Something a little bit different

I realize that today’s post is quite long. However, I think it makes up for this by being perhaps the most interesting blog entry I have ever written; I urge you to read it if you have the time. Today, as I promised yesterday, I am going to outline my own views on economics. I believe that an economic system can be analyzed by asking two key questions about it. I shall submit my own system to this analysis so as to best explain how it works and its moral justifications.

The first question we must ask when discussing economics is “what is the purpose of a particular economic system?” As odd as this may seem, it is actually a key question to understanding why certain economic systems function the way they do. For example, the purpose of capitalism is to allow land, labor, and capitol to be privately owned and traded. Communism, however, has a different goal: the development of a classless society. Because of the fundamental difference in why these systems exist, each functions in very different way. So, what is my answer to the question regarding the purpose of economics? Simply this: The purpose of an economic system is to allow the greatest amount of prosperity in terms of goods and services, and to allow these to be distributed to the constituents of society in a utilitarian manner. This sounds complicated, but is actually quite simple: the system’s chief goal is producing the most/highest quality goods and services (don’t worry about how for the moment) and distributing in a way that allows the most happiness for the most people. This leaves some room for flexibility, as it calls for an equal distribution of goods, but only to the point where this does not affect prosperity. This allows for the system to change as the culture of the society does (as the society fluctuates from considering classlessness as a virtue to considering the labor theory of value a virtue). The rationale for this goal—the “why” behind the “why”—is also relatively simple. To quote the economist C.H. Douglas, who is perhaps my most important influence as far as economic philosophy, “Systems were made for men, and not men for systems, and the interest of man, which is self-development, is above all systems.” The reason I encourage prosperity in terms of goods is simple: imagine what happens when an economic system is mismanaged and loses track of this goal. The best example I can think of is this: during the Great Depression, farmers were paid to destroy their crops so that the overall price of crops would rise. This is sacrificing goods for the sake of money; in my mind, this is incredibly foolish, as it means a decline in overall prosperity and wealth (it obviously means this because goods are being destroyed). Thus, seeking wealth and prosperity in terms of goods and services is a better goal for an economic system, as it means that this system works for the utilitarian benefit of all.

The second question we must ask when examining economic systems is “how does the system achieve its goal?” In some cases, there are multiple ways of a achieving the goal; communism, for example, could work toward a classless society by encouraging private ownership rather than collective ownership. Thus, you may agree with my opinion on the best purpose of an economic system but not the way I plan to achieve this purpose. I propose a system similar to C.H. Douglas’s “Social Credit.”

But before I explain the nuances of this system, I would like to quickly explain the nature of money, as it is crucial to understanding what I am about to propose. Money is defined as anything that can be exchanged for goods or services (that is not already a good or service, of course). Also, money is not an absolute; it has no value except in relation to human beings, and it is human beings who decide the exact value of monetary units. Similar to the reason that “dog” only means “dog” because we so choose, a dollar means more than a scrap of paper because we, the general public, have decided that it has a certain value. This value often (but not always) correlates to the quantity theory of value, better known as the idea of supply and demand. Of course, like any other commodity, the value of money to each particular person varies and fluctuates—but because it has at least some value to most people it can function as a part of society. Often, though, organizations such as the government or banks have more control over the value of money than individuals. Money generally functions as a medium of exchange, but, in some instances, it can take on other purposes. The main point, though, is that money is not made “in a factory”—in direct correlation with the production of goods/services—as fiscal conservatives claim, but instead by whoever controls its value (i.e. the government, banks, the people, etc.)

So, here is the system I am proposing: The government should take an extremely active role in economics for the purpose of encouraging overproduction. Though in capitalist systems overproduction is disastrous (it was one of the main causes of the Great Depression), it can be handled easily in “my” system. The government can achieve this by severely restricting trade of goods that can hypothetically be consumed domestically and by providing stimuli (in the form of payments and loans) to encourage the production of goods that can hypothetically be consumed there as well. The government also discourages imports with protectionist tariffs or similar measures. As I mentioned before, this encourages domestic overproduction. Once this occurs, the government is to offer a subsidy to companies to lower prices of their goods. Next, the government issues a “national dividend” to all citizens, giving them the money to purchase the all products produced that can be consumed. This also creates a perpetual demand, which will encourage more production in the next term, but will not alter prices because of the government’s pre-existing subsidy. This subsidy/dividend system ensures that most, if not all of the good produced domestically than can be consumed domestically are purchased and consumed. As I mentioned above, how the dividend is distributed depends on cultural factors (which is fine, because it is determined by politicians, who are elected officials). But where does all this money come from? Very simply—and this is the single most important aspect of what I am proposing—this money is fiat money. It is not backed by gold or any other standard; the government simply prints it at a mint and issues it. It appears that this would cause inflation and collapse, but, as I shall explain two paragraphs below, this is not so.

Additionally, as a matter of policy, the government is the only organization allowed to coin money and regulate its value. Private banks and other financial institutions must deal with money as if it were a physical commodity: under no circumstances may a bank loan more money than it physically possesses. (Today, believe it or not, banks can loan out more money than they actually have; the process is known as fractional-reserve banking.) Also, there is to be a single national bank, which can serve all of the purposes a conventional bank. This bank, however, being a part of the government, does not have to deal with money as a commodity like privately owned financial institutions. This national bank also serves to distribute the national dividend and handle the subsidies used to lower the cost of domestic products.

At first glance it appears that this system suffers from numerous practical flaws, the most prominent being that it encourages hyperinflation. However, remember that companies are paid a subsidy to lower prices and the national dividend creates unlimited demand and purchasing power—this ensure that all the goods produced that can be consumed are purchased. The only instance in which the system encourages inflation is in instances in which the government overcompensates and the national dividend is far greater than the total quantity of products produced. Also, it would appear to be worthless to a country such as Venezuela, which relies heavily on one or two exports. However, the government can deal with this by purchasing quantities of this product with fiat money (or just nationalizing that industry) and bartering with other countries for the products needed (few capitalist countries would want to work with a currency that is not backed by gold and is under the thumb of the government). Also, remember that the currency is only used inside the particular country utilizing the system, and that privately owned banks are very weak compared to those today, meaning that the government has an enormous degree of control over the value of the currency. This should prevent the currency from inflating, though I am sure that some inflation is going to occur. However, as long as there is only a minimal amount of inflation and it does not detract from the efficiency of the system as a whole, it is not much of a concern. Also, it appears that the system would not work for a country that relies heavily on imports. This is true, but, as I suggested above, there are methods by which a country can stimulate its own economy provided it has the natural resources to do so. Another complaint is that this system encourages wastefulness. Though this is a valid argument, the same can be said of capitalism; my system is no more wasteful than a capitalist one.

I welcome any comments on this topic; tomorrow I shall go into more detail and perhaps provide a hypothetical example of how this system would work. Again, sorry about the length of today’s post—I realize it was a bit hard on the eyes.