Circulation of wealth

[Malcolm Ramsay]

Thanks for the reply Ilyan.

"So what is the  deeper problem?"

I separate it into three distinct strands: the flaws in our political system 
which gives power to people who are not properly accountable and representative; 
land laws which destroy people's natural rights to land, and concentrate control 
of it in the hands of a minority; and a monetary system whose most fundamental 
feature causes wealth to flow naturally towards the rich. You seem to be mostly 
focusing on the monetary problem, but I'll say something about the others first.

The political one is the deepest, and can't really be regarded as a single 
problem - which is largely why it's so intractable. I focus on the land question 
partly because that's where all the different political threads come together, 
so it provides an issue around which a new society can form. When it comes down 
to it, the fundamental reason 'the state' exists is to provide a mechanism for 
deciding who has control over which piece of land. (People sometimes argue that 
the primary role of the state is 'defence', but it's only once some basic rules 
are in place, for determining how conflicts of interest are resolved, that a 
society develops its own sense of identity - and therefore only then that the 
concept of external threats has any meaning.)

So I'm focusing on land reform because I regard that as more fundamental, more 
amenable to individual action and more potent as a rallying point than monetary 
reform. An important feature of what I'm proposing is the symbolic value of 
people making a legally binding commitment to a healthier system of ownership. 
The world is full of disillusioned idealists who wanted to change the world in 
their youth, but have found themselves, as the years go by, too caught up in 
everyday life to keep up that idealism. But if people joining a society have to 
make an irrevocable, legally-binding commitment (to bequeath anything they leave 
when they die 'responsibly'), that should create a bond between the members 
which most voluntary societies don't have.


"Politicians [....] built inflation into the system.  [....]    There is no 
deeper problem than that." 


I think there is indeed a deeper problem - one which lies in the reason why 
inflation happens. Money serves three different functions which are not wholly 
compatible with each other; it has two 'tangible' functions as a medium of 
exchange and as a store of value; and it has an abstract function as a standard 
of value. But there is a conflict between its function as medium of exchange, 
which requires it to keep circulating, and its function as store of value, which 
encourages people to hold on to it - and that conflict compromises its function 
as standard of value.

The root of the problem stems from the fact that people prefer holding surplus 
wealth in as liquid a form as possible (which in its basic form is 'currency' 
i.e. cash). Therefore (in the absence of inflation) people are inclined to take 
physical money out of circulation, sticking it under the mattress or wherever; 
which has the effect of reducing the amount of cash in circulation (ignoring the 
banking system for simplicity).

In a commodity-based monetary system (i.e. where gold or silver is used as 
money) this leads to deflation (falling prices, compromising money's function as 
standard of value) and also creates a flow of wealth towards those who are 
hoarding the commodity, when they lend it at interest. In a fiat money system, 
where money can be created at will, deflation can be avoided by putting new 
money into circulation, but the problem of interest remains and a vicious circle 
results - the amount being hoarded increases, so even more money is created - 
which leads to inflation when the hoarded money eventually comes back into 
circulation. The process is less clear when non-cash money (i.e. money held on 
current account) is considered, but it's essentially the same.

What allows that process to happen is the fact that currency (physical money) 
holds its nominal value indefinitely. That's what makes it possible for people 
to hoard it, and it's also what makes hoarding it attractive; real wealth always 
has a carrying cost of some kind - it either costs you something to store it, or 
it loses value over time - whereas the carrying cost of money is negligible. 


So when you say "Politicians [....] built inflation into the system" you're not 
really being fair, because it actually happens quite naturally as a result of 
using a medium of exchange which, in its base form, can be taken out of 
circulation by anyone who has a surplus. It's something people find difficult to 
understand, especially when non-physical money is taken into account. 


In a well-designed monetary system cash would start to lose its value if it were 
taken out of circulation - in other words, it would need to be spent (or 
converted into a non-transferable form of savings-money) within a certain period 
(probably a few weeks or months). That would allow the monetary authorities much 
more control over the whole system; at the moment, for example, they can't 
temporarily boost the money supply, because any money they create has an 
indefinite life-span - with a depreciating currency they would be able to. It 
would also destroy the ability of the rich to charge everybody else for the 
privilege of using it, which is effectively what's happening with interest. That 
phenomenon (interest) results from the ability to take the medium of exchange 
out of circulation, and a mature society needs to break away from that.

