The Economics of Real Things: June 2003
The crew was complete: it included a Boots,
A maker of Bonnets and Hoods,
A Barrister brought to arrange their disputes,
And a Broker to value their goods.
A Billiard-marker (whose skill was immense)
Might perhaps have won more than his share,
But a Banker, engaged at enormous expense,
Had the whole of their cash in his care.
Lewis Carroll, "The Hunting of the Snark"
Money is the way society allocates the use of new
goods and services in the optimal way-puts new goods and services in the
hands of those able to make the best use of them. Society allocates new
capital goods and services for the work and new consumer goods and services
to keep us while we work. The real investment is not the investment of
money. The real investment is the investment of our time, our energy.
The real capital is brains. A society that allocates new goods and services
in the optimal way will attract brains and become rich.
There is the nation as producer
and the nation as consumer. The nation as producer consists of associations.
The nation as consumer consists of individuals. The sole purpose of a
production association is to enable wealth to be transferred to its individual
stakeholders as consumers. Even Bill Gates cannot eat unless he can transfer
wealth from associated production to himself. It should not be said that
we eat at the expense of production, because that is the only purpose
of production.
Under social credit, absentee
investors become a thing of the past. Society invests the use of new goods
and services; and individuals invest the brains, the time, the energy.
Thus, on the one hand, the stakeholders of an enterprise are those directly
involved in it as managers, workers, suppliers. On the other hand, society
as a whole is also a stakeholder because society has invested new goods
and services. Thus, every productive organization should pay (1) those
directly involved in it and (2) everyone in society.
Money is claim tickets to new
goods and services. All the money that production organizations work with
is currently lent into existence by commercial banks. This means that
the use of new goods and services is allocated by commercial banks. Commercial
banks are allowed to do this under the authority delegated to them by
the central bank, which the central bank holds from society. Therefore,
it is not radical to say that it is society that allocates the use of
all new goods and services.
Although society currently does
this by means of loans, it would be better to do it by means of investments.
If society allocates the use of new goods and services productively in
an optimal way, it should result in more and better new consumer goods
and services that can be distributed as a dividend. And the more efficient
production is over time, the fewer new goods and services need be allocated
to production; and what is not allocated to production is dividend. Thus,
society's return on its investment does not come in the form of money
(for society can create money at will) but in the form of more and better
new consumer goods and services that can be allocated with new money.
The more efficient production
is, the fewer people we need directly engaged in it. Suppose we need only
10% of the population thus engaged, then we want the best 10%. Society
will allocate all new capital goods and services to the use of that 10%
for production and a quantity of consumer goods and services to their
upkeep, comfort, and enjoyment. If only the ablest 10% of the population
needs to be directly engaged in production, then it would follow that
the new consumer goods and services that need be allocated to businesses
to pay wages and salaries could not greatly exceed 10%-for we are rewarding
the 10% only with the right to consume more per month. Excess unconsumable
wealth in the form of invested funds they will not have, because there
will be no such investments. Since there are a limited number of places,
we may expect a certain competition for the use of new capital goods and
services by those for whom production is an artistic and scientific challenge
(our "aristocracy of producers"). In addition, the dividend
means that no one will be constrained to aspire to be in the 10% who doesn't
enjoy the challenge for its own sake. Therefore, the amount required to
reward the ablest 10% of the population could not greatly exceed 10% of
consumer goods and services. The other 90% can be distributed equally
to every citizen as a national dividend.
Distribute Today's Product Today
Speaking to the Australian League of Rights last
October, I suggested five principles of social credit, of which the third
was "Today's product is always shared out today" and the fifth
was "We don't need everyone employed." Indeed, one might say
that to share out today's product today and to allow for increasing disemployment
are the two main objects of social credit economics. They correspond to
the first and third of the three principles that Douglas first made public
at Swanwick in 1924, namely:
1. That the cash credits of the population
of any country shall at any moment be equal to the collective cash prices
for consumable goods for sale in that country, and such cash credits shall
be cancelled on the purchase of goods for consumption.
3. That the distribution of cash credits to individuals shall be progressively
less dependent upon employment. That is to say, that the dividend shall
progressively displace the wage and salary.
