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Author Topic: A Resource Based Economy  (Read 261508 times)
Murwa
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August 25, 2011, 01:57:45 PM
 #721

I give up.
There's no point in explaining the same things over and over again.
Planned obsolescence is about monopolies and cartels, short-term thinking is caused by interest, artificial scarcity also interest, etc.
I feel bad that I haven't teach you anything, but I'm not wasting my time anymore.



Planned obsolescence is about monopolies and cartels - dead wrong . You as a producer want to sell products as often as possible ( obvious ) . It is called profit maximization - if you dont you get to be out competed or go bankrupt cause you cant cover operational costs.

short-term thinking is caused by interest - Yes

artificial scarcity also interest - wrong. Supply - demand mechanic as its finest. You can never achieve abundance because that would mean prices of goods would reach 0. Obviously that can never happen

Have you learned anything from me?

Actually yes i did i learned there are alternative currencies that could be taken into considerations as short term alternative, for out of debt money.

There rest of your "knowledge" is wrong .
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August 25, 2011, 02:51:16 PM
 #722

Since RBE is not communism, that just means that is going to be easier to become self-sufficient because of the robots. I like that, But...
I think cultural/technological advancements will also allow more specialization and division of labor, which is all that money is about.
I was worried about people thinking that the prohibition of money would be great and such. That's why I labeled RBE with communism.
If you think that money will disappear on its own, you just have to wait for it to be useless.

That's my point. Talking about the "elimination of money" is just detrimental at this point, because it feeds projections and hell-like scenarios by people who don't get the steps before that.

Rather, let's concentrate on what is relevant: the view of the world as a single system and the human species as a single family and recognizes that all countries must disarm and learn to share resources and ideas if we expect to survive in the long run. Hence, the solutions arrived at and promoted are in the interest to help everyone on the planet Earth, not a select group.

I like to quote Carl Sagan on this: The old appeals to racial, sexual and religious chauvinism and to rabid nationalism are beginning not to work. A new consciousness is developing which sees the earth as a single organism and recognizes that an organism at war with itself is doomed. We are one planet.

The money thing is just a natural consequence of that, not particularly relevant at this point.

It's not money, it's the system based on profit and competition.

Forgive me, but I know you'll ask me to elaborate on that, so I'm posting a fairly long article to explain what I mean.

In the modern day, there is a great deal of public criticism in regard to “abuse” within the financial system. Toxic derivatives, CEO Bonuses, Madoff pyramid schemes, Goldman Sachs fraud, etc.. These near-constant occurrences are traditionally considered “anomalies” within the current order, tossed on to the front pages of our papers as though we should be surprised by these realities. What you don’t see on the cover of newspapers in regard to such “corruption” are those actions which are, in principle, equally as corrupt – but have been accepted as “normal” under the guises of “marketing strategy” and the “competitive nature” of the marketplace. These include various forms of dishonestly, such as the deliberate withholding of efficiency of a given good for the sake of reducing it’s “cost basis”, to the protectionist tendency of any company to preserve itself, regardless of social function or the advent of innovations which might inhibit a currently profitable practice.

It is important to point out that the motivations, and hence actions, of any human being within a society can only be a consequence of that society’s influence. Stealing, for example, is not a “genetic” trait. It is the product of a culture. Human motivation is complex and the study of human behavior should be at the forefront of criminology, with all relevant attributes of the social system considered as a possible cause. It is no revelation of human psychology, and hence sociology, that if a certain act does not offer a proper reward, then naturally there will be little motivation to carry out such an action. Likewise, if personal gain/reward can be attained through what society even condemns as an “unlawful action”, that distinction truly changes nothing if there is a level of desperation within a given person to require whatever that action may be.

Now, historically, the public assumes that certain actions are “moral” and others are not. Lying, for example, is considered “amoral”, both by common religious and legal codes. But what exactly are they referring to? What level of lying is “real”? The fact is, every single act of monetary gain is based on a form of dishonesty, only this dishonestly is simply re-termed as “competitive”. In the marketing world, everything is driven by “advantage”. The “competitive edge” is nothing more than a passive corruption where competing companies seek to “out do” each other in whatever way they can for the sake of market share. The very act of seeking differential advantage is to be engaged in the abuse of another person or group. Regardless, our social system at large chooses to collar this understanding and instead imposes punitive reactions to what the system defines as “socially offensive behavior” (or crime) while, in fact, ignoring the root causes of most of these so-called “criminal” actions – along with overlooking the other “accepted” forms of dishonesty present.

As an aside, the resolution of “offensive” human behavior can only come from an adjustment of the social system. There is no such thing as a “criminal”, as we are all products, and hence the victims, of the culture in which we are born into.

