Friday, April 12, 2013

APPLYING SYSTEMS THINKING TO THE MONEY SYSTEM


Introduction

What makes up an economy?
The composition of an economic nugget
Bartering's difficulties
Overcoming the difficulties inherent in bartered exchanges
Safely de-linking the two halves of a bartered exchange or, guarding against money's pitfalls
Introducing money safely into the exchange process
The elements of an economic nugget when money becomes part of the exchange process
Preventing threats to the economic nugget's integrity
Using new issue money safely in the exchange process

The money system [Modelling the intrinsic values in an economy]
Accuracy of modelling
Maintaining the model's accuracy
Implementing a healthy money system
Necessary procedural changes
A the level of economic agents
At the collective level
The benefits of implementation of this money system



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Introduction

If we are to discuss our current money crisis in a meaningful way we first need to to accept that the essential role of any money system is that of representing the intrinsic value in the exchangeable goods and services that go to make up the real economic system. The money system is not the economy, i.e. not the real economic system. The money system endeavours to represent, as accurately as possible, the intrinsic value contained within the economy and this value, even though it is represented extrinsically by currency, is not, and cannot be, something extrinsic. It is intrinsic only to the exchangeable real goods and services that comprise the economy. These intrinsic values reside in people's heads no where else. Without the goods and services or the people there is no value to be represented and any money system established under such circumstances would be utterly meaningless.

In one sentence, a money system models, as accurately as possible, the intrinsic value in the exchangeable goods and services that lie at the heart of any economy.

We turn now to developing an understanding of what makes up an economy because in order to create a good model you first have to understand the thing that you are trying to model.


What makes up an economy?

An economy cannot be seen as just the heap of exchangeable goods and services that lie at its heart. It must also include the processes of exchanging goods and services, processes that take between the people who comprise the community to which the economy belongs

Thus an economy is the collective noun for all the voluntary exchanges of goods and services, completed, in process, and in prospect, that have, are and are about to take place between the members of a community. An economy is not a static thing, it is a living thing. If exchanges stopped there would no longer be an economy. Thus it is fair to say that the basic building blocks of an economy are the myriad of voluntary exchanges of goods and services entered into by the members of a community.

For our purpose here, which is to establish the guidelines for ensuring the creation of an accurate model of the intrinsic value of the goods and services in an economy, only the completed voluntary exchanges of goods and services are regarded as of relevance.

Exchanges in process or in prospect are just that, they have, as yet, not resulted in indisputable realisations of intrinsic values which is the case once an exchange is completed. Before an exchange is completed there is no indisputable concrete confirmation of the veracity of the intrinsic values of the items being exchanged and therefore there are no immutable values for our money system model to represent.

We shall call such completed exchanges economic nuggets and it is out of such economic nuggets that an economy is built. They are the fundamental building blocks of any economy. Without their existence there is no economy.


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The composition of an economic nugget

Economic nuggets are comprised of a number of identifiable components. They are comprised of six distinct elements, each of which is needed in order to produce a completed exchange, and thus an economic nugget.

These six elements are:

- the two parties, A & B, making the exchange
- the two items, IA & IB, to be exchanged belonging to A and B respectively
- the two simultaneous exchanges
- IA to B, and
- IB to A

Clearly the reason why A and B are happy to exchange IA and IB with one and other is because the intrinsic values [iv] that A is according to IA and to IB are equal and the same is true for B, otherwise they would not complete the exchange. Whether the intrinsic values in their respective heads are exactly the same is of no relevance.

Stated algebraically, it is sufficient for this voluntary exchange to happen if for A, IA(aiv) = IB(aiv) and for B, IB(biv) = IA(biv), and it is not necessary for IA(aiv) to be equal to IB(biv) or for IA(aiv) to be equal to IA(biv), or for IB(aiv) to be equal to IB(biv).

An exchange process not using money, as described above, is known as bartering but bartering is a process that naturally has a number of difficulties, difficulties get in the way of the exchange process ever getting started.


Bartering's difficulties

For someone wanting to complete a bartered exchange these difficulties are:

  1. locating the group of people, G, who want to enter into bartered exchanges
  2. finding amongst the members of G the sub-group of people, GO, who are offering things that you want
  3. finding amongst the members of GO the sub-group of people, GOW, who also want what you are offering
  4. finding amongst the members of GOW the sub-group of people, GOWW, who feel that what you are offering has the equivalent intrinsic value to them as what they are offering to you.

Clearly the above four difficulties present major obstacles to completing voluntary bartered exchanges, and a way needs to be found to overcome them.


Overcoming the difficulties inherent in bartered exchanges

A bartered exchange is a binary process, that is it has two equal halves to it and these two
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halves are tightly linked to one and other because the needs of the two participants have to match.

