Measure your government with your disposable income

So here's my train of thought for today -

• Industrial robotics is on the rise - http://www.ifr.org/industrial-robots/statistics/
• This means that either (1) manufactured goods should be more affordable or (2) demand is far outpacing production
• So imagine we take (1) to extremes and we see many manufactured goods becoming cheaper and cheaper
• I think it's valid to say that more robotics in an industry means less people earning in those same industries
• Lets also assume that we can take the metaphor further, that "automation" and other labor efficiency will reduce the number of jobs involved in the output of goods and services.
• Where will those people go? Without significant re-education, they'll go to lower-income jobs.
• They'll have less disposable income than they would have had with the job they knew at the manufacturing enterprise.
• What limits the growth of such enterprises dependent on the average consumer? It's the disposable income of the average consumer.
• More disposable income = more manufactured goods consumed. How many smartphones can one rich guy buy?
• Enterprises are not interested in creating more disposable income, but only on getting a "slice of the pie".
• As the disposable income of more "average-Joe" consumers goes down, more enterprises will look elsewhere for income.
• They'll look to government contracts, to large enterprises, to the wealthy. They'll look B2B. But they'll also look to war, healthcare, and prisons.
• They'll reduce the goods they supply to the average consumer and increase the goods and services to wealthy organizations.
• This means that those same manufactured goods will become less affordable to the average consumer.
• We'll see more and more households marginalized and debt-ridden. Wage-slaves living day-to-day. More alcohol and drug use, more crime, more desperation.
• The government will spend more, and enterprises respond with more products and prisons just to keep the peace.
• So something has to change. At least the measure has to change. The way we measure the success of our governments perhaps.
• Our measure has to be more on the demand-side. When WE have more money, they're doing well. 
• So measure your government on one thing. Not jobs, not inflation, not how well they're doing in the latest war. 
• Measure your government on what really counts. Your disposable income.

Using g-side to balance i-side

The thing that Kessler's article on i-Side vs. g-side ecomomics ("... the term i-side economics—for investment and innovation and individual incentive—rather than g-side economics, as in "what has the government given me lately?"") seemed to miss is that there is also a division within the i-Side, and that division is not healthy without the government's intervention.

The key is what I call the labor vs. investment capital balance rule. The more fairly that a person's "deliverable" capital (labor) is balanced against an investors capital, the freer a person is, and IMO, the better a capital-based system is likely to run. The more that a person's deliverable capital is not tied up (in garbage debt like credit cards, for example) and can be invested is one example. Another is their ability to move their deliverable capital to the venture that pays the best. This free movement of labor forces enterprises to not only be competitive with product, but also labor.

Why is it important for economies that enterprises also be competitive with labor? Without this balance, there is no "natural" way for markets to find a way to give individuals enough spending money to drive the consumer economy. If Joe Public's purse is empty, the rest of the economy will eventually flounder.

This two-way competitiveness (product and labor) can only be achieved if labor can move. One way this is enabled is if the safety net offered by each enterprise is seen as equal by the labor pool. If, for example, an individual contributor must stay with his current company because he would lose his level of medical insurance when moving, he becomes "stuck" with that company and the laws that allow an insurance company to do that distort the labor market in its client company's favor and so distort the free-market.

So the government needs to protect the deliverable capital of the individual to the extent that it balances with investment capital to prevent distortions (such as labor migration limits and debt that limits spending) on free markets. This is where the "g-side" needs to regulate the "i-side".

In Kessler's article, how well would Ford's automobile market have developed in the long run if the labor had only ever been able to work for Ford at a rate that Ford determined? Would they have been able to buy those cars and help to drive the market? It's the eventual balance between compensation and product that built the economy, not the product only.

Perhaps we SHOULD execute corporations

For the Rio+20, United Nations Conference on Sustainable Development, I asked the conference via Twitter “How can we give corporations a conscience?” The question was answered by one of the Rio participants, but in a manner that I found unsatisfactory. I don’t really blame him. He had no idea the question was coming and that’s got to be one of the most loaded questions of our time.

I think that when trying to solve a problem, coming up with the right question is the best way to start. Why do I think this question is important?

It starts with the standard arguments between socialists and capitalists - socialists saying that classes have to be eliminated before we can progress and capitalists saying that the capitalism is self-correcting and should be left alone. I’m not in agreement with either. I see government as a point on a two-axis system.

One axis represents the governments respect for capital - the higher the respect for capital, the more capitalist the government and the lower the respect, the more socialist. The other axis indicates the respect for the individual with big government at one end (limited respect for the individual) of the axis and anarchism at the other (maximum respect for the rights of the individual). Of course, it’s a bit simplistic to separate them since respect for the individual goes hand-in-hand with respect for capital. But it’s my way of keeping the typical extreme right vs. left arguments in perspective.