Now, before we begin, there is one more thing I would like to hesitantly point out. Criticism of the current financial order, and hence the profit problem, does not automatically mean the person presenting such a challenge is a “Marxist” or a “Communist”. Yes, the preceding statement is likely comical to those who are accustomed to thinking critically, but sadly, I need to point this out, for we can rest assured that a great number of people reading this article will simply try to find a way to reduce it to “Marxist Nonsense” – a thoughtless, capitalist catchphrase I have grown quite bored with. One of the greatest forms of imposed inhibition comes from creating associations that have been traditionally defined as “disproven”, “discredited” or the like. This is an age-old propaganda tactic to create uncomfortable, inconvenient and controversial associations in order to derail critical thought about specific “taboo” issues. Like a religion, the monetary system and the “theology” of the “free market”, is no exception. The high priests of our current economic model naturally come in the form of “monetary economists” which work in a field that is provably decoupled from any type of natural scientific order in regard to what actually sustains human life on this planet – which are natural resources and the scientific method. The only viable economic model that can possibly exist in any civilization must be explicitly based on resource management and preservation. The market system that currently exists in the world today is an utter failure in this regard and, in fact, works in a reverse capacity – perpetuating exploitation, pollution, and psychological neuroses.

Here are six problematic attributes of the market system:

1. A “Corruption Generating” Incentive System. It is often said that the competitive marketplace creates the incentive to act for the sake of social progress. While this is partially true, it also generates an equal if not more pronounced amount of corruption in the form of planned obsolescence, common crime, wars, large scale financial fraud, slave labor and many other issues. Well over 90% of the people in prisons are there because of monetary-related crime or non-violent drug offenses. The majority of legislation exists in the context of monetary-based crimes. Also, if one is to critically examine history and peer into the documented biographies/mentalities of the greatest scientists and inventors of our time, such a N. Tesla, A. Einstein, A. Bell, the Wright Brothers, and many others, it is found that they did not find their motivation in the prospect of monetary gain. The interest to make money must not be confused with the interest to create socially beneficial products. In a sustainable society, human motivation would be driven by contributions to society, and hence ‘themselves’ – not abstractly “making money”. The system would be designed to best facilitate the needs of the population directly. Yes, this is that dangerous phenomenon we hear so much about, with the image of blood engulfing the planet Earth, denoted as “socialistic”. God forbid society might actually be ‘designed’ to benefit the people which live inside of it. The fact of the matter is, the profit motive incentive, and hence our competition oriented system, is entirely “anti-society”. It is a pure corruption. The entire point of a social organization is to facilitate and perpetuate the well-being of its citizenry. In society today, the exact opposite is true. People are told they must “earn a living”, which perpetuates a form of superstition that only certain people deserve the “right of life” and others do not.

2. The need for infinite growth. Infinite economic growth is not only mathematically unsustainable, but it is ecologically detrimental. While people can debate the theoretical nature of “capitalism” and how it is “supposed” to function, one thing is historically clear. It perpetuates/requires constant growth and consumption. The entire basis of the Market System is not the intelligent management of our mostly finite resources on this planet, but rather the perpetual extraction and consumption of them for the sake of profit and “economic growth”. In order to keep people employed, people must constantly buy and consume, regardless of the state of affairs within the environment and often regardless of product utility and basic necessity. This is the absolute reverse of what a sustainable practice would require, which is the strategic preservation and efficient use of resources. In a sustainable society, a “steady-state” economy would be in order. This would mean that there is no pressure to consume, as labor is not linked into the feedback loop. While it is very difficult for most people today to imagine a world which does not impose the need for “labor for income”, it needs to be pointed out that the constant requirement for labor is nothing but detrimental in the modern day, especially in light of the growing efficiency of mechanization of labor across developed nations.

3. A disjunct, inefficient industrial complex which wastes tremendous amount of resources and energy. In the world today, with the advent of Globalization, it has become more profitable to import and export both labor and goods across the globe, than to produce locally. We import bananas from Ecuador to the US, bottled water from Fuji, Japan, while western companies will go to the 3rd world to exploit cheap labor, etc.. Likewise, the process of extraction, to component generation, to assembly, to distribution of a given good might cross through multiple countries for a single final product, simply due to labor and production costs / property costs. This is extreme inefficiency and only justifiable within the market system for the sake of “saving money”.

In a sustainable society, the focus would be maximum efficiency. The production process is not dispersed, but made as centralized and fluid as possible, with elements moving the very least amount, saving what would be tremendous amounts of energy and labor when compared to methods today. Food is grown locally whenever possible (which is most of the time given the flexibility of indoor agriculture technology today) while all extraction, production and distribution is logically organized to use as little labor/transport/space as possible, while producing the *best possible goods. (*see more below) In other words, the system is planned to maximize efficiently and minimize waste.

