I asked Philip Goodchild what he thought of the article on “helicopter drop” monetary policy I linked earlier this week, and he has given me permission to post his response here.
I am willing to entertain the ‘helicopter drop’ or citizen’s income recommended by the Social Credit movement (who are one of my primary influences) as part of a wider set of policies – here it is recommended as a tool of monetary policy.
In some ways, for the purposes of monetary policy, this does not differ too much from current practice in money creation – the Federal Reserve buys Treasury Bonds against its own account, the US govt holds the debt, and the money can be spent on whatever the govt prioritises. Money supply is then controlled by open market operations of the Fed, buying and selling existing Treasury Bonds to and from commercial banks. But there is no need for this money ever to be repaid.
But what is often missed here is that the US govt has this privilege of seigniorage because treasury bills are in demand internationally – for banking reserves, or because oil is priced in dollars. No other economy has such a privilege – and it is dangerous to start an analysis as if a national economy is initially an independent unit.
Yes, the primary problem any local economy has is a shortage of money, but where does effective demand for money come from? Liquidity preference and taxation are part of the story. But if money is simply given away, then this weakens the demand for money, and hence its value, in the form of intracurrency inflation or intercurrency depreciation. This contrasts with money created as credit, where there is a continual demand for money to repay liabilities. You can have more money overall by printing currency, but without its value being maintained beyond the needs of exchange, liquidity and taxation by debt, then its overall effective value will be less – so there is, paradoxically, a greater shortage of effective money than before. I know this sounds like I am simply appealing to the inflation argument, but what is crucial here is the effective demand for money, and the international demand for particular currencies.
So a citizen’s income may work if there are much higher rates of taxation – but then one would have to take back as much as one gives. It could still function as a tool of redistribution.
I think that there are three structural problems in a modern economy that are fundamental: demand for growth, redistribution, and capital flight (see note below). Any viable solution has to address all three. I don’t think this proposal addresses the latter – although one could be properly Keynesian and introduce tight controls on the movement of capital, so restricting international trade. But this in itself might produce capital flight, and so devalue the currency.
What our current system does is present an enormous disciplinary force to structure human activity – often in very unhealthy ways. The helicopter drop mitigates against this force. But there remains a real question as to whether a utopia should be based on complete freedom (which I see as an ideological effect of money) or whether it should have a disciplinary force producing a diversity of ends and activities (true wealth), rather than the monotony of accounted wealth. Perhaps the human soul needs an external demand, an entropy to combat, in order to be healthy, and to work. There is no point in removing a dominant system of power unless one has a better power to replace it with.
An explanatory quote from Philip Goodchild, “What is Wrong with the Global Financial System?” in The Journal of Interdisciplinary Economics, 2010, Vol. 23:
1. The paradox of growth: economic growth is necessary to make profits, to pay dividends, and to repay loans. For at the heart of all commercial activity is the issuing of credit, without which production and distribution for profit would scarcely be possible, since one has to purchase before one sells. A shortage of growth leads to a shortage of profits, a lack of available credit, and the vicious cycle of reduced demand, reduced production, and reduced employment – until confidence re-emerges. Yet economic growth means a growth in purchasing power, and thus a growth in consumption. While economic and population growth are geometric, the production of natural resources is cyclical. So a capitalist economy without growth is impossible, and continued economic growth is impossible (see Jackson, 2009). Our economic crisis will start to become serious in 2011 as a result of the next oil price spike that will arise when the depletion of production from existing wells is no longer compensated for by the production of new wells.
2. The redistribution problem: if people are remunerated according to their market value, related to their contribution to production, then wealth will accumulate with those who are creators of wealth. While this apparently results in efficiency, since wealth accrues to those businesses which are best able to make use of it, it leads to a lack of purchasing power among the wider population who need to act as consumers to make those businesses profitable. Our bubbles of speculative assets and leverage have been necessary as a solution to the problem of over-production. For state redistribution via taxation and welfare merely makes the economy much more efficient and effective, so boosting both economic growth and the potential for inequality. The historical alternative to excess consumption to address this problem has been warfare.
3. The threat of capital flight: each nation, each business, and many individuals are in competition for credit, or capital investment, without which there would be no creation of wealth. Each must therefore return a profit to capital. There is no sovereign control over the creation of credit, for credit is a relation, not a possession. Tight regulations over capital movements, as enforced in the past, do not entirely remove freedom of allocation of capital or credit; only taxation has achieved that, often at the cost of social unrest. Even in an international regime of tight regulation, there may be nothing to stop one privileged nation from unilaterally deregulating, as the US did in the early 1970s. Politics remains subordinate to economic forces since credit is an inherently collective phenomenon, and the confidence it appeals to is the confidence of those with sufficient wealth who seek to maximise returns. Political decisions are taken to maximise short-term profit at the expense of long-term stability and survival.