1000 Castaways, Chapter 5: The Real World, System Two

(←Chapter 4    Additional Material→)

System Two

The other main reason our real-world economies do not function as well as the Island is that we simply do not understand System Two, which organizes public projects and creates the vertical component of modern currency systems. The reasons for this stem from the long, complex process by which our modern economies emerged.

It might be expected that I will say that the inherited structure of our real-world System Two is sub-optimal and must be changed for our economy to run as efficiently as the Island economy. But the primary problem is actually our inherited beliefs, not structure…

1000 CASTAWAYS: FUNDAMENTALS OF ECONOMICS is now available-

Hardcover, Paperback, & Kindle at Amazon.com

Hardcover, Paperback, & NOOK at Barnes & Noble  

Angus and Robertson (Australia), Fishpond (New Zealand shipping)Waterstones (UK),

!NDIGO (Canada) India Print Edition & Amazon India, South Africa Print Edition

Ebook (Epub editions, global availability)  Kobo, Playster, & Apple books

Emergence

Bank-of-England-founding-charter-sealed-in-1694

 

 

 

 

 

15 thoughts on “1000 Castaways, Chapter 5: The Real World, System Two

  1. This is all very good. I can’t really find anything in these last four chapters worth quibbling with.
    I did spot one typo here: eveident

    I do think inflation needs more discussion, some people really care about it. You say both systems are not inflationary. I’m not convinced that is always true, but if it is where does inflation come from? And how can it be prevented or stopped?

    I have revisited Chapter 1. I think it most important to eliminate commodity money entirely. It is not necessary for establishing a unit of account. Commodity money thinking is the source of the “inherited beliefs” you wish to dispel so why allow it a foot in the door.

    “Promises to pay” is better than “promissory notes” but I think “IOUs” is better still. You should introduce them at the point you introduce commodity money, instead of it, which then allows ledgers to naturally develop as a record of who is owed what rather than appear as if by magic.

    And I don’t think you’ve made it sufficiently explicit that the bank, er–the Farmers Group, is issuing IOUs (ie. money) based entirely on its good name (ie. nothing) rather than on its stock of barley or IOUs that have been lodged with it. This is another thing that commodity money thinking has trouble understanding.

    You want to do this by showing a balance sheet. Tricky without having a whole (boring) Introduction to Accounting section. I think you need a lot more text describing how it actually works (taking deposits enables ex nihilo lending through the magic of accounting). And you want your readers to realise that you are talking about banks without actually saying so. A tall order, I know.

    Liked by 1 person

    1. Friday – thanks! I was just looking at trying to change the commodity money bit – just takes time to get to everything. I love the work of Graeber and Hudson, and want it to be reflected properly.
      On inflation – you might have noticed I did an “internet only” section (Ch 5)? I also have a whole section written but that I cut on inflation. I felt it was too obvious for the readers I am aiming at (breadfruit trees with the crop ruined by a cyclone, that type of thing. That actually happened to me in Fiji lol!), but might still use it. I am still reading your comment and will get back to you, thanks again.

      Like

      1. Yes, I also wondered about whether you could introduce inflation/deflation and the perils of commodity money by having too many barley farmers growing their own “money” and perhaps a barley crop failure in the story.

        This is all really good stuff, Clint. I dips me lid to you for taking the time to write it.

        Liked by 1 person

    2. Friday: “You say both systems are not inflationary. I’m not convinced that is always true, but if it is where does inflation come from? And how can it be prevented or stopped?”

      I had more on inflation but cut it.
      The discussions revolving around inflation/price levels are either so banal as to be boring (simple intuitive supply-demand stuff – a shortage of a good raises prices etc) or so poorly framed as to need a lot of work to make sense of. Either way, I found it to be too distracting to the reader, when I only want to get across the point that there are two separate systems of “money” that serve to distinct purposes, and that getting their balance right is the first step in having a “good” economy.

      So the banal is not worth putting, and the complicated needs to be done separately I guess.

      On prices/ “inflation” :
      of course there are some “simple” supply side price rises. These are the right signal and the right response is substitution, technology, or conservation.

      If this supply-side rise is from a fundamental input to the economy such as energy then you get a general price rise (1970s oil shock – I did it with a scarcity of wood on the island). The right response is still substitution, technology change, or conservation. You want the price rise signal to work.

      If you get the energy shock (e.g., 1970s oil) with an otherwise poorly run fiscal system (or weird interest rate interventions) you can manage to get “stagflation”.

      You can manage to set-off price rises in assets through a bloated overly-large finance/banking sector. We have managed that. Despite horizontal money netting to zero, if the overall size of it is too large, then it can spill over into the real economy. Just ask any person on normal wages who wants to buy a house if asset prices matter. Another avenue we have in the US is the financialization of university fees – that has bloated that sector, and all those administrators do spend into the real economy. Other similar dynamics make an overly large financial/banking sector cause real economy (real resource transfers) from the lower class to the wealthy and real “inflation”, despite horizontal netting to zero.

      This is addressed in the book simply by saying we have to keep the FIRE sector healthy (ie, small, which as I discuss, equals the same thing).

      We can devalue our currency by taxing too little. Ill-advised tax cuts (often favoring the wealthy so also exacerbating inequality) can devalue the currency (general price rises, same thing).