4. A propensity for “Establishments”. Very simply, established corporate/financial orders have a built in tendency to stop new, socially positive advents from coming to fruition, if there is a foreshadowed loss of market share, profit and hence power. It is important to consider the basic nature of a corporation and its inherent need for self-perpetuation. If a person starts a company, hires employees, creates a market and becomes profitable, what has thus been created, in part, is the means for survival for a group of people. Since each person in that group typically becomes dependent on their organization for income, a natural, protectionist propensity is created whereas anything that threatens the institution thus threatens the well-being of the group/individual. This is the fabric of a “competition” mindset. While people think of free market competition as a battle between two or more companies in a given industry, they often miss the other level – which is the competition against new advents which would make them outright obsolete. The best way to expand on this point is to simply give an example, such as the US Government and ‘Big Oil’ collusion to limit the expansion of the fully Electric Car (EV) in the US. This issue was well presented and sourced in the documentary called “Who Killed the Electric Car?”. The bottom line here is that the need to preserve an established order for the sake of the well-being of those on the payroll, leads to an inherent tendency to stifle progress. A new technology which can make a prior technology obsolete will be met with resistance unless there is a way for the market system to adsorb it in a slow fashion, allowing for a transition for the corporations ( i.e. the perpetuation of “Hybrid” cars in the US, as opposed to the fully electric ones which could exist now, in abundance.) There are also large amounts of evidence that the FDA has engaged in favoritism/collusion with pharmaceutical companies, to limit/stop the availability of advanced drugs which would void existing/profitable ones.

In a sustainable society, there is nothing to hold back developmental/implementation of anything, once it has been tested thoroughly. There could be no “Established Institutions”. New methods would immediately be implemented into society, with no monetary institution to thwart the change due to their self-preserving nature.

5. An inherent obsolescence which creates inferior products immediately due to the need to stay “competitive”. This little recognized attribute of production is another example of the waste which is created in the market system. It is bad enough that multiple companies constantly duplicate each others items in an attempt to make their variations more interesting for the sake of public consumption, but a more wasteful reality is that due to the competitive basis of the system, it is a mathematical certainty that every good produced is immediately inferior the moment it is created, due the need to cut the initial cost basis of production, and hence stay “competitive” against another company which is doing the same thing for the same reason. The old free market adage where producers “create the best possible goods at the lowest possible prices” is a needlessly wasteful reality and detrimentally misleading. It is impossible for a company to use the most efficient material or processes in the productions of anything, for it would be too expensive to maintain a competitive cost basis. They very simply cannot make the “strategically best”, physically – it is mathematically impossible. If they did, no one would buy it, for it would be unaffordable due the values inherent in the higher quality materials and methods. Remember: People buy what they can afford. Every person on this planet has a built in limit of affordability in the monetary system, so it generates a feedback loop of constant waste via inferior production, to meet inferior demand.

In a sustainable society, goods are created to last, with the expansion and updating of certain goods built directly into the design and recycling strategically accessed as well, limiting waste. You will notice the term “strategic best” was used in a statement above. This qualification means that goods are created with respect to state of affairs of the planetary resources and with the quality of materials used based on an equation taking into account all relevant attributes, rates of depletion, negative retro-actions and the like. In other words, we would not use TITANIUM for every single computer enclosure made, just because it might be the empirically “strongest” materials for the job. That practice could lead to depletion. Rather, there would be a gradient of material quality which would be assessed through analysis of, again, relevant attributes such as comparable resources, rates of natural obsolescence for a given item, statical usage in the community, etc. These properties and relationships could be assessed through programming, with the most strategically viable solution computed and output in real time.

6. The market system is driven, in part, by scarcity. The less there is of something, the more money that can be generated in the short term. This sets up a propensity for corporations to limit availability and hence deny production abundance. It is simply against the very nature of what drives demand to create abundance. The Kimberly Diamond Mines in Africa have been documented in the past to burn diamonds in order to keep prices high. Diamonds are rare resources which take billions of years to be created. This is nothing but problematic. The world we live in should be based on the interest to generate an abundance for the world’s people, along with strategic preservation and streamlined methods to enable that abundance. This is a central reason why, as of 2010, there are over a billion people starving on the planet. It has nothing to do with an inability to produce food, and everything having to do with an inherent need to create/preserve scarcity for the sake of short term profits. Abundance, Efficiency and Sustainability are, very simply, the enemies of profit. This also applies to the quality of goods. The idea of creating something that could last, say, a lifetime with little repair, is anathema to the market system, for it reduces consumption rates, which slows growth and creates systemic repercussions (like a loss of jobs, etc.). The scarcity attribute of the market system is nothing but detrimental for these reasons, not to mention that it doesn’t even serve the role of efficient resource preservation, which is often claimed. While supply and demand dictates that the less there is of something, the more it will be valued (and hence the increased value will limit consumption, reducing the possibility of “running out”), the incentive to create scarcity, coupled with the inherent short term reward which results from scarcity-driven-based prices, nullifies the idea that this enables strategic preservation. We will likely never “run out” of oil, in the current market system. Rather, the prices will become so high that no one can afford it, while those corporation who own the remaining oil, will make a great deal of money off of the scarcity, regardless of the long term social ramifications. In other words, remaining scare resources, existing in such high economic value that it limits their consumption, is not to be confused with preservation that is functional and strategic. True preservation, which must be strategic, can only come from the direct management of the resource in question in regard to the most efficient applications of the resource in industry itself; not arbitrary, surface price relationships, absent of rational allocation.

-DiamondPlus
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August 26, 2011, 10:22:33 AM
 #723

Monetary systems are just standards of value. Societal problems can't be corrected by the elimination of or reinvention of any system of exchange.

Different monetary systems promote different values and different ways to think and act.
You can read something written by Bernard Lietaer (or watch a video) if you're interested in the subject.

