Sunday, May 29, 2016

Henry George 2.0

Henry George 2.0

I name this post in a spirit of collaboration in a task we Georgists face.

The classical economic factors of production, namely land, labor, and capital produced by land and labor, were insightfully identified 240 years ago by Adam Smith (1776). David Ricardo (1817) goes right to them in his very first paragraph:


The produce of the earth —all that is derived from its surface by the united application of labour, machinery, and capital, is divided among three classes of the community; namely, the proprietor of the land, the owner of the stock or capital necessary for its cultivation, and the labourers by whose industry it is cultivated.1

The idea was that by sorting different contributors to production into distinct categories, we could gain understanding of who gets what and why. In the theory of classical political economy: Land gets Rent, Labor gets Wages, Capital gets (confusingly) profit or (also confusingly) interest. The Law of Rent shows us that Rent is the excess produce (output) left after Labor and Capital get whatever return they are reduced to by competition.

The return to capital goods is a debatable point. In a fully competitive industry, aside from temporary returns from leapfrogging with innovation, a competing business owner could theoretically expect little more than maintenance of his/her physical capital and making a wage to motivate his/her own labor.

The above-mentioned "fully competitive" industry is more of a wish than a reality. Examples which are a bit closer to that ideal, e.g. pizza joints in New York, are more the exception than the rule, or perhaps I should say more like a small fraction of the economy-wide sales volume.

How do the three factors get their returns? Usually, through some kind of money. Classical political economy for the most part treats money as a non-biased, ubiquitous medium of exchange, which thereby becomes invisible. Integrating Money into the model to show realistically its non-neutral effects in the ecosystem is the task here.

Moreover we need to integrate Credit into the model. Our first-use money is (federally underwritten) bank credit, amounting to roughly $12 trillion in the US economy. Our total credit market debt (TCMD) exceeds $60 trillion (2017).*

Henry George (1879) added greater clarity and consistency2 in the use of the classical framework. He eloquently showed its power in understanding how wealth is produced and distributed. Adam Smith (1776) had already mentioned that:

As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce. The wood of the forest, the grass of the field, and all the natural fruits of the earth, which, when land was in common, cost the labourer only the trouble of gathering them, come, even to him, to have an additional price fixed upon them.3

So we identify these three factors of production:
    •    Land        -    the natural universe except humans and their products
    •    Labor       -    human exertion
    •    Capital     -    produced goods (tools, buildings, merchandise, …) used in further Production
(Production refers to the entire process of extracting-assembling-exchanging goods and services, all the way to the end user.)

As used here, these three factors are mutually exclusive, and exhaustive. For example, the communications spectrum is part of the natural universe. Entrepreneurship is human exertion. I do not expect to see a fourth factor revealed… Or is this asking too much?

What will we say about software? When used in production, it would fall under Capital, as a tool. (I had to edit my first draft describing Capital as "physical goods…") Software is a produced good. Like a book or a movie, it might sell for a price, or in other cases it might become part of our cultural Commons, liberated from our quid pro quo exchange economy.

What will we say about a patent? Shall we class it under Capital as a produced good?—But it's not a produced good. A patent is a kind of license, legal title to use of whatever invention it refers to. This controversial topic would have to be the subject of another entire paper or book…

What will we say about money? In the dominant discourse since Henry George, the word "capital" generally means finance or money. To distinguish my usage here, I will capitalize when I employ the c-word by itself in a classical, Georgist sense, short for "capital goods."

What, then, is money, if not a factor of production?

Rent, Wages and Interest (the causes of Land, Labor and Capital engaging in Production) are generally denominated in money units, and transferred in money units through purchases of Land, Labor and Capital. "Money makes the world go round" is a saying that rings true in the exchange economy. In the gift economy "love makes the world go round." Will Homo sapiens be one of the casualties of the Sixth extinction4 in this Anthropocene epoch? I think we'll have to somehow get beyond separating our human activities (labor-production-exchange) from the natural world. Life 3.0 will find a way to put these together in harmony with the natural universe.

Here I'll focus on the Henry George 2.0 task, a major part of which is to develop a coherent theory of Money consistent with our core insights. Money is a social construct which provides a mechanism for trade. Its marketability serves as a motivator which liberates the point of giving and the point of receiving from each other temporally and spatially. We might bemoan the depersonalizing of human reciprocity which it has enabled. Yet again we can see that it has coincided with the extensive division of labor5 from which so much material progress has arisen, an insight nicely articulated by Silvio Gesell (1916).

The products of divided labour are not goods for immediate consumption by the producer, but wares, things useful to the producer only as means of exchange. A cobbler, a carpenter, a general, a teacher or a day-labourer cannot consume the immediate product of his own labour. Even a farmer can do so only to a very limited degree. They must all sell what they produce. ...

