites tremendous confusion about bank money and its role, leading to people analyzing bank money as though it were entirely analogous to the issuance of fiat money by a government, and the source of massive amounts of bank "seigniorage". But its not. A bank might be able to buy a fleet of company cars by creating a deposit account for a car company and crediting that account with the purchase price. But that account balance is a debt of the bank. The car company can withdraw some or all of it in cash over time. Or it can use the account to make a payment to someone who banks at a different bank. In each case, the bank will have to surrender the owed quantity of base monetary assets to someone else. And those assets are not created by the bank but are obtained by the bank in the markets for such assets, in exchange for other such assets that the bank itself does not create.

The only thing banks manufacture out of thin air is IOUs - no different in fundamental kind than the kinds of IOUs that you and I can issue out of thin air. If I issue an IOU and someone obtains it, then I have a liability, a debt. And the same is true of banks.

Matt Franko said...

y,

Govt is already doing all the student loans, and govt owns the GSEs now so govt is doing the home loans...

So it looks like all the banks still have is autos and they will probably soon F that all up then it will be near 100% govt lending anyways...

So F. Beard thinking that people are currently "borrowing from banks" is NOT even true or accurate of what is really going on these days....

Student loans are government... Home loans are government,

ok maybe banks still have Credit cards and autos... give 'em some time I'm sure they will F that up too and have to give those back to govt too before long...

So we have govt doing all the lending already and F Beard wants to give it back to non-govt now?

Keen is still scared of "debt doomsday" when govt is holding 80% of the paper anyway?

Does Keen think govt can default on these obligations?

rsp,

Unknown said...

Tom,

Randall Wray has also laid out a good 'Minskyan' program for reform of the banking sector, for example:

"What Should Banks Do? A Minskyan Analysis"
http://www.levyinstitute.org/publications/?docid=1301

This Levy Institute ebook also discusses many of these issues and policy options in some depth:

"Beyond the Minsky Moment"
http://www.levyinstitute.org/publications/?doctype=27

If I had to choose, I'd go for full-reserve banking as described in "The Chicago Plan Revisited" over banking nationalization, though I have no aversion to having public-owned banks operate alongside the commercial ones.

paul meli said...

All banks do is the underwriting and servicing of loans…the money created is STATE money (along with liabilities to the STATE)…all banks had to do was follow the rules…which they didn't in many cases.

Banks used to create their own "private" money…that didn't work out so well.

Still, if the government wasn't paralyzed by the "deficit" and had created the balances the economy demanded credit would not have been necessary to the extent that it was issued.

F.Beard (and Steve Keen et al)…you are focused on the wrong problem…

You are focused on A problem, not the main problem…not enough public spending to maintain full employment.

That said I am not opposed to some sort of debt relief, but that will just enable us to get back in the same situation before long.

Anonymous said...

Quote: "Dan, your example isn't really relevant to F. Beard's argument. What he finds immoral is the banking system's ability, in effect, to create the money it lends with a keystroke."

No, F.Beard's objects to the private for profit banking system's ability to impose a note of public liability for a private credit transaction.

It's the idea that the credit created by allowing private individual via an exclusive banking system to place all of us in the sights of that private transaction.

So when the banksters don't make wise decisions we are left with still having to honor the newly created public tender hence unrelated
private speculation by a few who have access to the so called "private credit" creation of the banks put all of us at risk because all the speculation is done with the public tender.

However, what F.Beard has failed to do is prove that a system where borrowing from a private source would be more useful and stable.

The simply reality is that a public means of debt settlement regardless of whether the debt is public or private is done with a single currency because the cost of having to decide the individual merits of this private script would be impossible without a single standard of public value to compare it to i.e. a public currency and thus it is simply more effective to use the public script rather than using a market of floating private script.

The logical solution to the moral question using public credit creation for private enterprise is to legally separate the risk pools aka Glass-Steagall which is what we used to have before all this neoliberal bs was used to destroy it.