2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
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August 27, 2011, 05:45:53 AM
 #724

Monetary systems are just standards of value. Societal problems can't be corrected by the elimination of or reinvention of any system of exchange.

Different monetary systems promote different values and different ways to think and act.
You can read something written by Bernard Lietaer (or watch a video) if you're interested in the subject.


I was attempting, using a comedic monologue, to impart the idea that to truly eliminate undesirable behavior in the human animal you need to eliminate the religions of the world. Don't start with money. If you want to be successful start with GOD.

BTW: Lietaer, while he has some interesting ideas on human greed, will probably go down in history as the founder of the most rapid failure of a globally accepted currency system.

While religion is irrelevant to the implementation of an RBE, you should know that the first section of the first Zeitgeist documentary explores comparative theology and why religion no longer serves any meaningful purpose.

www.zeitgeistmovie.com

Bitcoin combines money, the wrongest thing in the world, with software, the easiest thing in the world to get wrong.
Visit www.thevenusproject.com and www.theZeitgeistMovement.com.
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August 27, 2011, 08:35:09 AM
 #725

BTW: Lietaer, while he has some interesting ideas on human greed, will probably go down in history as the founder of the most rapid failure of a globally accepted currency system.

But wait, is the terra more than a proposal?

2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
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August 27, 2011, 08:42:35 AM
 #726

While religion is irrelevant to the implementation of an RBE, you should know that the first section of the first Zeitgeist documentary explores comparative theology and why religion no longer serves any meaningful purpose.

www.zeitgeistmovie.com

There's any fallacies and lies in the video, starting with the religion part. Not that I'm religious, but there's no need to lie to refute dogmas.
Here's a good critique of the video, although I haven't read the full blog.

http://natsufan.wordpress.com/indice-de-articulos/

Sorry, it's in Spanish. Google translator? That will remember you that machines are still too dumb to do certain things.

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August 27, 2011, 06:19:55 PM
 #727

BTW: Lietaer, while he has some interesting ideas on human greed, will probably go down in history as the founder of the most rapid failure of a globally accepted currency system.

But wait, is the terra more than a proposal?


I'm not refuting the work of Lietaer. I'm suggesting perhaps using Lietaer as an argument favoring social economic theory is less than perfect. There are so many more apropos scholars if you want a favorable retort. Try instead: Hobson, Lenin, Keynes, Marx, Stalin, Max Weber, Amartya Sen, James M. Buchanan, Charles Raymond Plott, Vernon L. Smith. Even notable social psychologists like Erich Fromm support the concept of using social economic theory as a springboard to human advancement. I was just shocked that out of all of the excellent discourse on the subject you chose Lietaer. His self promotion and involvement in projects like Gaiacorp appear to have a self-serving bias, too much so for a scholar.

I choose him because he contrast different types of moneys and states that some of them promote collaboration rather than competition. Yin and yang currencies, I know, too much for a scholar too.
I've repeating the name Silvio Gesell many times since I joined the forum, trying to explain the freigeld concept, a cash-money free of interest.
I haven't read much literature about mutual credit systems (with Ryan Fugger's Ripple as the best of them) and I thought it was a relatively new concept, but it seems that LETS-like system are even more ancient than precious metal cash.

I don't like at all:
Lenin, Keynes, Marx, Stalin
I don't know the economic theories of:
Hobson, Max Weber, Amartya Sen, James M. Buchanan, Charles Raymond Plott, Vernon L. Smith.

2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
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August 28, 2011, 05:51:12 PM
 #728

I do like David Graeber. Not because I agree with his ideas but because I'm fascinated with Anarchism.

I'll read what he says. I've been reading much anarcho-capitalism lately. Although austrian economists don't see the problems of interest, I like it.

Again you confuse me. You should have started by using Silvio Gesell. His theories support socioeconomic reform. You say you don't like Keynes but Keynes liked Gesell and valued his theories more than the ideas of Marx. All of which were contemporaries of the same era and espoused the same socioeconomic concepts regarding status and class.

Keynes liked Gesell but didn't understand him. He thought he could achieve the same using inflation instead of demurrage, but the results are different.
Also, watch these funny videos:
http://www.youtube.com/watch?v=d0nERTFo-Sk
http://www.youtube.com/watch?v=GTQnarzmTOc

The distributed Ripple network is great. Thats what it all about.

Yes, it's like super-LETS.

2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
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August 30, 2011, 12:37:18 PM
 #729

Work force is shifting from mundane tasks ( which are easily automated ) to the more creative one ( in which money incentive does not fit ). Thus entire argument when we automate most of the economy there will be no progress is invalid and in fact data show us we can at least expect total opposite effect ( increase in innovation )

LOL.,
You assume that civilisation can run on creativity alone!
You extrapolate the shift from manual labour to thought labour without realizing there will always be a lot of manual work in this world that for the comming time cannot be done by robots.
You also think that innovation is the bestest goal we can have.
But there are a lot of things that have very little practical use of innovation.
Take the humble shoe-lace.
Why would anyone want to innovate this (except for a novelty value)?

