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Page history last edited by Xavier Shay 13 years, 3 months ago

How do you think a new economic system will opperate? 


Hi! Xavier Shay and Steve Hopkins will be doing a session at Trampoline. At this stage (apart from a fair amount of reading we've been doing) this is all we know for sure. We also know that the presentation will address some of the following themes. 


1) Currency

2) Trust

3) Transparent economic systems

4) Peer-to-peer and trust


But we thought we try a Fred Wilson and open up our presentation and see what ideas and thoughts you guys could provide. It's everyone presentation, after all. 


We will update all of this space more and more (and probably link to our presentation when we have one!) so that you can follow along and let us know whether we're talking about the right things. 


Cheers till then!


Xavier and Steve. 


[xavier] I'm treating this page as a discussion page, so have labeled my thoughts


Thoughts from emails so far:


(thanks to Jan Stewart)
Just read something Maslow wrote on economics:
It can be assumed that classical economic theory, based as it is on an inadequate theory of human motivation, could be revolutionized by accepting the reality of higher human needs, including the impulse to self-actualization and the love for the highest values. 
I wonder if economists talk about that?
"democracy is the worst form of government except all the others that have been tried". Perhaps the same can be said of our money system?

The biggest problems we have are people ones - a government that takes misreports key figures and spends too much debt.

The Clinton administration did a great job of not spending a budget surplus, Bush came in an doggedly implemented all of his election promises at great expense, plus a war, to undo all this good work. In the past 5 years(?) congress let lapse a law that required all new gov spending to be backed by a new source of income, so spending could blow out again. Social Security is in big trouble in the coming years because it hasn't been designed to cope with the expected influx of elderly - more so because a lack of real resources. The government can print money, but that doesn't help it if there's not enough nurses*.

The fed reserve is run by economists who generally understand what it takes to make sound monetary policy. Even though they're a separate entity, they can still be undermined by politicians who aren't economists.

These aren't failures in the money system per se, they're just people being stupid, selfish and/or shortsighted. This will be the downside of any system, I imagine. GFC was the same problem. Risk spread from treasury bonds (no risk) to junk bonds (high risk) used to be 23% (23% higher interest rate on the riskier investment) - it had dropped to 4% before everything went haywire, which is ludicrously low.

Will the internet and increased transparency and engagement help prevent these sorts of failures in the future?

Inflation isn't necessarily evil. It encourages liquidity (discourages hoarding) which I think is probably a good thing. A free market does create greater stress levels though (creative destruction cycle - if you're inefficient you get replaced), and hoarding is stress free for some people, so this is why a lot of people aren't fans. I believe it's an acceptable trade off for an efficient economy - I embrace change more than most though.