The second thing that drives my political opinions is the Tao of Pooh, Benjamin Hoff’s introduction to Taoism based on A. A. Milne's Winnie-the-Pooh.  I think many people get different things from this book. What I got was a sense that when we mess with natural systems, we often get unintended and unhappy results. This is my motivation for having good confidence in capitalism. In many ways, it’s a natural system and we should leave it alone.

The problem is that pure capitalism doesn’t seem to be working. So I had to ask myself why? If we’re leaving it alone, and it’s not working, is the rule I got from Hoff wrong? I don’t think so, but capitalism isn’t strictly natural. I think it works well when it behaves naturally, but it is rarely natural in several respects.

The first issue is that government messes with the system a lot. In some cases, it’s arguably good. For example, government will break up monopolies. In other cases, it’s bad. For example, a government might try to protect their country's industries by subsidizing them.

The second issue is that sometimes corporations just get too big. They wield too much power. They can push governments to their benefit and use their enormous wealth to consume the smaller players. They can move to the least regulated country so that they can maximize their profits.

The third issue is that corporations are psychopathic.

The Wikipedia definition of psychopathy is “a mental disorder characterized primarily by a lack of empathy and remorse, shallow emotions, egocentricity, and deceptiveness.”

In other words, I'm saying that corporations have no conscience.

It’s no surprise. The raison d’être of a corporation is to make money. In addition, the way that investment in corporations happens, the investors (and their consciences) are a long way away from the decisions made by the company. 

Corporations are essentially one group of people hired by a group of investors to make money for them. In some cases, the investors don’t even know that they’ve invested in the company.

For example, in a mutual fund, you might know that you’re investing in resource-based corporations, but you have no idea that the mutual fund bought Freeport-McRoHan stock and that the company is polluting the environment and paying police forces to brutalize Papuans.

The nature of capitalism will likely always create instruments such as mutual funds. It’s unlikely that we can persuade individual investors to check into all the companies they’re investing in. It’s just not practical.

So this leads me to asking myself this question. How can we give corporations a conscience?

I see two ways that corporations can have a conscience. The first way is to develop it in the people running the corporation (the “internal” conscience). The second way is to have an external agency regulate it (the “external” conscience).

Both the internal and external mechanisms have problems. The internal conscience is the most likely to be sacrificed to profit. Corporations need to adapt to market pressures. Given two corporations in the same environment, one with an internal conscience and the other without, the corporation without a conscience will likely succeed.

The externally-enforced conscience is more likely to have an effect. A regulation will apply equally to all the corporations in an environment, limiting the ability of market forces to twist that conscience.  But the ability of a corporation to influence the regulation increases with its wealth. Governments are made of individuals and every man has his price. Even the best intentions of a politician can be influenced by the amount of money some corporations can bring to bear on a problem.

In addition, sometimes the punishments applied to corporations are just not appropriate. Some corporations are quite willing to accept the punishment as a cost of doing business.

It’s interesting that corporate personhood is so vilified lately. The decision the Citizens United v. Federal Election Commission seems to imply that corporations in the US now have very little limitation on their ability to influence elections. Many groups are pushing to have this decision overturned.

To me it seems like an opportunity. The more a corporation is a person, the more we should be able to apply laws to that person. The (unattributed) quote “I refuse to believe corporations are people until Texas executes one” presents some interesting perspectives.

Corporations are groups of individuals. They are the shareholders and the employees. These people have rights, but they seem to have very little liability in the group.

The Wikipedia definition of a corporation says “A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members.”

To simplify (perhaps too much), the shareholders of a corporation are not legally responsible for the actions of that corporation.

This means that we cannot force legal action against the shareholders for an ill-behaved corporation. The only action that will impact the shareholders is monetary.

My proposal to give corporations a conscience is very simple. We need to create a standard of financial liability for a corporation that executes a corporation if it shows that it has no conscience.

We do so by giving a corporation a global “criminal record”. We classify offenses as “summary” or “indictable”. Summary offenses yield standard fines as determined by the court. Indictable offenses yield impacts proportional to the profit of the company. An example of an indictable offense would be “bribery of a public official to influence regulation”.

As a corporation is shown to have more and more incidents of unconscionable behavior, its “repeat offender” index is increased. The fines applied by courts for indictable offenses are multiplied by this index. An index of 10% means a fine of 10% of the profits of the company. If the index reaches much higher than 100%, the corporation is dissolved (executed).

One interesting implication of such a mechanism is that corporations would have incentive to police their competitors. If they can prove their competitors have committed an indictable offense, they could potentially eliminate them.

This idea is mostly a “lark”. I’m certain that existing political and economic systems have too much inertia to change so dramatically. But what I hope is that it gets you thinking. Maybe someone will come up with a mechanism that gives corporations a conscience. Or maybe a corporation will do something so evil someday that someone will remember this thought, dust it off, and make it law.