Innovation is needed, but in some sectors more than others.
Innovation without a clear path to a goal is just a marketing term.
Automation in and of itself does not increase or decrease innovation.
It is a technology, like all other technologies, that is free of moral implications.
It is our *use* of automation that can modulate innovation.
So the question is much more sociological.
How will we use this technology?
What are the pro's and con's of applying this technology to parts of society?

You can't look up to the problems of the world and just shout:'Innovate!'
You will need to look at each problem separately and apply innovation when needed.
But then you will find that sometime less innovation is more efficient.
Which is an innovation by itself.
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August 30, 2011, 12:53:06 PM
 #730

the problems of interest
Could you briefly describe here what these are?
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August 30, 2011, 01:18:30 PM
 #731

the problems of interest
Could you briefly describe here what these are?

1) They impede capital yields to drop to zero by competition (as other sustained profits do). This means that the demand for a given type of capital is not fulfilled. I the case of factories, the unemployed are the ones demanding more factories. You can read more here

2) The compounding nature of interest pushes a quasi-exponential growth of the debt/credit. Since the credit participates as an effective part of the money supply, it produces inflation. When the growth of the debt becomes unsustainable, a process of liquidation (shrinking credit) begins, which causes deflation, which accelerates the liquidation in a positive feedback. The liquidation periods are known as recessions or depressions.

3) Interest makes the financial market prefer the short term investments.

Tree Metaphor

Imagine you plant a tree. In ten years, that tree can give you $100 in lamber and in 100 years, $ 1000.
Now from the financial perspective.

With a currency that yields 5% interest, $100 in ten years are equivalent to $ 61.39 today. And $1000 in 100 years are equivalent to $ 7.60 today.

If the currency has 5% demurrage, $100 in ten years are equivalent to $ 167.02 today. And $1000 in 100 years are equivalent to $ 168,903.82 today.

With interest, the same stuff in the future is valued less than today. With demurrage, the same stuff in the future is valued more than today.

This proves that the structure of money has an impact in our way to value things over time.

This fact disrupts our relations with nature and threatens the long run survival of human beings.


2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
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August 30, 2011, 02:12:52 PM
 #732

the problems of interest
Could you briefly describe here what these are?

1) They impede capital yields to drop to zero by competition (as other sustained profits do). This means that the demand for a given type of capital is not fulfilled. I the case of factories, the unemployed are the ones demanding more factories. You can read more here

2) The compounding nature of interest pushes a quasi-exponential growth of the debt/credit. Since the credit participates as an effective part of the money supply, it produces inflation. When the growth of the debt becomes unsustainable, a process of liquidation (shrinking credit) begins, which causes deflation, which accelerates the liquidation in a positive feedback. The liquidation periods are known as recessions or depressions.

3) Interest makes the financial market prefer the short term investments.

Tree Metaphor

Imagine you plant a tree. In ten years, that tree can give you $100 in lamber and in 100 years, $ 1000.
Now from the financial perspective.

With a currency that yields 5% interest, $100 in ten years are equivalent to $ 61.39 today. And $1000 in 100 years are equivalent to $ 7.60 today.

If the currency has 5% demurrage, $100 in ten years are equivalent to $ 167.02 today. And $1000 in 100 years are equivalent to $ 168,903.82 today.

With interest, the same stuff in the future is valued less than today. With demurrage, the same stuff in the future is valued more than today.

This proves that the structure of money has an impact in our way to value things over time.

This fact disrupts our relations with nature and threatens the long run survival of human beings.



Excellent analysis.  Now add in inflation, risk, and time-preference.

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August 30, 2011, 03:11:10 PM
 #733

Excellent analysis.  Now add in inflation, risk, and time-preference.

You mean monetary inflation?
When central banks issue more currency to fight deflation, the liquidation process is postponed but not avoided. Some of the new investments not based on real loanable funds but in inflation are made and the unavoidable collapse of credit becomes even worse.

When I said interest, I meant basic interest, excluding risk premium. If the lending is risky, the borrower acquires at the same time a loan and an insurance. While the basic interest can be suppressed through demurrage (freigeld) or money abundance (LETS), the risk premium has to stay.

Time-preference is not applicable to all goods and services. It wouldn't be applicable to money with demurrage. No one would prefer to save fish forever instead of lending it because fish decays. Time-preference belongs to the "abstinence theories" by the terminology of Boehm-Bawerk, but I don't think the austrian school is correct in this particular point.
To remove your prejudices regarding interest and time preference, I recommend you this short story.

2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
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August 30, 2011, 04:20:41 PM
 #734

Excellent analysis.  Now add in inflation, risk, and time-preference.

You mean monetary inflation?
When central banks issue more currency to fight deflation, the liquidation process is postponed but not avoided. Some of the new investments not based on real loanable funds but in inflation are made and the unavoidable collapse of credit becomes even worse.

When I said interest, I meant basic interest, excluding risk premium. If the lending is risky, the borrower acquires at the same time a loan and an insurance. While the basic interest can be suppressed through demurrage (freigeld) or money abundance (LETS), the risk premium has to stay.