The problem is the delusion that we can have unregulated system not subject to public law while having a common framework for conducting commerce and clearing liabilities aka a "free market" i.e. a market free of public account.

The idea is an oxymoron inherently and any one who has ever referenced it as a system has never contributed anything to the understanding of real economics whatsoever.

It's a common flaw to based on the flawed understanding of mathematics which the denial the concept of the unity of the many to the one which seems like common sense but is logically wrong.

Most humans never learn how to resolve paradoxes and thus are always trying to create "perfect world" logic aka praxeology and other irrationality in the name of being "logical" according to some traditionalist standard of being rather than being methodically adaptive like Roger Erickson correctly says is the essence of real economy.

As for capitalism being Inherently unstable I would suggest that it is if we define capitalism as being a program of free trade and no price rigidities such as a , tariffs, price controls like minimum wages or a JG to buffer labor value.

However, capitalism under a National system of sovereign protection can be made quit stable via rigid system of administered pricing and buffers to protect against demand and value leakage and miscalculation that results from sector maladjustment based on that value leakage.

I think MMTers basically believe this except they haven't yet discover the concept of value leakage and are still working with Keynesian demand leakage.

Unknown said...

Tom,

"The Hayek quotes you provided are the basis of the market state that Alan Greenspan and Ben Bernanke bought into".

Reading the 'Denationalization of Money', it's clear that Hayek wanted the government to be obliged to collect taxes in private bank-issued currency.

That is basically the equivalent of turning banks into the 'sovereign'.

They found a quasi-way of doing this in the eurozone…

I think latter-day Hayek enthusiasts probably realized that all his stuff about private banks issuing their own paper currency in perfect amounts to maintain price stability was somewhat ridiculous… so instead they tried to mutate and pervert a state currency system into one controlled by private banks - by creating an untouchable 'supra-national' central bank (the ECB), which is beyond individual state control, and from which only private banks can borrow directly.

As you say, a sort of “market state”.

Unknown said...

"the concept of value leakage"

Care to elaborate?

Unknown said...

Matt,

"Keen is still scared of "debt doomsday" when govt is holding 80% of the paper anyway?"

Where do you get that figure from?

Matt Franko said...

y,

Since 2010, govt has not even been securitizing but rather just doing direct govt lending for student loans where this year they project "profiting" 51B from these efforts, Elizabeth Warren who is supposed to be a progressive would like these "profits" cut by about 75% as far as I can tell...

The GSEs were bought out by Hank Paulson in 2008 and now are govt owned entities that also have contributed "profits" this year...

"Altogether, 9 of every 10 new mortgages are backed by the U.S. taxpayer, up from three in 10 in 2006, when the government share hit a decade-low, according to the publication."

http://www.propublica.org/article/weve-nationalized-the-home-mortgage-market-now-what

Look at the H.8 report, bank loans and leases are up like 300B in the past year, probably all autos and some trade inventories... big deal.

300B divided by $25k per car is 12M cars which is about what we sell over here in a year...

The banks arent even involved any more, non-banks do most of the origination for mortgages... outside autos perhaps.. they are hanging on by a thread...

rsp,

Unknown said...

The simply reality is that a public means of debt settlement regardless of whether the debt is public or private is done with a single currency because the cost of having to decide the individual merits of this private script would be impossible without a single standard of public value to compare it to i.e. a public currency septeus7

In order to have a true free market in private money creation, government money must be inexpensive fiat. And yes, every private money of consequence would have a market determined floating exchange rate with fiat.

and thus it is simply more effective to use the public script rather than using a market of floating private script. septeus7

Most people would probably use fiat for all debts IF it were properly managed and not, say, wasted on propping up what should be purely private banks.

Unknown said...

"every private money of consequence would have a market determined floating exchange rate with fiat"

At present most 'private money' (i.e. bank deposits) is on a fixed exchange rate with fiat. If banks can't maintain that fixed exchange rate, they go bust.