      Of course extreme spending were it to happen could cause price rises. WWII is the most common example given. But otherwise, there is very little evidence that currency issuers under normal circumstances commonly spend enough to cause price rises. Even WWII, which everyone agrees was a massively abnormal amount of spending, left a legacy of decades of economic growth in its wake.

      Bonds = needlessly paying interest to savers. They are savers so may seem to be neutral, but over decades and decades, % payments is an unwavering pumping of HPM into the economy. We know it is inflationary which is why raising interest rates doesn’t cool the economy in the medium-run (i.e.,“monetary policy” doesn’t work)
      The rich can save AND spend. They’re rich! Eventually those old savings do get spent.

      The Island has no interest payments on saved tax-credits, a healthy small finance sector, and doesn’t allow hoarding over a period of decades that is eventually dissaved (throwing a spanner in the works).
      So no, I don’t see inflation as a problem with a properly run system– if we duplicated those aspects of the “Island” economy, we would not have price rises. We could do the Green New Deal (with no “offsets”) and everything else we want, up to about approaching the levels of the New Deal and then WWII, and STILL not have problematic price rises. We would likely get decades of incredible stability and growth, just like the 1950s-1960s.

      Like

      1. I can see that would be hard to work all that into the story. Inflationphobes tend to assume that it is only caused by government spending or wage increases. You don’t really have a government to spend, nor any unions to demand higher wages, so maybe you can get away with it.

        Like

      2. Thanks Friday.
        There is an Island “gov” spending, Chapter Two, building roads and schools etc. But I think it is actually realistic this is not inflationary.
        I can find no examples in modern history (really: none) where a peacetime currency-issuing government has ever caused problematic price rises from spending. The cause of price rises is always something else.
        On unions and wages, good point, I’ll have to think about that.
        Islanders UNITE!! Lol 🙂
        Thanks again for the comments, always useful

        Like

      3. I forgot about Chapter Two. You could point out that when the government buys a new road the wealth of the community is increased by the same amount as the money supply, so that spending is not inflationary.
        There is a limit though: if it tries to buy more roads than there are workers or rocks to build them then it will bid prices up.

        Like

    3. “I have revisited Chapter 1. I think it most important to eliminate commodity money entirely. It is not necessary for establishing a unit of account. Commodity money thinking is the source of the “inherited beliefs” you wish to dispel so why allow it a foot in the door. ”
      Agreed in principle. But not sure how in a realistic seeming scenario this could be done. In theory, straight to a tax-credit (wergeld or similar) as a unit of account, but in real life commodities were units of account before effective taxation. How can this be done quickly and in a believable way?

      Like

      1. I kind of outlined it before. I see it as a pretty straightforward evolution from interpersonal credit. Barter rarely happens for well-known reasons but people want to get something in exchange for their surplus so they accept IOUs. Initially the fisherman writes IOUs for fish, the farmer for barley, etc. Then the receiver of the IOU exchanges it with a third person for their surplus. Quite quickly I imagine it will become apparent to all that IOUs denominated in some commodities are easier to trade than others. They start to ask for IOUs to be made out in the popular commodities. Eventually everyone naturally converges on one, or an authority adopts one and everyone follows.

        Like

  2. I think it is a matter of timing. I have that happen a few paragraphs later, with the Farmers Group. I am not sure it is believable to make IOUs negotiable at the early stage you mention. In the real world that is the main reason it literally took thousands, possible tens of thousands, of years for negotiable IOUs to develop.
    But I also see the benefit of introducing negotiable IOUs straight away, as as you say, this doesn’t let commodity money in the door at all (and I shouldn’t). But realistically, negotiable instruments won’t happen til something “big” and widely recognized can make it happen; I don’t think it happened with groups of friends and their IOUs, it took govs and banks much later

    Like

    1. I think it would be an interesting experiment to take a bunch of young kids and get them to start trading things. Not just pokemon, it would have to be a variety of stuff. I bet that once they hit on the idea of IOUs the rest would follow quite quickly.
      There is a 100 000 year old bone with tally marks on it. There are tradeable warehouse tokens from early Sumer, at the dawn of civilization. I think setting a unit of account over a whole realm was an act of authority, but the idea and infrastructure must have been long-standing already.
      Your islanders are not children or cavemen. They already ‘remembered’ how governments work. I don’t think it a greater leap for them to figure out the possibilities of IOUs.

      Like

      1. [One more thing: on the experiment idea with kids and the Islanders “I don’t think it a greater leap for them to figure out the possibilities of IOUs”] – I think that’s true in a small group, but probably not a large one.
        I make the Island 1000 people instead of 10 to capture the needed dynamics of our modern societies (1000 is just barely big enough to imagine some of the anonymity that causes social institutions to be needed, and thus modern banking and modern government)).

        BTW, are you familiar with Dunbar’s Number? https://en.wikipedia.org/wiki/Dunbar%27s_number

        The natural size of trust etc in groups, 150 is around the max size for normal groups, “the number of people you would not feel embarrassed about joining uninvited for a drink if you happened to bump into them in a bar” 🙂 Guess the Island needs a bar lol (and a Union)
        Anyway, thanks again for all the valuable input. Best, Clint

        Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s