Time-preference is not applicable to all goods and services. It wouldn't be applicable to money with demurrage. No one would prefer to save fish forever instead of lending it because fish decays. Time-preference belongs to the "abstinence theories" by the terminology of Boehm-Bawerk, but I don't think the austrian school is correct in this particular point.
To remove your prejudices regarding interest and time preference, I recommend you this short story.

There is only one kind of inflation.  If you want to call it monetary inflation, feel free.

A moment's thought should convince you that an insurance premium is exactly the same as a higher interest rate.

Time preference is indeed applicable to all things.  The only way it couldn't is if you assume it only goes in one direction at all times and for all things.

The island story doesn't remove prejudices, it just tries to replace them.  Also, it doesn't apply here, because you were talking about money.

I suppose I should also point out that inflation is indistinguishable from currency demurrage, in practice.

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August 30, 2011, 05:00:31 PM
 #735

Excellent analysis.  Now add in inflation, risk, and time-preference.

You mean monetary inflation?
When central banks issue more currency to fight deflation, the liquidation process is postponed but not avoided. Some of the new investments not based on real loanable funds but in inflation are made and the unavoidable collapse of credit becomes even worse.

When I said interest, I meant basic interest, excluding risk premium. If the lending is risky, the borrower acquires at the same time a loan and an insurance. While the basic interest can be suppressed through demurrage (freigeld) or money abundance (LETS), the risk premium has to stay.

Time-preference is not applicable to all goods and services. It wouldn't be applicable to money with demurrage. No one would prefer to save fish forever instead of lending it because fish decays. Time-preference belongs to the "abstinence theories" by the terminology of Boehm-Bawerk, but I don't think the austrian school is correct in this particular point.
To remove your prejudices regarding interest and time preference, I recommend you this short story.

There is only one kind of inflation. If you want to call it monetary inflation, feel free.

Although they're related, I like to distinguish between monetary inflation (money printing) and price inflation (rising prices) to avoid misunderstandings. Monetary inflation is taken into account in my later explanation. Price inflation was already in the first analysis.

A moment's thought should convince you that an insurance premium is exactly the same as a higher interest rate.

But there's a basic interest that doesn't disappear with perfect secure lending. I guess you attribute it to the time preference.

Time preference is indeed applicable to all things.  The only way it couldn't is if you assume it only goes in one direction at all times and for all things.

No. Why should I prefer everything now instead of later? Things rot and capital depreciates with its deterioration.
The utility of a liter of milk today doesn't include the utility of a liter of milk in a year, because you won't be able to safely drink it in a year.
With demurrage you could prefer 100 coins next year rather than 100 coins today. Money, an artificial good, a symbol of value can have the qualities that its users decide it to have. Their users will chose a currency with demurrage if it has advantages, for example, cheaper trades and loans.   

The island story doesn't remove prejudices, it just tries to replace them.  Also, it doesn't apply here, because you were talking about money.

I don't understand how are you still convinced that is always better to have a loaf of bread today than tomorrow. It is so clear to me that it depends on the concrete circumstances of the owner of the bread...
Why bakers sell on credit (without interest) then? Wouldn't they be better keeping the bread although they can't sell it tomorrow?

I suppose I should also point out that inflation is indistinguishable from currency demurrage, in practice.

I don't think so, but it is a common claim.

Isn't demurrage equivalent to inflation?

No. Their impact on the gross interest is the opposite. Demurrage removes the privilege that lenders have over borrowers and the demurrage is substracted from the basic interest.
With inflation, the money holder could just buy things and sell them later at a higher price. That has to be taken into account when negotiating the interest.
This is added to the gross interest in the form of inflation premium (Hausse-premium in the text).
The reason why we have low interest with inflation today is the way the inflation is created.
Central banks monetize debt by buying bonds and giving cheap loans to banks. This way, when the real savers (not the central bank) go to the financial market they find that some borrowers (the banks and the governments) have already obtained its funds with cheap loans and they have to lower their prices (their interest) to meet the demand that the central bank has decreased.
Real savings have to be balanced with investments and that's in my opinion the most important lesson from the austrian school. But that's not incompatible with demurrage.
They found out that increasing the money supply doesn't solve the problems of deflation, just postpone and aggravate them.
But with demurrage you incentive money circulation without increasing the money supply.

2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
kjj
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August 30, 2011, 05:21:03 PM
 #736

There is only one kind of inflation. If you want to call it monetary inflation, feel free.

Although they're related, I like to distinguish between monetary inflation (money printing) and price inflation (rising prices) to avoid misunderstandings. Monetary inflation is taken into account in my later explanation. Price inflation was already in the first analysis.

The concept of price inflation as a thing only exists for people that think prices are supposed to be fixed.  For everyone else, it is just a consequence of something else, usually (monetary) inflation.

A moment's thought should convince you that an insurance premium is exactly the same as a higher interest rate.

But there's a basic interest that doesn't disappear with perfect secure lending. I guess you attribute it to the time preference.

I said higher interest rate, as in the difference between the interest rate with the insurance and the interest rate without it.

