Positive money

A non-profit group called ‘Positive Money’ has created a series of videos describing how money works in the real world. These videos explain how, contrary to the process described in many economic textbooks, most of the money in the economy is created by private banks, and that the central bank is not in control of the money supply. Furthermore they argue that banks are not limited by reserve requirements, and do not need to possess central bank money before they can make loans, nor is the amount of money private banks can create constrained by the total amount of central bank money. The videos are well-executed, and their view is backed up by an impressive roster of people who ought to know, including Mervyn King, former governor of the Bank of England, and various other good-bodies and fair-fellows of the economics profession. This Positive Money group also have a book out, which I have added to the towering virtual stack that is my Amazon wishlist.

Banks have a license to create money

The take away from the videos is that in the real world banks do not lend pre-existing money, but simply create money when they make credit available to their customers. Because the money in your current account is strongly backed by the government through the Financial Services Compensation Scheme, which guarantees all deposits up to £80,000, most of this ‘credit’ created by banks bears as little credit risk as central bank base money, or physical cash money; which is to say, it bears no credit risk. In essence, private banks have a license to create money. This is an important and worthwhile point that needs to be more widely understood (especially by economists, and most especially by those economists who write mainstream economics textbooks).

However I have a few minor quibbles with the arguments presented in the videos. Here follows the first quibble.

Bankers are not the only people in the economy

In this video it is claimed at 0:39 that the shrinkage in the money supply causes the economy to slow down. This is confusing to me because I do not see how the sequence of events would necessarily be from banks choosing to shrink the money supply, to a recession occurring. It seems to me that an equally valid flow of causation would be as follows: consumers choose to spend less, meaning that consumers borrow less, meaning the amount of bank credit/money falls, as people pay down their existing debts. This could happen regardless of what the bankers themselves choose to do. The bankers are not the only agents in the economy, but the videos present a model in which it is the bankers – and only the bankers – that decide what the level of the money supply will be.

This brings me on to my second quibble. In this video it is claimed at 13:20  that “the money supply of the nation depends on the mood-swings of banks and the senior bankers that run them, this is surely an insane way to run and economy”.

It is true that bankers’ moods influence the economy, but it is not clear to me that this is the only problem, precisely because – again – bankers are not the only agents in the economy. As is often the case, the great Daniel Davies says it far more concisely than I can:

Keynes The Master did not fuck up by not including a separate banking industry in his model; the investment decisions and motivations of the bankers in deciding whether or not to provide finance to the rest of the economy are exactly the same as those of industrial capitalists and are equally adequately described by Chapter 15. Bankers make their decisions based on whether loans will succeed or fail, which depends on their assessment of demand in the economy, and the model closes.

So the question is: did the recession begin because banks no longer wanted to lend, or did the recession begin because people no longer wanted to spend? And is our continuing economic weakness a result of unwillingness of bankers to lend, or is it a result of business managers’ unwillingness to invest? These are empirical questions and – as Davies points out – at this level of abstraction it doesn’t really make any difference. Somewhere there is a group of homo-sapiens making decisions about the future, and it doesn’t matter if those homo-sapiens are in a bank credit department or in a company head office.

On Positive Money’s substantive proposals

Positive Money have a bunch of substantive proposals that they outline here. I am not yet in a position to comment on these, but it looks like they might be a stalking horse for green social democracy, of which I am of course entirely in favour; but it seems to me that if you want social democracy, then you might as well do social democracy, instead of footling around with the banking system. I may be completely wrong here, of course.

In summary: contra Positive Money, the problem isn’t that bankers have too much power, but rather that anyone tasked with the business of making investment decisions in an uncertain world will be subject to severe swings in outlook, due to the irreducibly chaotic and non-ergodic nature of the real economic world. This problem runs far deeper than banking, and might run deeper than our particular brand of industrial capitalism itself; it could well be a property of any industrial economy run by agents that resemble human beings.

Iain M. Banks and Quentin Tarantino

There are many similarities between the late Iain M. Banks and Quentin Tarantino. Here are some of them:

  • Both excel at the low-level technicalities of their respective art forms. Banks writes excellent and inventive prose, and Tarantino creates excellent and inventive scenes.
  • Both write clever, naturalistic dialogue.
  • Both have a taste for macabre and disturbing violence.
  • Both juxtapose this violence with a strong sense of ‘normality.’ Note the ‘party’ scenes in various Culture novels, and the conversation between Vincent and Jules.
  • Both often choose to tell stories in a series of out-of-sequence vignettes.
  • Both enjoy over-the-top action and gore.

