Saturday, April 9, 2011

Natural money bunkum

I kept trying to read this natural money site but it is so ignorant of economic history it makes my head hurt. Interest on loans is (mostly) the level of risk that has to be covered for credit to be offered. One cannot abolish risk, one can merely degrade the ability to price it and so deal with it more effectively.

If I was to nominate a single reason why the Western economic take-off occurred, I would nominate capital markets. Capital markets meant ideas could be operationalised. To take one example that made so much of a difference (we live in the Renaissance that never ended because of it), the printing press operated very differently in Europe than it did in China because of capital markets.

To be sure, those capital markets were embedded in property rights and competitive jurisdictions that allowed them to operate, but their operation then had effects back on the operation of property rights and competitive jurisdictions. And yes, debt was misused. Sovereign monarchs could be even worse than the duly elected representatives of sovereign peoples at mishandling the taxpayer-guarantee – Philip II of Spain was paying amazingly high interest rates at one stage due to previous Habsburg bankruptcies. But, even given all that, the operation of capital markets was an incredible advantage to Europe and its offshoots. Some financial instability has been a small price to pay, just as the business cycle pales compared to the long run trend of higher incomes and higher life expectancies.

The Aristotelian argument, in all its offshoots, against interest rates is natural law bunkum. Risk is a real factor in economic affairs: a central factor, as assessment of risk is so central to economic actions in so many ways. Being able to price it properly, and in diverse ways, is an enormous advantage. The problem in recent times is not interest rates, it is action which badly distorts risk assessments and incentives. The economy will not work better if one closes down such a basic information channel: that is massively magnifying the problem, not creating any sort of solution.

5 comments:

  1. I am the writer of Naturalmoney.org and I am a systems designer and not a historian or an economist. It is true that economic theory is worthless in understanding the system.

    My prime angle is systemic efficiency and systemic failures. History and economic theory are political sciences. The efficiency and infallability of the Natural Money system is best explainable to system engineers.

    By 2012 I will have a computer program that can support the concept. If I am right, the current financial system is finished.

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  2. About risk.

    You must get risk out of the financial system. The public should not be punished for failures of individuals to correctly assess risk. Now those individuals must be bailed out or otherwise the system collapses.

    What can you do. If you eliminate interest, you eliminate risk in the financial system. This means that many debt levels of corporations and people will be lower.

    Many types of finance now available will not be possible with natural money. World trade and multinationals will collapse! You are right about that. But it WILL HAPPEN because Natural Money is MORE EFFICIENT.

    Local production and consumption will be more efficient because of the energy constraint we are about to face. Labour will replace energy consuming production. Unemployment will be gone.

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  3. Actually, mainstream economic theory is quite useful in understanding the economic system, as long as you are aware it is a work in progress.

    It is impossible to abolish risk, because one cannot know what is not yet knowable. Systems design is a poor basis from which to base understanding of the economic system (which itself is a massive system-of-systems), precisely because it entails a form of knowledge closure and information certainty that is far from how economic reality is.

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  4. The type of problem we have with the financial system is that interest brings risk into the financial system while the risk should be taken by the provider of capital.

    Now you can start a hedge fund, finance it 99% with a loan if you are prepared to pay a high interest rate. If you blow things up then the financial system is at risk.

    I am not going to argue to much. The experiment I am preparing will prove whether or not I am right. Whatever argument you or I may have, it changes nothing. I am right or I am wrong. In 18 months we probably will know it.

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