Distributing today's product today doesn't sound
like it should be that difficult. In fact, with prices on the one hand,
and money in people's pockets on the other, changing daily, it is quite
challenging. How do we keep prices and purchasing-power (product and claims
to product) together automatically and with the least fuss to everyone?
Society allocates 100% of new
capital goods and services and 10% of new consumer goods and services
to the ablest 10% of the population in a kind of partnership. And in keeping
with the idea of a partnership, let us suppose these goods and services
are allocated not as a loan-an exact sum to be paid back-but as an investment
by society. The ablest 10% are also making an investment-of their brains,
time, energy-and both parties should claim a share of the proceeds. Between
the two, society, which allocates all the material investment, should
both bear the greater risk (as it is able to do) and reap the greater
reward.
A logical arrangement would be
that if the ablest 10% agrees to a reward equal to 10% of new consumer
goods and services, then they should also take 10% of any increase in
new consumer production. In other words, as consumer output increases
with improved methods, the work force will to take not the same amount
as before but 10% of the larger total, and society will distribute 90%
of the larger total as dividend. Everyone wins. Similarly, should the
ablest 10% using all the new capital goods and services unexpectedly produce
a bit less than before, then 10% of the difference will come out of wages
and salaries, and 90% of the difference will come out of the national
dividend.
In money terms, suppose prices
of new consumer goods and services are 100 (arbitrary) money units and
wages and salaries are 10 units and dividends are 90 units and this time
the work force produces 10% more than before-new consumer goods and services
priced at 110 units. The work force has earned a wage-increase or bonus
of one-tenth of the 10 extra units, for a total of 11, so the other 99
units may now be distributed as dividend. In this way, today's product
is distributed today.1
Such a system should automatically
adjust production to desired consumption. In the situation imagined, if
the 10% extra new consumer goods and services are allocated by means of
10 extra units at the beginning of the month and those units remain unspent
at the end of the month and this is a consistent trend, it is a signal
to production to slow up. Consumption is satiated and the improved methods
have made it so that whereas before, 1/10 of the population was needed
for production, now only 1/11 of the population is needed to produce the
same amount.
Suppose, instead of 1/11, it
is an even 9%. It follows that 1% of the population can move from the
work force to the leisure force and the 1 unit of money that was their
wages and salaries can move from the work fund to the dividend fund. That
would then be 9 units allocated to wages and salaries and 91 units to
dividend. However, just as, in the previous example, we shared the increase
between wage-bonus and dividend, so here, too, we might allocate 1/10
of the freed money to a wage-bonus, 9/10 to dividend. That would make
9.1 units allocated to wages and salaries and 90.9 units to dividend.
If consumption is satiated and
continues to be satiated, then all improvements of process will go to
further decrease the necessary work force or increase the quality of the
product (a factor that can be increased without limit).
The above assumes that prices
stayed the same (100 units). However, one could also say that if prices
are related to costs, then 1 unit saved today can translate into a lower
price tomorrow, resulting in a natural price fall over time. A lower price
means that much less need go to dividend. If wages and salaries are 10
and dividends are 90 with prices at 100 and 1 unit is saved, bringing
wages and salaries to 9 and prices to 99, then dividends will still be
90. Wages and salaries of 9 would thus buy about 9.1% of new consumer
goods, and dividends of 90 would buy 90.9% of new consumer goods, which
is the same result as before. Today's product is shared out today.
Notice that since the material
investment comes from society and the stakeholders in the business are
those who are engaged in the business, who invest their brains, time,
and energy, then as long as the individual stakeholders can be rewarded
by wages and salaries, then there is no need for a "profit."2
Society and the work-force are in a partnership together, society providing
the material means and the work-force providing the brains, time, and
energy. Increased production is a profit of the partnership and is shared
out to both parties as described.
What Use Is Money to the Seller?
In 1996 I wrote:
Money is simply the king's promise to
the nation as consumer, on behalf of the nation as producer, that so much
wealth exists and will be delivered as required. . . . The promiser doesn't
lend promises, he gives them. For as soon as a promise is honored, it
is cancelled. He may, however, want the cancelled promise back for purposes
of accounting. It is a receipt, proof the wealth has been delivered as
promised.3
Money is a claim ticket to existing goods and services.