I have no wider point to make, I was just struck by the parallels.

 

God, I miss Iain Banks.

Politics is shit

Politics is shit.

 

When human beings live together they generate conflict, and politics is the resolution of conflict. Just as conflict needs to be resolved, so shit needs to be shovelled. Shovelling shit is necessary whenever a sufficiently large number of human beings live together. You need – somehow – to deal with all the shit. Similarly, when a large number of human beings live together you need – somehow – to deal with all the politics.

I am glad that we live in a civilization where politics is (for the most part) performed indoors sitting down, rather than out on the streets. I am thankful to those who spend their time engaging in the business of politics, although I wouldn’t necessarily want to spend time in their company. I am the privileged beneficiary of many centuries of development in the science and art of politics. If politics is badly executed, it can lead to large numbers of people dying horribly. All these things can also be said of the noble art of waste management.

I do not like politics. On a personal level, I do not enjoy or relish conflict. So from my point of view, the whole business of politics is something I would like to see dealt with as efficiently and quickly as possible, with minimal harm and minimal spillover.

This attitude colours my entire perception of political debate. I see ‘politics’ as an unpleasant necessity, rather than a hobby. Politicians desire to wield power over other people, and even if that power is directed to good and useful ends, there remains the uncomfortable fact that politicians still desire to wield power. That’s why they’re politicians. Yes, they might be doing it for what they consider to be good reasons, but they’re still seeking to wield power. In this respect, politics is unlike shovelling shit, because some people enjoy it.

The fact that some people enjoy politics for its own sake – the fact that some people enjoy conflict – is a problem. Perhaps its one of those deep and ineradicable problems of human nature. Or perhaps a better world is possible. The victory condition of human civilization must be to have as few people shovelling shit as possible. Civilization advances by increasing the number of operations we can perform without thinking about them, as someone said. So how do we go about reducing the need for politics? How do we reduce conflict?

Or: how do we reduce the causes of conflict? Right now, as far as I can tell, the only thing we know of that actually reduces conflict is technological progress. Technological progress has the potential to make everyone richer, and – ceteris paribus – richer people are less likely to get so angry and wound up that they end up attacking each other.

This is not to say that technological progress is necessarily going to solve all our problems. Technology is the harnessing of scientific knowledge to human purpose, and human purposes can be good and bad. But technology gives us room to manoeuvre. Better ways of shovelling shit ultimately mean longer lifespans and less human misery. As does better politics.

In conclusion, I see the humanity’s victory condition as being a reduction in the need for politics, and a reduction in the need for conflict. This observation is neither original nor helpful, but I like to keep things simple. Politics then, is only worth engaging in to reduce the need for politics. Insofar as blogging is political, it should be undertaken with the long run desire to render it unnecessary.

Some thoughts on Charles E. Lindblom’s “The Market System”

The Market System: What It Is, How It Works, and What to Make of It is a very good book. Go read it, and enjoy. Lindblom is the epitome of scholarly good faith and rhetorical balance. He presents a fair and intellectually rigorous analysis of just what it is we speak of when we speak of ‘the market’ or, as he calls it, ‘the market system.’ Care is taken to distinguish capitalism from the market system, and to discuss allocative efficiency as something distinct from dynamic efficiency. Lindblom recognises that the market system is a fragile instrument, which cannot work in isolation from a set of other institutions and norms of ethical practice.

This is not intended as a complete review or, God forbid, a precis of the book. It is my understanding that The Market System is by way of being a precis of Lindblom’s life work, and as such the book is as informationally dense as one would expect. It is fairly abstract and theoretical, which I appreciate*, but utterly readable and compelling. There are a few points which I feel need to be highlighted, as they are many important insights I would like to be able to refer back to at a later date. I am going to list some of these insights here, with a short comment:

Markets are about co-ordination.

Society is based on co-ordination. People behave in ways that enable them to achieve common and personal ends. Lindblom distinguishes between two types of co-ordination. One is co-ordination to curb violence inflicted by one person against another. The other, more ambitious form of co-ordination involves people helping each other to accomplish goals.

Co-ordination can be achieved in a number of different ways. One way is tyrannical, that is, it consist of one person telling other people what to do. Another way of achieving co-ordination is democratic, whereby people collectively decide what to do, and which among them shall do it.