One of the interesting things I've stumbled upon (which is probably economic policy 101) is that countries tend to hold a lot of cash in their accounts to help smooth out cash flows. Imagine the US as freelancers (very simplistic example, but it works). When you freelance, you tend to hold more cash on you than when you're an employee because you're never quite sure when that invoice will get paid (I've personally felt this - Xavier you're probably the same). So the US (and, more importantly, every other country) holds a fair amount in their coffers to allows for costs they may experience (wars, emergency funds spent, health emergencies, large imports etc etc) between income (large export invoices paid, tax payments, yada yada.) This is especially relevant in a country like Australia, which still makes a lot of its cash from resources (Uranium, Aluminium, Steel etc etc). Whilst the companies that create the profit from these things take most of risk, the countries still need cash to make those transactions happen. 
So, countries hold cash. Most countries, hold their cash in the standard international currency they benchmark against (for Australia, the US). This keeps liquidity in the market. As of April 2008 (according to the IMF) 66 countries around the world use the US Dollar as their exchange rate anchor. 
Money, like any other product or service, is exposed to fluctuations in supply and demand - and it is this that has kept the US market quite liquid (even as it's suffered through the crisis). 
"The US Government, for it's part, finds it quite easy to finance its current account deficit: the foreign central banks (like the Reserve Bank of Australia) are a kind of captive market" - Foreign Affairs magazine. 
Anyways - I'm quite keen to phrase our presentation around a couple of key points. 
1) Currency is a product/service just like anything else. It is susceptible to competition just like anything else, it's just that nothing on earth compares to the US dollar at this stage - if aliens invaded tomorrow landed in Obama's office however, I'm pretty sure no amount of trillions of dollars would appease them. If they operate in Xion Dollars, the US Dollar loses it's market (just like any other product or service). [xavier] I don't like this analogy - the purpose of money isn't to placate invading aliens, the next paragraph implies that a power based currency would do a better job, despite the fact that we could just buy power normally. Also, assuming we weren't just thrown into slavery and at least some of our governments continued to operate, there'd still be a market for our currencies, because we still need to pay taxes.
But, natural resources (and energy!) would. I think we could see our currency literally move more towards actual currents. Why don't we trade in power? in electrons? 
[xavier] In order to address these, we probably need to explain our current system - there's some important things that I don't think heaps of people know about, in particular how money is created (since this is where most criticism of the system comes back to). We need to understand how a commodity money (trading in power) is fundamentally different from fiat currency - it's essentially going back to a gold backed system (which has both benefits and drawbacks).
a) We're on a fiat currency, not backed by gold, that is only good because the government accepts it for payment of tax, and enforces it's use for settling debts.
b) Money is created by debt. We need to explain (ideally demonstrate!) fractional reserve banking. This concept is unique to a fiat money and is what cops the most flak.
on power as a currency, there are 5 properties generally recommended for a successful commodity: 
a) rarity (fail)
b) durability (fail - you can't easily store power without loss forever?)
c) divisibility (win)
d) fungibility (win)
e) ease of identification (fail - you need specialized equipment) 
(a) is a particular problem, as a power-backed money would be subject to intensely fluctuating inflation/deflation as technology changed, new sources were discovered. The problem with gold is that it's value is at the mercy of gold miners - this was generally not a large problem because of its rarity. With a fiat currency - for better or worse - we at least have more fine grained monetary policy tools. The currency is insulated from failure by external events. Of course, the government can still screw them up themselves (see any of the countless hyperinflationary episodes of the past century), but the developed economies now all have a large barrier of policy and smart economists - independent of their relatively fickle X-year term governments - to help prevent this. 
2) I'm keen to take these large, marco discussions back down to a more tangible point. What does the next type of bank look like, give then above? 
I'm not so tied to #2 - I just think it's interesting to consider what a new model of 'bank' would offer. What about a bank that took current dollars (US say) and invested them into the power market. Then, people traded in KwH? It's also relevant where carbon/climate change comes in. As climate gets worse, the most efficient way to produce 'currency' is to do that without needing to spend currency to make it. So to import coal (or dig it out of the ground before producing 'electricity' actually becomes a very inefficient and costly business to be in.)
Building a solar panel, or a wind farm would be too - but would be more cost effective in the long run. 
[xavier] another point I find poignant is that things have become so complicated that they are so far removed from everyday transactions as to be unrecognizable. This is particularly relevant in a global market, where $US1 can pay a skilled teacher for a day in developing currencies. While at a macro level there are good reasons for this to be so, they don't make intuitive sense at the bottom end.
Is it necessary to have a robust unique identifier for each human on the planet to make a trust system work?  Reputations are built up over time, and when agents representing humans are interacting with each other they need to feel comfortable that an interaction with two agents (with different and possibly conniving strategies) is not actually representing one human.
[xavier] You at least need a unique identifier per domain - from a privacy perspective intuitively I feel better about having an SSH key and a passport be separate, even though they both uniquely identify me, I'll need to think more about why that is. 
My interest in money etc has been along the lines of a few points (from Patrick Hearps)

- money as it stands today, deregulated, with the ability of govts to print it at will, is little more than a promise of future growth. This therefore relies on continued economic expansion to operate.