Unknown said...

However, what F.Beard has failed to do is prove that a system where borrowing from a private source would be more useful and stable. septius7

I don't claim that borrowing from a private source is stable. Usury has problems of its own, apart from creating money by lending it into existence. That's why even the ancients had debt jubilees.

Also, my favorite private money form, common stock, does not even involve debt. If so, where is it? Are not the stock owners listed under Equity and not Liabilities?

Matt Franko said...

F,

The problem is we have reached a point where literally the govt is "lending" us our own "money"... and they dont know that they are doing this... this is THE problem...

rsp,

Unknown said...

A society needs a neutral and stable medium of exchange that is not itself either a commodity that can be consumed or that has a fluctuating value, ... Dan Kervick

The allowance of genuine alternatives for the payment of private debts would tend to keep the value of fiat stable since if government excessively overspent relative to taxation, ONLY the government and its payees would NECESSARILY be hurt since everyone else could escape the "stealth inflation tax" by using private monies. And if government underspent relative to taxation then taxpayers would howl that their real tax burden was too high. So the allowance of genuine private currency alternatives INCREASES the stability of fiat.

Unknown said...

And, of course, the existence of stable fiat sets an even higher standard that private money issuers must meet, given fiat's other natural advantages.

Dan Kervick said...

F. Beard, your underlying theory is that free markets and competition are sufficient to promote stability. But the record shows that capitalist financial liberalism has produced endless cycles of bubbles and busts.

Unknown said...

Then let's go to all out socialism and at least be non-hypocritical thieves.

Also, what "free markets?" Government backing of banks goes back hundreds of years.

Ignacio said...

There is no need for a banking system for leverage and credit dynamics to happen when there is any form of private ownership and market dynamics functioning. These happen in any complex society which gains enough activity volume and population, been happening since 5k years ago or more.

It's just in our modern era we haven't found yet a copping system to stabilize these fast enough, the instability of capital ownership and subjective preferences and the market dynamics they tend to create.

So: 1) yes, capitalism as defined in its traditional form is inherently unstable; 2) yes, non-capitalistic interventionism can stabilize it thanks to the fungibility of money.

P.S: What F.Beard repeats over and over it's possible in plenty of places, there are lots of nations where there is no legal tender laws (and even if there are), also that form of money is also possible. yet any behaviour has to rise in any natural way that conducts us along these lines.

Unless your believe system is that a big secretive cabal has constructed the current environment, you will believe the current institutional frame has emerged naturally in human societies (with more or less corruption and private interests shaping it, but emerged nevertheless). Maybe we should talk more about evolving it before dreaming about destroying it, someday we ourself will have evolved enough to get rid of even monetized economies, but until then, let's pretend not to have every answer to why things are the way they are and why should be a radical different way we want to enforce.

Ignacio said...

No 'honest money' is going to change that prices go up and down, that stuff gets overproduced and that some guys get left hanging all that useless stuff while other hold the money. That has nothing to do with the existence of banking.

Yes, credit facilitates that, whatever transmission mechanism we implement for that credit (lending against real estate or other), but this is inherent to economic agents behaviour. I'm in favour of full reserve banking, yet I understand that that won't prevent crisis and 'economically unjust' situations, even if it would rise the importance of equity over credit and risk taking to generate income instead of passive rents.

We have to seek other mechanisms to seek a balance for that, otherwise ultimately we would forbid private ownership because it's the desire for accumulation of wealth and ownership of private capital what drives that process, not the nature of any credit system which is simply a transmission mechanism for that behaviour.

The target of reforms should be the incentives for one behaviour or an other, not trying to remove not even the behaviour itself, but a proxy of the behaviour! You are targeting the wrong thing, three degrees away from the real problem (and solution).