Politicians would still be able to mismanage the economy, but they'd find it 
much harder. At the moment, however, they don't even have the power to manage it 
properly - because control of the money supply is effectively dispersed among 
all the people who have surplus wealth. It might be reasonable to blame them for 
not fixing the source of the problem, because it was described a century or so 
ago by Silvio Gesell (who Keynes described as a 'neglected prophet') - but until 
then, it's not really fair to blame them for something they have no power to 
prevent.

I didn't say much about that issue in my recent posts because I don't see it as 
something we can usefully address in the short term (however I have written 
about it elsewhere in the past: In search of honest money). Unlike the land 
issue, I don't think it's something which can help in getting a new society 
started, and setting up a new currency needs a critical mass of people - but 
it's something that would need planning for from early on. 


In a mature society I believe money would need to be directly linked with the 
tax system, because when it comes down to it, the only absolute value that a 
fiat currency has is the obligation that the government has to accept it in 
payment of taxes. And rather than the money supply being anchored in a gold 
standard, or in the latest guess of a panel of economists (or a basket of 
commodities as some people have suggested), there would be a 'labour standard'. 
Labour provides a unit of value which is meaningful to everyone and, assuming 
everyone is expected to contribute towards the community, a currency based on 
that obligation would be of value to everyone directly .... but I'd better not 
get started on how a tax system ought to work.

Malcolm



________________________________
From: ilyan <ilyan.thomas at virgin.net>
To: Malcolm Ramsay <malcolm.ramsay at talk21.com>
Cc: diggers350 at yahoogroups.com
Sent: Monday, 10 January, 2011 0:30:57
Subject: Re: [Diggers350] Re: Circulation of wealth

Thanks Malcolm,

So what is the  deeper problem?

Marx described how to progress from feudalism to socialism by 
efficiently accumulating wealth with Capitalism.     He also described 
an internal flaw that makes Capitalism collapse,  expecting that to more 
or less compel the transformation.

Keynes showed how to iron out the booms and slumps of Capitalism.  
Politicians and Economist  misused  Keynes to keep the Stock Market 
rising and built inflation into the system.   That causes people to rush 
to buy assets and we are well  on the way to Hyperinflation, Panic, and 
Total Collapse.    There is no deeper problem than that.

The last man to really kill inflation in the UK was Stafford Cripps when 
he put a  surcharge on unearned income that resulted in Lady Astor 
having a tax bill in excess of her £25,000 income,  she had to sell some 
shares.    But the resulting sound money enabled all the subsequent 
prosperity the Tories took the credit for.

Now all the Politicians are debauching the currency in the way Lenin 
advocated to wreck countries.   They should be hanged as traitors.  
Unfortunately that will not solve the problem of industrial and 
population growth poisoning the planet and causing Mass  Extinction.

Inflating the currency is like putting straight nitrogen on the land.  
You get a quick return of growth but destroy the long term sustainable 
production.

Climate change is already damaging food production and the feedback 
developing there could bring everyone real problems quite soon.

Overpopulation has made Higher Communism impossible.    If there are any 
survivors they will be right back with primitive communism.   Will they 
have learned enough from the catastrophe to find their way from there 
directly to higher communism?
Ilyan