Time preference is indeed applicable to all things.  The only way it couldn't is if you assume it only goes in one direction at all times and for all things.

No. Why should I prefer everything now instead of later? Things rot and capital depreciates with its deterioration.
The utility of a liter of milk today doesn't include the utility of a liter of milk in a year, because you won't be able to safely drink it in a year.
With demurrage you could prefer 100 coins next year rather than 100 coins today. Money, an artificial good, a symbol of value can have the qualities that its users decide it to have. Their users will chose a currency with demurrage if it has advantages, for example, cheaper trades and loans.   

I keep saying time-preference.  Why do you keep acting as if I had said "now-preference"?  Also, the utility of a liter of milk in a year doesn't include your ability to trade it now.

The island story doesn't remove prejudices, it just tries to replace them.  Also, it doesn't apply here, because you were talking about money.

I don't understand how are you still convinced that is always better to have a loaf of bread today than tomorrow. It is so clear to me that it depends on the concrete circumstances of the owner of the bread...
Why bakers sell on credit (without interest) then? Wouldn't they be better keeping the bread although they can't sell it tomorrow?

I said no such thing (see above).  I also said explicitly that rot doesn't apply here because you were talking about money..  Oh, and yes, bakers might very well be better off letting their bread rot, because you might be willing to pay more for (different) bread tomorrow when you are hungrier than you are today.

I suppose I should also point out that inflation is indistinguishable from currency demurrage, in practice.

I don't think so, but it is a common claim.

Isn't demurrage equivalent to inflation?

No. Their impact on the gross interest is the opposite. Demurrage removes the privilege that lenders have over borrowers and the demurrage is substracted from the basic interest.
With inflation, the money holder could just buy things and sell them later at a higher price. That has to be taken into account when negotiating the interest.
This is added to the gross interest in the form of inflation premium (Hausse-premium in the text).
The reason why we have low interest with inflation today is the way the inflation is created.
Central banks monetize debt by buying bonds and giving cheap loans to banks. This way, when the real savers (not the central bank) go to the financial market they find that some borrowers (the banks and the governments) have already obtained its funds with cheap loans and they have to lower their prices (their interest) to meet the demand that the central bank has decreased.
Real savings have to be balanced with investments and that's in my opinion the most important lesson from the austrian school. But that's not incompatible with demurrage.
They found out that increasing the money supply doesn't solve the problems of deflation, just postpone and aggravate them.
But with demurrage you incentive money circulation without increasing the money supply.

So, lenders won't include demurrage in their calculations when deciding what interest rate to charge?  How do you expect to make this happen?

Also, read your post from July again.  In it, you are very close to the Eureka! moment.  You understand that we use peculiar mechanisms for economic policy, but then you direct your criticisms towards neutral concepts rather than the implementation.

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August 30, 2011, 06:09:35 PM
 #737

2) The compounding nature of interest pushes a quasi-exponential growth of the debt/credit. Since the credit participates as an effective part of the money supply, it produces inflation. When the growth of the debt becomes unsustainable, a process of liquidation (shrinking credit) begins, which causes deflation, which accelerates the liquidation in a positive feedback. The liquidation periods are known as recessions or depressions.
This is the one I was probing for, since I hear it occasionally, and it doesn't seem valid to me.

If you play around with toy model closed economies of only a few participants, you can create all kinds of scenarios where the base money supply is constant, and there is prolonged, stable lending going on between participants, without the need for any inevitable bankruptcies.  I.e. you can come up with counterexamples to your assumption that "the compounding nature of interest pushes a quasi-exponential growth of the debt/credit."
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August 30, 2011, 06:14:24 PM
 #738

The concept of price inflation as a thing only exists for people that think prices are supposed to be fixed.  For everyone else, it is just a consequence of something else, usually (monetary) inflation.

I don't think that prices are supposed to be fixed and the concept also exist in my head.
Although price inflation has a cause and it's usually monetary inflation, it is a useful concept when discussing monetary matters.
In the equation of exchange (M * V = P * Q), dM (if greater than zero) is monetary inflation and dP (if greater than zero) is price inflation.

A moment's thought should convince you that an insurance premium is exactly the same as a higher interest rate.

But there's a basic interest that doesn't disappear with perfect secure lending. I guess you attribute it to the time preference.

I said higher interest rate, as in the difference between the interest rate with the insurance and the interest rate without it.

I think we agree in this part then. When I criticize interest I mean basic interest, I have nothing against risk premium.

Time preference is indeed applicable to all things.  The only way it couldn't is if you assume it only goes in one direction at all times and for all things.

No. Why should I prefer everything now instead of later? Things rot and capital depreciates with its deterioration.
The utility of a liter of milk today doesn't include the utility of a liter of milk in a year, because you won't be able to safely drink it in a year.
With demurrage you could prefer 100 coins next year rather than 100 coins today. Money, an artificial good, a symbol of value can have the qualities that its users decide it to have. Their users will chose a currency with demurrage if it has advantages, for example, cheaper trades and loans.   

I keep saying time-preference.  Why do you keep acting as if I had said "now-preference"?  Also, the utility of a liter of milk in a year doesn't include your ability to trade it now.