Lindblom argues that the market system is ‘a method of social co-ordination by mutual adjustment among participants rather than by a central co-ordinator.’ The market is just one form of social co-ordination, and is not the only form of social co-ordination that takes place without a central co-ordinator. One example Lindblom gives of non-market, co-ordinator-less social co-ordination** is that of people walking down the street without bumping into each other. We observe where other people are heading, we make eye-contact, and adjust our own heading to those of other people, who in turn adjust their heading… und so weiter.

The nature of efficiency

Lindblom defines efficiency as “the ratio of valued output to valued input’. He then presents the argument for ‘efficiency prices’, which was the part of the book I was least happy with. ‘Efficiency prices’ are ratios between different commodities and services determined by good old-fashioned supply and demand, with all the limitations and abstractions of such arguments. I’m not going to discuss it much further here, but I will note that Lindblom is alive to the problems of the ‘efficiency prices’ argument as he presented it. Some of these problems include:

  1. Real market systems contain monopolies that limit the extent to which real market systems can approximate efficiency prices.
  2. Some goods and services are, by their very nature, not amenable to being traded in market systems.
  3. Spillovers, also known as externalities.

Allocative efficiency versus dynamic efficiency.

One way in which markets are about competition lies in their role in dynamic efficiency. This is in contrast with allocative efficiency, which entails that a given set of resources are distributed in a fashion that leads to an outcome superior to the initial condition. Allocative efficiency is about co-ordination.

But Dynamic efficiency, whereby agents change what they supply to the market in response to changes in market demand, is, arguably, about competition. Because it is through competition that those agents that attempt to provide one service at too high a cost are ‘forced out’ and therefore required to provide some other service. The distinction here between co-operation and competition becomes blurred, and might ultimately come down to a matter of nuance and personal values. For example, is it ‘efficient’ if a worker is replaced by a machine that does the worker’s job for less money? Maybe, maybe not, it all depends.

Think social, not economic.

The market system is not something that exists independently of society. The market is one element of the vast and interlocking set of systems that human beings have developed to solve problems of social co-ordination and co-operation. Although we are used to thinking of ‘the economy’ as a separate entity from (say) ‘the Church’ or ‘the state’, all of these institutions impinge on each other in countless different ways. Moreover the way they impinge on each other has changed over time, and this has changed how the market system itself is thought of and (as a consequence) how the market system works.

Islands of hierarchy in a sea of markets.

Lindblom distinguishes between market systems and command systems. He also notes that a great deal of economic activity actually takes place in hierarchical command systems, rather than purely through markets. Corporations exist, and their internal operation is guided through a more-or-less centralised command and control system. Command systems and market systems are two different solutions to problems of co-ordination, and each has their own pros and cons.

Market outcomes are not fair

Because prior determinations (e.g. inherited property, IQ, talent) are randomly allocated, there is no inherent justice in the market system. Market outcomes are as just as the prior determinations that go into them. Because the prior determinations are random at best, or the result of a long history of coercion and violence at worst, then market outcomes are not just.

Elites and mass

Lindblom distinguishes between ‘elites’ and ‘mass’ in both the governmental and market domains. He highlights how the elites – the ruling classes – of both the public and private sector, have successfully obfuscated and manipulated the public, who are rendered ignorant by a constant barrage of advertising and propaganda.

 

This latter point is crucially important. I don’t know if there ever was a golden age of enlightened public discourse, but it is clear to me that the ‘mass’ of the developed world has become more inert and ignorant*** even as it has lost the ability to act as a countermanding power to the interests of elites, whether they be market or governmental. I don’t know what to do about this.

 

 

* I dislike the habit some writers have of peppering their books with Illustrative Anecdotes (Malcolm Gladwell, I’m looking at you Ketchup Boy). Examples are fine, but I’d rather have them presented within a framework of rigorous theoretical argument. Lindblom strikes exactly the right pedagogical pose, at least as far as I’m concerned, but I realise that this fairly abstract approach might not be to everyone’s taste.

** Jesus Christ that’s an ugly sentence. Writing is really difficult.

*** So this is a point that’s been on my mind for some time now. I really, really don’t want to be one of those guys that sits at his computer bewailing how ignorant and stupid everyone else is and how all the bad things in the world are because everyone else is so ignorant and stupid, not least because I recognise that I’m pretty ignorant and stupid myself. Yet here we are.