It is obvious what this means to a consumer. It enables him to buy existing
consumer goods and services. But what use is money to a seller? It is
not as obvious as it might appear.
If money is to be an accounting
system for wealth and if society is to take care that cash credits of
the population shall be equal to cash prices for consumable goods, so
that today's product can be distributed today, then money is going to
have to be cancelled with every purchase (that is the second part of principle
1) and reissued only on the same basis that society issues all money,
to allocate new goods and services. This concept is imaged at the present
time in the fact that all the money that production works with is on loan.
If money retrieved from sales were set immediately against loans, the
whole amount would be cancelled out of existence and a new round of expenses
would then be financed out of a new credit issue. This is, in fact, Douglas's
second principle from Swanwick, namely,
2. That the credits required to finance
production shall be supplied, not from savings, but be new credits relating
to new production.
Suppose society allocates the use of existing goods
and services to a company by giving it an account with a line of credit.
Per principles 1 and 2, money retrieved from sales would be put into that
same account and therefore automatically reduce the balance owed and so
increase available credit by that amount. When the company puts $100 in
and then takes $100 out, it is, in a very real sense, not the same $100,
because it is all a line of credit. Periodically, society will change
the company's credit line based on (a) the total capital and consumer
goods in existence and (b) the performance of the company. All credit
lines together must total 100% of capital goods and services plus about
10% (in our example) of consumer goods and services.
In this system, there are no
owners' dividends, because there is no private money investment. With
only 10% of the able adult population required for production, we can
insist on the very best. Since we create our own money, we have no use
for "silent partners," who collect dividends but do no work,
except insofar as we are all, as members of society, which creates the
money, "silent partners" receiving the national dividend. There
is society's allocation of consumer goods and services to wages and salaries,
and there is the national dividend-that's all.4
Ten percent of the population
are in business (1) because they enjoy it and (2) to increase their personal
consumption in the form of wages and salaries. So sales receipts to the
seller are (1) a voucher from the public that will secure the seller a
continued line of credit to pursue his vocation, and (2) an opportunity
to earn wage-increases or bonuses. Since society's allocation of new goods
and services is not a loan but a true investment, lack of sales receipts
do not leave the company with a debt. They merely exhaust its credit.
The Open Corporate
We now make a short digression to an idea of Chris
Cook of the UK to see if it has anything to offer us.5
Cook shows how various stakeholders in an asset-holding enterprise (money
investors, suppliers, management, staff, and even customers) can align
their interests by entering into an open corporate by means of a Limited
Liability Partnership. The open corporate as a whole makes a profit as
against the outside world, but its members do not make either profit or
loss as against one another. Rather, the profit of the open corporate
as a whole is distributed among the members in accord with their LLP membership
agreement. This is facilitated by proportional shares (i.e., shares denominated
in fractions adding up to 1). A proportional share is a percentage claim
on the revenue stream produced by the enterprise. As such, it constitutes
a unique kind of equity.
The open corporate model is equally
applicable to social (i.e., public) and commercial enterprises. Money
investors would be invited to purchase proportional shares either outright
or as an investment for a defined period of time (typically related to
the expected lifespan of the physical capital that the enterprise uses).
The latter option is called temporary equity and is designed to obtain
the temporary use of money in such a way as to make borrowing at interest
obsolete. For example, the Bank of Scotland (and two other investors)
entered into a 27-year investment agreement with Hilton Hotel Group in
2002. Ownership of ten hotels was transferred to an LLP with both the
Hilton Group and the B of S as members. The Hilton Group operates the
hotels and pays rent to the LLP (or net rent to the B of S, after deducting
its own proportional share). The management group is called the occupier
or user with secure and exclusive rights of use under the agreement; and
in this case both parties are investors.
A charitable enterprise could
be an open corporate in which the intended beneficiaries were enrolled
as share-holding members, receiving their benefits per a members agreement.
As applied to social enterprises,
such as hospitals, schools, transport and communication utilities, and
public housing, both service provider and service users would be share-holding
members of a Community LLP (of 1,000 to 4,000 individuals). The service
provider would pay rent to the LLP. Community members could receive their
proportional shares of this rent in money when not using the service or
else draw on this account when using the service. In this latter case,
proportional shares of a Community LLP are functioning as money.