If a way of separating these two halves could be found then the whole process would become less cumbersome and more efficient in terms of the time and the energy required to complete it. This is so because by de-linking the two halves the needs of A and B would no longer have to match.

At some point in time it was discovered that the way to de-link the two halves of a bartered exchange was to externalise the intrinsic values involved in the exchange. Once this was successfully done the intrinsic values involved could be ported and used in one, or many, exchanges distinct from the original single bartered exchange.

With successful externalisation A only needs to give to B the now externalised 'intrinsic value' of IB rather than exchange IA for IB, and then B is free to find another item, IX say, that they want and for which they can give to the owner of IX the externalised 'intrinsic value' received from A.

How is this externalisation of intrinsic values historically done?

It is done by rendering intrinsic values into generic, visible forms the veracity, the accuracy, the integrity etc., of which forms is generally accepted by the community.

Over the centuries the externalisations have involved many different types of physical objects but now-a-days the externalisations are mainly rendered in the form of physical notes and coins, generally known as money or currency, and now-a-days also in the more abstract less physical form of the recording of currency values in writing or electronically.

The use of money might have removed the difficulties associated with bartered exchanges but it does not removed the need for the formation of economic nuggets. Now money does bring with it some changes to the processes that form economic nuggets and thus some threats to their integrity and these threats need to be guarded against if the two halves of a bartered exchange are to be safely de-linked. Safely here means de-linking the two halves of the bartering process without in anyway damaging the integrity of the resulting economic nugget.


Introducing money safely into the exchange process

By introducing money into the exchange process we are enabling the separation of the two halves of the binary exchange process from one and other with each half becoming a distinct sales and purchase operation in its own right. But when considered together these two halves must still be able to fully substitute for the original bartered exchange, that is, from the point of view of the integrity of the original intrinsic value, otherwise the economic nugget will not be formed.

It is necessary at this point to recognise two distinct categories of money, old issue money and new issue money.
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Old issue money is money the value of which has already been uniquely and honestly linked to the intrinsic value of a particular item, or group of items, be they goods and/or services, and it is therefore representing actual, i.e. real, intrinsic value and as a consequence its introduction into the exchange process cannot damage the integrity of an economic nugget in any way.

New issue money is money the value of which has not yet been linked to the intrinsic value in
any specific goods and/or services. Thus it has no real value and the value stated on it is illusory. Clearly the introduction of such money into the exchange process undermines the value accuracy of the money system model.


The elements of an economic nugget when money becomes part of the exchange process

In order for an exchange involving money to still yield the economic nugget, that would have resulted had it been a bartered exchange, the exchange must meet two criteria

1. include the following nine elements

  • party A who both buys and sells
  • party B selling IB to A
  • party C buying IA from A
  • two items to be sold, IA & IB, belonging to A and B respectively
  • two equal sets of money, MA & MC, to the value of IA ,or IB, belonging to A & C
    respectively and to be used for purchasing IB and IA
  • two completed purchase processes where A buys IB from B using MA and C buys IA from A using MC

  1. MA and MC must be comprised of old issue money.


Preventing threats to the economic nugget's integrity

Threat to the intrinsic value integrity of economic nuggets only arises if the money introduced into the exchange process is new issue money, and continues to remain new issue money into the future. That is this new issue money never becomes old issue money in an honest manner.

When new issue money remains a fictitious externalisation of intrinsic value such new money is fraudulent and if it is put into circulation it remains quite unrecognisable as fraudulent, unless it is in the form counterfeit notes and coins of poor quality. Then its fraudulent nature being unseen, it has, by default, to steal for itself some of the intrinsic value of the money already in circulation. This damages the accuracy of the model of the intrinsic value in an
economy, i.e. the money system, by debasing, or devaluing, the building blocks of the money system, i.e. the currency, giving rise to general price inreases. These increases are commonly referred to as inflation.
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The issuing of new money is a necessity however. The question is, can new money be issued without the risk of creating inflation?

If the volume of exchangeable goods and services in the economy has increased then there is a genuine need for an amount of new money of equivalent intrinsic value to the increase in goods and services and the issuing of such new money will not be inflationary.

If however the new money is being put into circulation before there are in existence, actual exchangeable goods and services the intrinsic value of which the money can represent, the new money will be inflationary until such time as these exchangeable goods and services come into existence and then the money can represent the intrinsic value of these goods and services. Because of this it is essential to keep a tight control on the amount of new money issued in order to be able ensure that it uniquely represents the intrinsic value of newly developed goods and services.