Correct me if I'm wrong with time-preference. But from what I know it claims:

"
1) When you own something, you have the ability to use it now or use it later.
2) When you borrow something you own, you are able to use it later but not now.
That's why no one will lend at zero interest."

1 is not true for all goods. If money is everlasting, that's true for money. But perfect durability is not a requirement for the medium of exchange. In fact it is an obstacle for a medium of exchange, since money can ask for interest to be involved in commerce and don't suffer if "the wares don't want to pay". Everlasting money ask for its tribute as exchange enabler just as a fee can be asked for crossing a bridge.  

I also said explicitly that rot doesn't apply here because you were talking about money.

I answered it to you.

With demurrage you could prefer 100 coins next year rather than 100 coins today. Money, an artificial good, a symbol of value can have the qualities that its users decide it to have. Their users will chose a currency with demurrage if it has advantages, for example, cheaper trades and loans.   

Oh, and yes, bakers might very well be better off letting their bread rot, because you might be willing to pay more for (different) bread tomorrow when you are hungrier than you are today.

I said give it to their usual customers for credit at no interest, not giving it away.

So, lenders won't include demurrage in their calculations when deciding what interest rate to charge?  How do you expect to make this happen?

Yes demurrage is taken into account reducing basic interest instead of just increasing the nominal interest like inflation does.
I explain the differences between demurrage and inflation with more detail in this post:
https://bitcointalk.org/index.php?topic=36450.msg469848#msg469848

Also, read your post from July again.  In it, you are very close to the Eureka! moment.  You understand that we use peculiar mechanisms for economic policy, but then you direct your criticisms towards neutral concepts rather than the implementation.

Sorry, I don't understand.
What eureka was I close to?
What neutral concepts? I don't think interest is a neutral concept.
The fact that economic cycles are worse now than in earlier times due to our "peculiar policies" doesn't mean that there weren't monetary problems with gold.

2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
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August 30, 2011, 06:29:22 PM
 #739

2) The compounding nature of interest pushes a quasi-exponential growth of the debt/credit. Since the credit participates as an effective part of the money supply, it produces inflation. When the growth of the debt becomes unsustainable, a process of liquidation (shrinking credit) begins, which causes deflation, which accelerates the liquidation in a positive feedback. The liquidation periods are known as recessions or depressions.
This is the one I was probing for, since I hear it occasionally, and it doesn't seem valid to me.

If you play around with toy model closed economies of only a few participants, you can create all kinds of scenarios where the base money supply is constant, and there is prolonged, stable lending going on between participants, without the need for any inevitable bankruptcies.  I.e. you can come up with counterexamples to your assumption that "the compounding nature of interest pushes a quasi-exponential growth of the debt/credit."

Yes, you can create such examples. If the profits are greater than the interests, the debt doesn't have to grow. But when there's losses, someone will eventually buy the failing business with its debts. Well, or it can go bankrupt. It is hard to prove.

Just think this. If a single family would have saved an ounce of gold and lent it with 5% compounding interest (the father gives the gains to the son, etc) since the year 0, their wealth would be right now 4.08959621 * (10 ^ 42) ounces =  1.15938102 * (10 ^ 41)  kilograms.
The total mass of the earth is 5.9742 * (10 ^ 24) kilograms.
So their wealth would be (1.15938102 * (10^41)) / (5.9742 * (10^24)) = 1.94064648 * (10 ^ 16) times the total mass of the earth in gold. Obviously there's not that quantity of gold, so their compounding loan would be eventually unsustainable. Note that the borrowers could have payed back their loans and then the family lent to other people, but the total level of debt to the family would be always increasing.

2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
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August 30, 2011, 06:56:18 PM
 #740

Yes, you can create such examples. If the profits are greater than the interests, the debt doesn't have to grow. But when there's losses, someone will eventually buy the failing business with its debts. Well, or it can go bankrupt. It is hard to prove.

Just think this. If a single family would have saved an ounce of gold and lent it with 5% compounding interest (the father gives the gains to the son, etc) since the year 0, their wealth would be right now 4.08959621 * (10 ^ 42) ounces =  1.15938102 * (10 ^ 41)  kilograms.
The total mass of the earth is 5.9742 * (10 ^ 24) kilograms.
So their wealth would be (1.15938102 * (10^41)) / (5.9742 * (10^24)) = 1.94064648 * (10 ^ 16) times the total mass of the earth in gold. Obviously there's not that quantity of gold, so their compounding loan would be eventually unsustainable. Note that the borrowers could have payed back their loans and then the family lent to other people, but the total level of debt to the family would be always increasing.

My argument shows that systematic bankruptcies aren't an inevitable result of compounding interest with a fixed base money supply, not that they aren't ever ensured, even in the most absurdly unrealistic cases.

That businesses which can't turn enough of a profit to finance their debts get new management or go bankrupt is a good thing, as the supply of credit is finite, and this process optimizes its allocation for economic efficiency.  But it's not as though there must exist indebted businesses in the economy that aren't profitable enough to finance their debts.
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