An LLP can be a member of an
LLP. This makes the system "scalable," that is, the nation can
be conceived as a kind of "partnership of partnerships," built
up from below by interests reflected in proportional shares of proportional
shares. For this purpose, a distinction is made between land and property.
"The only form of universally acceptable Japanese Money," says
Cook in his Japanese example,
will be an electronic Yen backed by Land-Yen
3.0. . . . When divided into proportional 'shares', the aggregate of Land
Values forms the basis of Yen 3.0. Property on the other hand would form
the basis of locally fungible Money, which deteriorates in Value over
time depending on the condition of the local housing stock and policy
decisions in respect of urban renewal.
Yen 3.0 will consist of "proportional shares
of future Land rentals." Land is to be owned by the partnership of
partnerships (which could acquire it by creating money to pay off the
mortgages) and rented by the users à la Henry George. Property
would be owned by social and commercial LLPs and financed interest-free
over the expected life of the property.
The Open Corporate in Social Credit
Clearly, there are aspects of this proposal that
are inconsistent with social credit. The circularity of having proportional
shares that are claims to revenue-streams payable in proportional shares
may be a problem. I would suggest, instead of "revenue-streams,"
thinking in terms of streams of new consumer goods and services. If, as
social crediters say, money "is backed by what it buys," "land-backed
money" becomes irrelevant. Indeed, society's distribution, by means
of the national dividend, of the balance of new consumer goods and services
not needed by the work-force is, in effect, the producers' "land-rent"
payment-for it reflects the fact that production took place in a place
and was beholden to the lord of that place (society in its money-creating
function) for access to new goods and services!
To adapt this idea to social
credit, we would get rid of the distinction between social and commercial
enterprises, and we would also want to get rid of the assortment of money-investors.
Per Douglas's second Swanwick principle, society in its money-creating
function is to be the sole financial partner in all enterprises; and in
that sense all enterprises are "social." In the Hilton Hotel
deal, strike "Bank of Scotland" and write in its place "Society
in its money-creating function." That, after all, is the authority
that the Bank of Scotland is really exercising. Having society as the
sole financial partner distributing its share of the benefits in the form
of a national dividend disposes of both the "money-investor"
and "consumer" member categories. That leaves the "hands
on" people who are actively engaged as producers, merchandisers,
and service providers-the 10%.
What is most valuable, from our
point of view, in Cook's proposal is the idea that the various contributors
to production of a thing can be linked by a partnership agreement incorporating
proportional shares to automatically distribute the usufruct of increased
and improved production, so that all activities of production naturally
converge on the final product. It gives the highest incentive to individual
initiative and creativity, which itself is the best way to decrease the
work-force and increase wealth. There is also enough of a hint here to
see how, in line with Douglas's second Swanwick principle, society itself
could play the role of financial partner in such enterprises and pay a
return to each and every citizen.
Notes
1. The same result would be achieved by discounting
consumer prices 1/11 (about 9.1%), which would make both the 10 units
of wages and salaries and the 90 units of dividend buy more.
2. Indeed, if wages and salaries are 10, prices could theoretically be
10. This, however, would fail on the count of Douglas's third principle,
that "the dividend shall progressively displace the wage and salary."
Nor would it actually distribute today's product today, since 10% of the
population would be unable to consume all the goods and services.
3. Triumph of the Past, December 1996, p. 1, col. 1; p. 3, col. 1.
4. The whole economy is a consumer production system, and capital production
is merely a stage of it. Society does allocate capital goods, facilitating
their transfer from company to company. Such transactions transfer costs
from one stage to the next but do not, in themselves, add to cost, because
(shorn of various added-on charges) they are reimbursements for wages
and salaries (i.e., consumer goods) allocated in a previous period. What
does add to the total cost of goods is the wages and salaries expended
at each stage, and we have already posited these to be 10% of consumer
production.
5. From various papers supplied by Cook, bearing such titles as "Co-operative
Corporate Partnerships" and "Open Capital: The Last Big Thing?" |