On 05/01/2011 22:02, Malcolm Ramsay wrote:
> Ilyan wrote: "Wealth  is best recirculated and Capitalism preserved  by a
> Progressive Tax on Wealth  sufficient to clear the National Debts."
>
> Thanks for the comment, Ilyan, but anyone in a position to implement a
> progressive tax on wealth would be in a position to address the deeper 
problem.
> It makes no sense giving people, with one hand - through inheritance - wealth
> they haven't earned, and then taking (some of) it back with the other, through
> taxation; especially since the giving creates a sense of injustice in those 
who
> are left out, and the taking creates resentment in those who are being taxed.
>
> It's worth distinguishing between operational and structural factors in the
> economy. Taxation is operational; governments are constantly changing the way 
>it
> works, and who it hits. Introducing a progressive tax on wealth might help for 
>a
> few years, but however long it survives there will always be pressure to get 
>rid
> of it because people will always be aware of it as an imposition.
>
> Inheritance, on the other hand, is essentially structural; it happens without
> any government action, simply as a result of old laws which have never been
> properly reviewed. Reforming it would be a one-off change, which would affect
> one generation but which wouldn't cause any on-going resentment.
>
>
> "If you try to grow a new society within the framework of the old, you will 
>find
> [...] that power remains in the hands of Politicians."
>
> Power has to lie in somebody's hands. The important thing is to make them
> properly accountable - which is why my previous post focused on the
> constitutional changes I'd like to see.
>
> Malcolm
>
>
>
> ________________________________
> From: ilyan<ilyan.thomas at virgin.net>
> To: Malcolm Ramsay<malcolm.ramsay at talk21.com>
> Cc: diggers350 at yahoogroups.com
> Sent: Saturday, 25 December, 2010 18:40:04
> Subject: Re: [Diggers350] Circulation of wealth
>
>
> Wealth  is best recirculated and Capitalism preserved  by a Progressive
> Tax on Wealth  sufficient to clear the National Debts..
>
> If you try to grow a new society within the framework of the old, you
> will find there are lots of bigotted dogmatic Marxists  incapable of
> becoming scientific Marxists who will  use the tricks of democracy to
> ensure that power remains in the hands of Politicians.   The feuding,
> backstabbing, and splitting on the left is a pretty plain warning that
> Socialism is unlikely to start functioning before the Capitalists
> destroy Capitalism,  and the real bite in that is that simultaneously
> with destroying Capitalism, the Capitalist will destroy Earth's ability
> to support Life.
>
> Anyone got a relevant quote from William Morris?
> Ilyan
>
> On 23/12/2010 23:19, Malcolm Ramsay wrote:
>> In a previous post, Foundations of social justice, I wrote about the 
political
>> changes which I believe would be necessary to bring our current system of
>> government into line with the requirements of social justice. I don't believe
>> there's any way to bring those changes about directly, but I think it can be
>> done indirectly; by creating a 'private' society with a similar structure to
>> our
>> existing system but based on slightly different foundations. It would be 
close
>> enough to what we already have that it would be consistent with the 
historical
>> legacy, but it would avoid the features which create a bias towards injustice
>> in
>> our current system. It's aim would not be to challenge the existing system,
> but
>> to fill in some of the gaps in it .... and eventually supersede it.
>>
>> It can only do that, of course, if it can attract enough people that it can 
be
>> regarded as a genuine alternative. I've no idea whether or not what I'm
>> proposing will be able to do that, but the only way to find out is to try.
>> Conventional wisdom would say it doesn't have a chance, because attracting
>> people usually involves appealing to their self-interest, but what I'm
>> suggesting does exactly the opposite: it asks people to surrender some of the
>> rights they have, under the existing system, to act selfishly - because those
>> rights are the root cause of most of the inequality which is so deeply
>> entrenched in our world.
>>
>> I am talking here about a small number of specific rights, which members 
would
>> be expected to formally surrender to the society, either by deed of covenant
> or
>> through a legally-binding contract. For the most part these are rights which,
>> for practical purposes, exist only as a result of perverse actions by the
>> state:
>> specifically, the right to bequeath inordinate amounts of wealth to your
>> descendants; and the right to earn interest (above inflation) on surplus
> money.
>> For many people in this group these are rights which might seem irrelevant,
>> because they don't expect ever to be able to exercise them - but I believe
> they
>> are important anyway, for a number of reasons which I'll try to explain.
>>
>> Critics of the status quo often attack the people who benefit from it -
>> bankers,
>> landowners, businessmen and the rich in general - as though they are actively
>> and maliciously doing down the poor. Sometimes no doubt they are, but for the
>> most part they have no need to - the system works in their favour simply as a
>> result of how it has developed, and all they have to do to benefit from it is
>> follow the path of least resistance. Most of the time they're guilty of no
> more
>> than turning a blind eye to the fundamental bias in the system - and they
>> justify it to themselves with the argument that they're only doing what the