Using new issue money safely in the exchange process

Now the possibility exists that either one, or both, of MA, and MC in the above specification 'The elements of an economic nugget when money becomes part of the exchange process' involve new issue money, in which case

Criteria 2 is replaced by the following over-arching rule:

  • The person who first puts new issue money into circulation has to recognise that the new issue money is actually a commitment on their parts to supply goods and/or services, to the value of the new issue money, into the community and to do so as soon as possible. Failure to do so will inevitably be inflationary and the entity concerned should then be prevented from issuing any new money into circulation until they meet their outstanding new issue money commitment(s).

Meeting their commitments is probably best done by the transfer of the intrinsic value attached to old issue money, presently in their possession, equivalent in value to the new issue money, by withdrawing the old issue money from circulation at which point the new issue money becomes old issue money.













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The money system [modelling the intrinsic values in an economy]

Money is so effective in its facilitation of the exchange process that bartering has, to all intents and purposes, ceased to be practised. Consequently the use of money has become integral to virtually all economic activity. In other words the modelling of the intrinsic values of the goods and services that comprise an economy has become an integral part of that economy, shaping virtually all economic decisions and actions .This means that the accuracy of the modelling of the intrinsic values in an economy, which is what the money system does, is of critical importance to maintaining a healthy economy. Once money is introduced into an economy its health can only be maintained if the modelling accuracy of the money system is maintained.


Accuracy of modelling

The accuracy of representation achievable by a model is determined by the granularity of the representation, i.e. the more fine the detail being represented the more accurate the model is likely to be. In the case of the intrinsic values of exchangeable goods and services their range is truly unbounded so the logical thing to do when establishing extrinsic representations of these values is to have something that represents the smallest possible intrinsic value as the basic building block of the model. Historically this is what has been done and usually 1/100 of the unit of the currency represents the lowest intrinsic value and these
units, or fractions thereof, can be accumulated as needed to represent any desired intrinsic value. This has meant that the granularity of the money system is such that it can be used to represent from the smallest intrinsic value to the greatest.

In any economy the vast majority of exchangeable goods and services have intrinsic values that are greater than a single unit of currency. Now there is no sense in seeking to match each unit of currency with the intrinsic value of a particular fraction of a good or service rather the intrinsic values of goods and services need to be matched with their own particular accumulations of the units of currency. In other words each accumulation of currency has to have an unseen umbilical cord which connects it , and only it, irrevocably to the good or service the intrinsic value of which it is representing. Otherwise the accumulation is representing nothing and is therefore meaningless. Such empty representations degrade the model because it to loses its accuracy.


Maintaining the model's accuracy

The model's accuracy is maintained if any accumulation of currency uniquely represents the intrinsic value in a particular exchangeable good or service, otherwise not. How then do we establish a mechanism which will ensure that that accuracy, that integrity, is maintained?

In order to ensure this the use of new issue money in the exchange process has to abide by certain rules as explained above in, Introducing money safely into the exchange process, If these rules are observed then the currency will not be debased, i.e. the model will retain its accuracy.


Implementing a healthy money system

Money's primary purpose is to facilitate the voluntary exchange of goods and services between the members of a community. Therefore as the issuing of money is essential to the existence of any modern economy its issuance should be at no cost to its first recipients, any associated issuance costs should be borne by the whole community.
The most socially healthy way for new issue money to come into existence is for it to only be produced at the point where a purchaser has need of it because they have zero or insufficient old issue money to complete a purchase.

Now provided that, the new issue money recipient, i.e. the purchaser, goes on to meet the associated commitment to supply into the community goods and/or services of itrinsic value equal to the value of the new issue money, the integrity of the economic nugget, that they are party to creating through this transaction, is preserved and secondly the accuracy of the model, i.e. the money system, is maintained.

Prior to the advent of computers and IT, notes and coins had of necessity to be in a physical form which meant that issuing new money in response to such individual demands as outlined above was really not practicable. As a consequence of this physical limitation our current
dysfunctional money system evolved. It is dysfunctional because new money is issued without it being umbilically linked to the intrinsic values in specfic goods and/or services. Consequently the model of intrinsic value, i.e. the money system, loses its accuracy. To add insult to injury the recipients of the new issue money are charged interest on it as though it was old issue money which is fraudulent.

However with the advent of infomation technology, notes and coins no longer need to be in a physical form, they can, and are, already kept in the form of electronic records. Thus in conjunction with mobile phone technology this situation holds out the possibility of new money being issued electronically on demand to any individual anywhere provided that they have a phone and are within the reach of the mobile phone network.

Thus as money's primary purpose is to facilitate voluntary exchanges of goods and/or services between the members of a community it makes good moral sense, and it is now technically feasible, for this to be done, free of charge to the individual by a central, publicly funded, currency authority, the Hational Currency Authority [NCA]

How might this work in practice?