But sales, mutual exchanges of products, are effected through the medium of money. Without the intervention of money no wares can reach the consumer.6


A factor-y brings together a location, workers and Capital, in order to produce, let us say, cell phones. None of the three factor-providers (location owner, worker, business owner) has use for extra cell phones. They have not been motivated to cooperate in production by "real wages," i.e. direct distribution of the produce. Rather, they make their contribution in order to receive tradeable money in exchange. The money distributed to suppliers of the three factors is accounted by the business as costs of production. It might also be said to be the "cause of production" -- however not final cause in general. Mostly the money will subsequently be exchanged for other
    •    products (whether for end use or as Capital),
    •    services (whether for end use or as Labor),
    •    and assets (mortgages, cash, land, patents, licenses, businesses, stocks, bonds, …). -- These purchase categories (products, services, assets) are not mutually exclusive because assets overlap with products. Assets also include non-produced items: Land and Money items.

Toward a Georgist Theory of Money

Introduction

The division of labor is an expanded characteristic of the human experience since the Neolithic (Agricultural) Revolution. The change from a hunting and gathering method of subsistence, to cultivation and husbandry, generated a surplus produce, and concurrently, mechanisms by which exchange occurred.

Settled towns and villages became possible, people could be fed from the surplus allowing them to focus attention on specialized endeavors, which in turn produced their own surplus. All this could not have occurred without mechanisms of exchange, i.e. monetary systems.

Mechanisms of exchange are non-trivial. They are a substantive part of the political economy. George defined Political Economy as the science of the nature of wealth and the natural laws governing its production and distribution. Production entails social arrangements which we refer to as Money. Many have pointed out that economic theory has left out monetary systems.7 The notion the general population has been lulled with, is that in the last analysis, goods, services and assets are being traded for goods services and assets. That lullaby leaves out the particular nature and effects of the mechanisms which are enabling trade for 12+ millennia.

Monetary systems are not neutral conveyors of factors to production, nor of goods services to us as holders and spenders of money. The creation and trading of non-produced assets, which are essentially social/legal constructs, is why the effect of Money in our economy is not neutral. Different legal mechanisms affect outcomes differently. We know this is the case with Land tenure systems. We need to look further into how it is the case with monetary mechanisms as well.

Consider various types of Money systems:
  • mutual credit associations
  • local currencies
  • use of demurrage (depreciation) of money akin to depreciation of produced goods
  • masquerading of commodities as if Money were those commodities themselves
  • official national currencies issued as bank credit, by privately-owned institutions
  • public banks (e.g. Bank of North Dakota, est. 1919) issuing dollars as credit
  • national currencies issued by government maintaining full seigniorage (e.g. US coins 1792-present; US Notes 1862-1971)
  • block chains and cryptocurrencies allowing decentralized control, or being put into play by the too-big-to-fail banks
Within each of such types, multiple different mechanisms can be enacted. Types can also be combined in multiple ways. Past, present and future, money has been, is, and probably will be done in many, many different ways.

At present the dominant national currencies in nearly all 200-some nations are mostly issued by banks as credit under blessing and support of government. Because the US dollar is so ubiquitous in our daily lives, it's sort of like the water in which a trout moves about. We seldom consciously think of where it comes from or how its particular mechanism influences outcomes. Congress, mainstream Media, and MS Academia seldom discuss such a fundamental, atomic fact of our existence in this society.8
Production<-->Exchange<-->Distribution.
Money is at the heart of each transaction we make.

__________

  1. David Ricardo, On the Principles of Political Economy and Taxation (1817), Preface
  2. Henry George, Progress and Poverty (1879), I.2, e.g. "... to clear away from the idea of capital the ambiguities that beset it, and to fix the scientific use of the term."
  3. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (1776), I.6.8
  4. Elizabeth Kolbert, The Sixth Extinction: an Unnatural History (2014)
  5. Adam Smith, op. cit., I.2.1, writes "This division of labour... is the... consequence of a certain propensity in human nature, ..., the propensity to truck, barter, and exchange one thing for another." Smith's notion that barter came before money is misleading, but the overall insight is that the ability to exchange gives rise to division of labor.
  6. Silvio Gesell, The Natural Economic Order, III.2.10  (original German:  Die natürliche Wirtschaftsordnung durch Freiland und Freigeld, 1916)
  7. Richard Werner, "A lost century in economics" (2015)
  8. In the UK, for the first time in 170 years since 1844, Parliament had a debate on "money creation and society" on 20 November, 2014.
    http://www.parliament.uk/business/committees/committees-a-z/commons-select/backbench-business-committee/news/mps-debate-money-creation-and-society/