>> poor
>> would do if positions were reversed.
>>
>> And that's a valid argument, because it seems to be largely true; when people
>> escape from poverty they are keen both to make their own wealth secure, and 
to
>> spare their offspring the experience of poverty - but in doing so they help 
to
>> perpetuate the factors which create that poverty. Economically there are two
>> principal reasons for social inequality: one is the fact that we use a medium
>> of
>> exchange which, in its base form, can be taken out of circulation by anybody
>> who
>> has a surplus - which allows the rich to charge everybody else (through
>> interest
>> on loans) for the privilege of using it; the other is the 'inheritance trap' 
-
>> the fact that landowners can designate their successors without regard to the
>> public interest, which allows accumulations of wealth to persist long after
> the
>> person who earned it has died.
>>
>> These two factors act to hugely distort the natural circulation of wealth.
>> Reformers generally focus on the distribution of wealth, but it's the
>> circulation which really matters; as long as that's healthy the system will
>> automatically come back into balance, but if wealth is not circulating
>> properly,
>> redistribution will produce only a temporary solution. And focusing on
>> redistribution can blind us to a simple truth: that control of the system is
>> not
>> just in the hands of the rich. Wealth constantly flows - naturally - from the
>> rich towards the poor, in the form of payment for services, and a healthy
>> economy therefore has a tendency towards equality. There is also a constant -
>> natural - flow from the passive towards the active (the industrious and
>> creative) which creates a counter-tendency towards modest inequality.
>>
>>
>> Those two different types of flow create a dynamism in a healthy economy. 
But,
>> as we know, there is also a constant - unnatural - flow from the poor to the
>> rich, in the form of rents and interest, which stifles much of people's
>> creativity and keeps them in poverty. Cutting off those unnatural flows would
>> allow the system to return to a natural equilibrium, within a generation or
>> two,
>> without the trauma of redistribution. But because they result from laws and
>> customs (of inheritance and money creation) which are deeply embedded in our
>> society, there are no simple ways of cutting them off (or, rather, there are
>> technically simple ways, but because they can only be implemented by
> government
>> there are no simple ways of bringing them about).
>>
>>
>> 'Within a generation or two' doesn't make for a very inspiring call to arms;
>> but
>> we're looking at a problem which has its roots in the distant past, and which
>> is
>> so intractable partly because of the weight of history. It's over 350 years
>> since the time of the Diggers and the fundamentals of the problem have not
>> changed. If we put all our effort into working for immediate reform, and 
fail,
>> we will leave future generations with the same problems that we've inherited
>> ourselves; and those problems will perhaps persist for another 350 years. But
>> if
>> we take steps - what steps we can - to make things better for future
>> generations, we might find that it also helps us in the present.
>>
>> The steps I'm proposing - individually surrendering the rights which create
> the
>> problem - will only (individually) make a small contribution; but they cost 
us
>> very little and they don't prevent us working for more immediate reform. And,
>> as
>> I envisage them, they will create a virtuous circle. I said above that 
members
>> would have to surrender the right to bequeath inordinate amounts of wealth to
>> their offspring, but they would not be prevented from bequeathing 'a fair
>> share'
>> - that, however, would be conditional on their offspring also joining the
>> society. Anyone joining would therefore be, in effect, permanently 
withdrawing
>> their own wealth - however small it might be - from the pool that the rich
>> monopolise, and adding it to a pool which would be governed by fairer laws.
>>
>> In itself, if only relatively poor people join, this would make for very slow
>> reform, possibly taking centuries - but there are various side-effects which
>> might speed it up. To some extent, people who care about issues of equality
>> face
>> a moral dilemma over earning money, because accumulating wealth can be akin 
to
>> joining the enemy. There are all kinds of ways of reconciling that of course,
>> and many people who have escaped from poverty find ways of helping others; 
but
>> when it comes to making their will, most of them, I'd guess, find it easier 
to
>> push aside a vague feeling of guilt than risk the resentment of their
> children.
>> However, if they've made a legally-binding commitment, years earlier, which
>> limits what they can leave, then they are spared that dilemma. It might be a
>> minor factor, but for anyone who has made a commitment of the kind I'm
>> suggesting, accumulating money becomes a positive contribution to the cause 
of
>> equality.
>>
>> The most important side-effects, however, will come from the legitimacy it
>> might
>> add, both to demands for reform, and to direct action such as squatting -
> that,
>> I believe, could bring about major reform within fifteen years or so. To
>> understand that, it's necessary to look at the relationship between law and
>> justice, and the relationship between the courts and the other branches of
>> government - I'm going to leave that for another post.
>>
>> Malcolm Ramsay
>>
>>
>>
>
>
>
>



      
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