Unknown said...

otherwise ultimately we would forbid private ownership Ignacio

No. Common stock as private money would INCREASE private ownership.

because it's the desire for accumulation of wealth and ownership of private capital what drives that process, Ignacio

Certainly pathologically greedy individuals exist,

not the nature of any credit system which is simply a transmission mechanism for that behaviour. Ignacio

but we need not and should provide a government-backed mechanism to service those folks. That's fascism, friend.

And let's not pretend that there's no option other than fascism and communism. Ancient Israel had strong property rights, periodic debt forgiveness, mandated provision for the poor, AND mandated return of agricultural land to the original families every 50 years at most to prevent massive land accumulation and permanent dispossession. And Christians (or their descendants) can't do at least as well?!

Unknown said...

make that "need not and should not", please.

Matt Franko said...

F.,

The Mosaic Law allowed lending, just without interest... and btw that whole thing ended up a complete failure which is the key takeaway...

You write here:

"Ancient Israel had strong property rights, periodic debt forgiveness, mandated provision for the poor, AND mandated return of agricultural land to the original families every 50 years at most to prevent massive land accumulation and permanent dispossession. And Christians (or their descendants) can't do at least as well?!"

"Israel" didnt "have" this... these features were mandated BY LAW... and they didnt enforce any of these most important parts of it:

"Woe to you, scribes and Pharisees, hypocrites! for you are taking tithes from the mint and the dill and the cumin, and leave the weightier matters of the law, judging and mercy and faith. Now these it was binding for you to do, and not leave those.
24 Blind guides! straining out a gnat, yet swallowing a camel!" Mat 23:23

That whole thing was a complete FAILURE due to the type of humans that obtained the positions of authority there... (sound familiar?)

"The Law" was a demonstrative exercise of failure for us... we (humans) have already been put thru this... we should seek to learn from this past failure that is documented in both the Hebrew and Greek scriptures....

The structure of our system we have today is basically fine... it is NOT "government backed" it is government decreed by law ... it is not a cartel by any stretch of the imagination...

We need BETTER PEOPLE in positions of authority, just like Israel did 2,000 years ago or NO legal system will work...

Here is Paul's key observation here:

"14 For whenever they of the nations that have no law, by nature may be doing that which the law demands, these, having no law, are a law to themselves,
15 who are displaying the action of the law written in their hearts, their conscience testifying together and their reckonings between one another, accusing or defending them,..." Romans 2:14

It's not that we have "the law written in our hearts" rather, it's that we have "THE ACTION of the law written in our hearts"...

The word is ergon, it means "act" or "work".... "The 'work' of the law written in our hearts..."

What are our objectives? What kind of results do we want (coming out of the laws we write)?

We need BETTER PEOPLE to occupy these temporary earthly positions of authority and leadership. This is the way we have to roll for now... it's the best approach we can expect for now.

Right now we have terrible people in authority foisted upon us in all areas, govt, media, academe, religion... you name it...

These people dont even know what the hell is going on, they are all not qualified for their positions....

Write all the laws you want, study whatever "price data" of "capitalism" you want like you are studying the weather or something...

Until we confront and expose these the unqualified for leadership/authority among us and rebuke them, and then get better people in there, we wont get the outcomes we are looking for...

It's not "the law", it is "the ergon of the law" that we should seek to be concerned about...

Once we get focused on these outcomes (if we can), these "actions of the law", the rest will fall in place.

Ultimately this will require "Devine intervention" to achieve the ultimate outcome, but I am still led to think we (humans) can at least make things better for ourselves now, even with what little authority we (humans) have been presently given...

and btw things ARE already sloooowly moving "our way" right now if you look at what is really going on...

rsp,

paul meli said...

"Then let's go to all out socialism and at least be non-hypocritical thieves." - F.Beard

Socialism is the State owning the means of production.

The only true socialism we have in the U.S. I can think of is the military and the VA medical system.

Providing the payments to the system through public spending is not socialism, it is a necessary condition for the form of capitalism we have here in the U.S. to function at any meaningful level.

It always comes down to what choices the public makes on what it wants the spending for.