If you're not angry...

I've seen this expression in several contexts, but I'm not sure who originally coined it. "If you're not angry, you're not paying attention." This relates to a feeling I have every day. I look around me and very few people have the same sense of frustration that I do about our economy and politics. True, people sometimes seem concerned, but most of the time people just ignore it - a bit like everyone ignores death. It's easier to ignore than to try to do something about it.

To me, something is terribly wrong. I'm neither an economist or a political scientist, but I can feel that the system is poorly designed. Why isn't the public doing anything?

An example is Glenn Greenwald's article in Salon about the defamation of Wikileaks. At first seems like another article about the government vs. Wikileaks, but after reading it a bit further, you might start to get the same sense as I did. That is, that people should be paying attention to this. That something isn't quite right. Try reading it. Maybe you'll get uneasy too.

I worry that sometimes I tend to bore my friends and family with my rants. I try to tell them about how fractional reserve banking is theft. I try to tell them that political parties do not make a democracy. To talk about global climate change. I try to tell them that something is wrong. But I can see by the glazed expressions that it's just not getting through.

I think others have the same problem as I do. Why is it that we can see and that we're angry, and nobody else is? Is it because of some conspiracy of brainwashing or propaganda? Is it because people are lazy and don't want to pay attention? Or is it just because it's too complex?

"The more abstract the truth you want to teach the more you must seduce the senses to it." - Friedrich Nietzsche.

How do we "seduce the senses" of the public? How do we show them, beyond a shadow of a doubt, that something needs to change?

I don' know. But I do know that something is inherently skewed in the existing system if the public is not angry.

Here are a few suggestions for tools that might do the job:

1. Make an information service that is not "news". Let's call it the "un-news". Malaria is a major cause of death and suffering in the world, but we almost never hear about it. I want an information service that tells me about the ongoing problems in the world, not just those that are newsworthy.
2. Make a social networking service that's about arguments. Make one place where we can discuss a given topic, summarize the arguments about the topic, and come to a consensus on the conclusions. A system that cuts the "false" out of rhetoric and makes it easier to understand what's critical to a given issue. We need a tool that allows us to immediately see when the conventional news media is presenting poor evidence or arguments.
3. We need help. Who? Who did we turn to in the past when things weren't working? Usually, we turned to philosophers. Yes philosophers. Those people tucked away in the dusty corners of the social sciences buildings of our universities. These are the people that are experts in rhetoric, experts in logic, and can pull apart the weak arguments of conventional economists and politicians and perhaps assemble something right out of the pieces.  I'm not saying they are without bias or interest, but I'm sure that if they were given the task of deciding whether a given thing was true or not, that we'd get a clear answer.

Perhaps the biggest impact of Wikileaks and their supporting press will not be the piecemeal impact of each leak, but the overall snowball effect that encourages the public to pay attention (and hopefully get angry). I can't say for sure what needs to change, but I can say that we need to be more strategic about how we get that change to happen.

Two incompatible views of the future

I just tried imagining two possible futures. In one, we continue down the very ugly path we're on, and in the other, we reach my ideal future. What's interesting in this speculation is that the some of the items in the list are incompatible with the other view. That is, if you pick them up and try to stick them in the other future, it doesn't seem to work.

What this implies to me, is that some of the items are enablers for their respective futures. Play the game yourself. Choose your own futures if you like.

Here are my possible futures.


EITHER

- contracting population
- banks controlling nations
- uncontrolled inflation OR a police state
- massive market fluctuations OR concentrated wealth
- fortress states and conflict zones
- token-representation tyrannies and dictatorships
- severe censorship and dogmatic propaganda wars
- reduced education
- reduced health care and social assistance
- no pensions
- shortened average life-spans
- droughts, famine, and war in much of the world
- economic drivers based on greed and fear
- out-of-control global warming

OR

- contracting population
- bitcoin-type currency
- non-inflation-based economy
- no banks
- no debt
- reduced-speculation markets
- non-resource-based economy
- anonymous cloud-based open-source computing environments
- dispersed, geographically-overlapping communicative-assent-based governments
- legalized drugs
- no censorship at all
- advanced media aggregation and dissemination
- cheaper education
- easier access to medical and social services
- minimal limits on immigration
- economic drivers based on eco-sustainability
- stabilized global warming

Is fractional-reserve banking theft?

If we use a conventional definition, "fractional-reserve banking is a type of banking whereby the bank does not retain all of the customers deposits within the bank. Funds received by the bank are generally lent to other customers."

If we use the conventional definition of theft, it is the "illegal taking of another person's property without freely-given consent."

So what's the relationship between the two?

When a bank lends the same money that is also deposited, the deposit exists as currency and the lent money exists as currency at the same time. This process is compounded. The person that borrows the money either deposits it or spends it (so the money gets deposited again), and the money can be lent again. This has the effect of creating money.