- understanding money is perhaps not so important as understanding what wealth is? I read a fascinating book recently simply called "How The Economy Works" by Kevin J Wilks. Found it at North Fitzroy Library, shoudl be availabel thru Yarra Library network. His argument is basically that wealth is surplus value created ultimately by the input of energy into society - originally was primarily photosynthetic energy from agriculture, but that has since been eclipsed by fossil fuels

Trading in kWh is an intersting concept, but remember money is just a tool to measure common value - it could be anything we want it to be. The only reason we place value on a bit of paper or plastic from the govt instead of a pile of stones or shiny bit of metal, is because we trust that it is valued the same by others.

a comment on "The fed reserve is run by economists who generally understand what it takes to make sound monetary policy. Even though they're a separate entity, they can still be undermined by politicians who aren't economists.

These aren't failures in the money system per se, they're just people being stupid, selfish and/or shortsighted."

(a) who do you think was being selfsih & shortsighted? everyone, I think. From the bankers to the mums & dads. That;s how our society works - we place greater value on short-term gain than long-term. Our financial insitutions are geared towards continouusly generating short term profits, and use the discount rate mechanism to achieve this - it's a mathematical way of saying 'the future will take care of itself"

(b) All very well to say that politicians don't understand economics, but the more I delve into this it seems to me that economics is not grounded in reality. There really are physical limits to this world we live in!

Interesting to hear a mainstream economist talking about the end of growth:


I'm not yet convinced on the need to curb growth per se, but definiately growth in linear material & resource consumption needs to finish up. The only way we will continue to grow is to live in a system which is powered by renewable energy and our systems of consumption are cyclical, without creating waste.


[dan donahoo] Random Thoughts


Great topic. I guess I come from a practical persepective. I happened upon LETS through an interest in permaculture and systems design. So, I'm less interested in "How" question and more interested in the "Why". More experienced in the micro than than the macro.


So some thoughts:


1. Why do we need one new economic system. Surely, what we have through a whole range of activity in society are systems of exchange (call it energy exchange) if you like that operate outsiode systems that anyone can capture. So, is it about re-inventing a whole new system, or tweaking the smaller systems so when the large system falls over - you are ok, there is something to fall back on?


I'm interested in this from the idea of communities and economy's in transition - from one state to another, usually brought about by a significant event.


My example for this is why we re-established an re-invigourated Mount Alexander Local Exchange Transfer System. In Castlemaine, the main employer (despite an influx of treechangers) is the Bacon Factory. It employs over 1000 people, it is the life blood of the rest of the economy - what would happen if it closed down (and ever time there is a takeover that is a possibility - there have been a couple in the last 10 years).


What would happen is a whole bunch of people in Castlemaine would turn to Centrelink. Begin loooking for other jobs that aren't there and eventually heading elsewhere. Yet, all of those employees and their families have a range of skills and abilities. A LETSystem wouldn't be the "new economic nirvana", but a local economy that would allow them to trade and barter their skills to complement their unemployment benefits while looking for work. This could be anything - from a car service to pluming or electrical services to baby sitting or food.


So, there is a LETS community in Mount Alexander of 100 or so...it bubbles along with trading days and so on...and it will be there in case of such an event to be used by people who otherwise might just regard it as one of those weird hippy things.


2. I think the most interesting thing is looking at how the electronic environment could facilitate the tracking of transfers. Obviously we are moving well towards this. But, alternative economies could set up their own trading systems run through apps on iPhones, or in the way Second Life does and smaller local economies and their "currency" could develop their own value in the larger economies and a dynamic state of trade could occur that way. Yeah - so i'd be interested in discussions that look at multiple economies of different sizes and for different purposes moving forward.




RBA Glossary http://www.rba.gov.au/Glossary/detail.asp?term=ADI 


Economy eating itself - http://www.rollingstone.com/politics/story/30481512/wall_streets_naked_swindle/print


Supply & Demand in a POW camp - http://www.albany.edu/~mirer/eco110/pow.html

Comments (1)

Steve Hopkins said

at 10:13 am on Oct 19, 2009

Thanks for the addition @ppeach :)

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