Firstly there is already a very successful worldwide alternative money system issuing its currency in this way, it can be found at www.ces.org.za , and there is no reason why such a system could not be adapted to serve an NCA. The rest of current monetary facilities such as banks etc., etc. would remain in place but they would only handle old issue money.. In order to control the accuracy of the model, i.e. the money system, a necessary procedural change would be that any transaction involving money would, as its first port of call, have to pass through the NCA's national currency system [NCS].


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Necessary procedural changes

A the level of economic agents

Every economic agent in the country would need to be registered with the NCA as an Account Holder[AH]. For people it would probably be simplest to use their Id numbers for this purpose.

Every AH would have a record in the NCS.and every AH would have a limit on the amount of unredeemed new issue money that it could hold at any point in time. AH's would probably need to be categorised for the allocation of limits according to some yet to be defined criterion. Ideally these limits would be set periodically in a national democratic referendum on the matter.

For each AH the NCA would keep a record of the amount of unredeemed new issue money issued to the AH. This is so that the NCA can both issue and control the amount of unredeemed new issue money in circulation.

Every AH would also need to have a specified bank account [SBA] accessible to the NCA. The SBA would only hold old issue money. Because of the controls on new issue money when such money is paid into an AH's SBA it can be safely regarded as old issue money.

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When a payment is to be made by an AH then it would have to start with a request to the NCA for an amount to be paid from its SBA into another AH's SBA.

The NCA would first check to see if there were sufficient funds in the SBA to make the payment.

If that was the case then the NCA would do the transfer and that would be it.

If that was NOT the case then the NCA would check in its records to see if the amount of new issue money required by the AH was within the specified limit for unredeemed new issue money.

If that was the case then the NCA would issue the necessary new issue money, add it to the AHs unredeemed amount of new issue money and do the transfer and that would be the that.

If that was NOT the case then the NCA would refuse to issue the new issue money or do the transfer and report the situation to the AH.

If an AH was to receive a payment into it's SBA from another AH's SBA the payment would first be passed to the NCA and the NCA would check to see if the AH had any unredeemed new issue money.

If that was the case then the NCA would use the payment to redeem the AH's unredeemed new issue money by writing off, i.e. permanently withdrawing from circulation, the equivalent amount of old issue money received. The consequence of this redemption is
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that the money received in payment rightly goes out of circulation being replaced by the now redeemed new issue money. Any excess could rightly be transferred to the AH's SBA. If there was no excess then no transfer to the AH's SBA could be done.

If that was NOT the case then the NCA would transfer the payment as is to the AH's SBA and that would be that.


Procedure at the collective level

The NCA would need to constantly monitor whether the amount of money in circulation corresponded with the intrinsic value of the economy. In other words that there was neither deflation nor inflation. This is a difficult balancing act requiring the perusal of a variety of national statistical reports before issuing planned amounts of new money into circulation. The NCA should probably aim for a 1 to 2 percent inflation rate.

With the NCS there are a variety of ways that new money could be issued ranging from to the Treasury to every citizen.

Implementation of this money system, the benefits

Monetary stability The immediate major benefit of the implementation of the above procedures for dealing with new issue money is that the accuracy of the model, i.e. the money system, could be largely maintained and currency induced inflation in prices could be minimised.

The NCS would not only keep control of the amount of unredeemed new issue money held by a AH it would also keep a unique record of every unit of currency issued into circulation and the successive AH holders of it.


This would enable other valuable benefits to arise from this money system. They are as follows:

  • Democratisation of money:
    Should any AH need extra money to complete a purchase the NCA would produce for them as much new issue money as they needed for the purchase, provided that the amount of unredeemed new issue money already given to them did not exceed the limit allowed. Thus shortages of cash would not block any person from entry into the economy,
  • Money with a built-in moral history:
    Each unit of currency would have a unique digital identity and a history of its holders starting from when it was first issued into circulation would be kept in the NCS. Thus there would be an accessible moral history available to all AHs.
    Thus any AH who wanted to view the transaction history of a unit of currency in order to see if the currency was acceptable to themselves would be able to do so. 11
    This is equivalent to the level of information that a purchaser would have had were they in a bartering situation. In a bartering situation if the purchaser did not like the source of the goods being offered for exchange they would not enter into the exchange. Similarly if money being proffered is money that has passed through transactions that the seller does not approve of, like drug dealing, arms trading, or environmental destruction for example they can refuse to accept it. In other words the units of currency would carry a moral colour instead of, as at present, being morally colourless.
    Money laundering would no longer be possible.
  • Tax system simplification:
    The current Tax system could be radically simplified by reducing it to the collection of a percentage on every transaction made through the NCS.


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