To be exact, in many countries this monetary inflation (as opposed to price inflation), is at about 5% (I don't know this for all countries, but I do think it is about this for Canada) and often greater.

What does this mean though and how does it relate to theft? I'll give you a hint. If you had a hundred dollars in your pocket, and someone were to come up to you and took five dollars without your consent, would you not consider it theft?

That's very close to what actually happens. The best description I've seen of what our modern currencies are is a collective debt instrument. To simplify (and perhaps poorly interpret), a currency is like the sum total of all goods and services in exchange.

When a bank lends money that is also a deposit, they increase the money that represents the same "sum total of all goods and services in exchange". To give a simple example, imagine all the goods is just three carrots. Imagine also that there are three dollars as currency. As a carrot producer, you expect to be able to sell the three carrots for three dollars. But then comes a banker and lends two of the three dollars to someone. Suddenly there is five dollars in your money supply. You could continue to sell your carrots for three dollars, but it's more likely that you'll want a bit more, since those five dollars represent the same amount of goods in exchange.

In this manner, fractional-reserve lending makes each dollar buy less - each dollar in your pocket or in your paycheck. What it means is that it is money out of your pocket, exactly as if someone came up to you on the street and took it.

The question now is whether that money is taken legally or illegally.

I would say that it's up to lawyers to argue if it is legal. I just don't know.

If it is legal, then it amounts to a tax. A taxation without representation.

If it is not legal, then it is theft.

Exploiting Central Bank Reserve Profiles

It's about time our economic leaders started thinking about what reserve currencies are for, and how we can start moving away from the current system and towards something that is a tool for economic stability instead of a thinly-veiled global tax.

My sense of the problem is that we should be basing all countries' reserves on a GNP ratio or something such indicator. That is, that the proportion of each currency held in reserve by any country exactly corresponds to the relative economic strength of the country of that currency.

Of course your first reaction would probably be that such a system would be untenable. That even the evaluation of the "relative economic strength" indicator would be subject to endless debate. True.

But just because something is difficult, does not mean that it should not be done.

Lets imagine a perfect world where the system is already in place. Some central world agency publishes the "reserve profile" at some set period. The Fx markets fluctuate for several days afterwards. National banks take their time and buy and sell currency during a grace period until they reach the required profile.

After the reserve adjustment, country A finds that it's currency is selling for less. In fact, it's because its economy has taken a downturn. Traders react by snapping up stocks and commodities on its exchanges at the slightly lower relative prices. With a little luck, country A's economy improves slightly.

Country C decides it is not going to try to meet the reserve profile. Instead it starts buying up its trading-partners' currencies.

So we can see that a reserve-profile is not the only tool that needs to be created. We also need something that encourages country C to play by the rules.

My second suggestion is that a reserve-profile could be adjusted by one of two means to counteract this situation.

The first mechanism is that the "economic strength" function S_C that returns a currency's proportion of the reserve should be adjusted by some function D_C to indicate that the country has a distorted reserve. That is, that all other countries will act to counter the decision of country C to buy its trading partners currencies by in turn buying C's currency.

The second mechanism is that any given currency "overbought" by C could have its proportion S reduced by the appropriate margin to account for C buying it. That is, other countries could sell more or buy less than usual of C's trading partners' currencies. This mechanism has the advantage of looking a bit more elegant because the total world reserve of any currency would then correspond to its S function.

Some consideration could be taken to making the buying and selling as non-disruptive as possible and to making the correction of "overbuying" or distortions obvious. For example, a world bank could sell its reserves of a given currency to counteract a distortion at which point it buys back the currency from other central banks. Some such "float" mechanism might simplify the process. It could even be taken so far as to say that the central banks only buy their reserve currencies from this bank. This would allow that bank to prevent country C from buying too much.

The definition of the strength function S should not be underestimated as a stabilizing tool. For example the S function could incorporate a component function that might act to stabilize carry-trades when a given national bank has been forced to reduce its rate disproportionately. Likewise, other such "nudging" of ratios could be used to temporarily prop up unstable currencies.

I understand that there are many factors that make such a system difficult to implement. I know that it is simplistic to look at a currency such as the US Dollar as if it was only bound to the economy of the US. However, that currency is closely bound to the politics of the US and it is clearly a matter of sovereignty that our reserves are not independent of those politics.

It is my belief that my suggestion is probably difficult to implement, but could yield a number of tools that central banks could use to stabilize the world economy. The public would likely find it a great deal more palatable than the current reserve system or any proposed by an emerging power. It would let us finally escape the vestiges of the Bretton Woods agreement in a rational and fair manner.

I understand that my idea is not weighted with the strength of years of economic study and experience that a true economist undoubtedly has access to, but I could not in good conscience fail to pass it on considering what I believe its potential for good to be. I hope you will consider it as carefully as I have.