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New Economics for the Videamation Age

Throughout human history, people have been fighting for a fair go.
‘Occupy Wall Street’ and the push for a ‘Living Wage’ are just two of its most recent manifestations in the US and elsewhere, triggered by the GFC and the growing gap between rich and poor.
 
This You Tube clip neatly illustrates the point: http://www.youtube.com/watch?v=QPKKQnijnsM&feature=youtu.be
 
Taxing the Rich
For some, the simple answer is: ‘tax the rich and give to the poor’. Yet we know handouts don’t get to the root of poverty.
 
Growing the Pie
For others, the answer is just as simple: ‘grow the pie’.
 
But if economic growth was the answer, the problem should have been solved long ago. In the US, the wealthiest country in the world, around 16% of the population still live in poverty, up from prior decades, and more than many other developed countries[1].
 
Beneath this appalling statistic are 50 million US citizens, individual people, whose hopes and dreams are shattered in the daily fight for survival.
 
[1] Wikipedia http://en.wikipedia.org/wiki/Poverty_in_America
 
Working your Way Out
“Get a job!” is no answer either - if people are incapable.
 
Many can hardly care for themselves, let alone contribute to the wellbeing of the rest of us. For some it’s addiction to alcohol, drugs or gambling that destroys any chance of living a decent life. Many too are burdened with long lasting mental or physical wounds inherited from birth, or inflicted in life. The young, the old, and chronically ill who lack any income, as well as those who provide unpaid care for them, are also amongst our poorest.
 
The same problem exists for people who could work, but for whom there are no jobs suitable to their skills and knowledge.
 
As a result, we have high levels of under-employment (much higher than the official stats admit)[2], while many higher skilled jobs go begging[3]. No one wins.
 
[2] CNBC http://www.cnbc.com/id/101326426
[3] Forbes http://www.forbes.com/sites/emsi/2013/03/07/americas-skilled-trades-dilemma-shortages-loom-as-most-in-demand-group-of-workers-ages/
 
The Impact of Automation, Virtualisation and De-monetisation
The problem is only going to grow worse, as more and more of our material and information flows are automated: in agriculture, mining, manufacturing, warehousing, distribution, and even retail[4].
 
IBM’s ‘Watson’ (supercomputer) will soon be ubiquitous in the cloud, enabling automation of even more ‘higher order’ jobs[5].
 
While we may like to extend the trend from the past, and envision a world where more ‘high value’ jobs emerge than are lost, there is little evidence of this happening. The new businesses of the 21st Century (Google, Facebook, LinkedIn, even Amazon, etc.) are a source of new ‘knowledge jobs’, but they are not big employers in the overall scheme. And increasingly, they draw their workforce from the global talent pool.
 
As billions more people are connected via the web, and educated through Massive Open On-line Courses[6], the rivalry for new ‘knowledge’ jobs will escalate.
 
New Design Competition[7], Freelance Contracting[8] and Crowd Funding[9] sites are a part of the mix, further intensifying global competition in all areas of product and software design… with relatively few winners.
 
It heralds a ‘rock star economy’, where a few achieve global stardom, while most eke out a living (many in ‘personal services’, such as cleaning), and an increasing number are excluded altogether. As the poverty statistics show, these problems cannot be fixed by just ‘growing the pie’… especially when we can bake a much bigger pie with many less cooks and ingredients.
 
[4] Huffington Post http://www.huffingtonpost.co.uk/2014/01/17/rise-of-the-machines-economist_n_4616931.html
[5] IBM http://www-03.ibm.com/innovation/us/watson/
[6] MOOC List http://www.mooc-list.com/content/frequently-asked-questions
[7] 99 Designs http://99designs.com.au/
[8] Freelancer http://www.freelancer.com/
[9] Kickstarter https://www.kickstarter.com/
 
The System cannot solve the Problem: it is the Problem.
This is because ‘The Economy’ works by paying an income to everyone who participates in the production process (by contributing their capital, skills and knowledge).
 
Each person’s income is a measure (by the market) of the ‘value’ they create. Essentially, it entitles each participant to take out of the economy what they put in.
 
Overall:The total received as income by all participants = the total value of goods and services produced.
 
As a result, it is only the participants who can consume all they produce - as they spend their income. Meaning: those ‘outside the economy’ (the young, the old, the unskilled and incapacitated, and their unpaid carers)… can never benefit from the pie, unless income is shared. This puts lie to the argument that the incapacitated and unskilled can pull themselves up by their own bootstraps… if we just grow the economy.
 
You can’t get a job if there are none (for which you are qualified), or if you are incapacitated, or if you have to care for someone who can’t pay you.
 
Sharing is now done through the family (if you have one to support you), and ineffectually via charity and through taxation (if you don’t)… or, much more effectively… through crime.
 
In an environment where many cannot work due to: some incapacity, or lack of skills and knowledge, or because they are unpaid carers; where employment is falling due to automation; and work is being de-monetised… where are people going to get the money they need to live… without resorting to crime?
 
Importantly, without money to signal their needs, the market will not even create the goods and services they require. This represents a huge lost opportunity for business.
 
‘Taxing the rich’, ‘growing the pie’ and exhorting people to ‘get a job’ are not the answer, simply because they are tackling the wrong problems: ‘the rich have too much’, ‘there’s not enough to go round’ and ‘the poor are lazy’.
 
So what’s the right problem?
 
The Root Cause of Poverty
The problem is not that the wealthy have too much money. It’s that the poor have too little.
 
It is also clear that much of the ‘free time’ generated by automation is accruing mainly to one section of society: the un-employed and under-employed.
 
The Opportunity
What if we could…
  • Improve the lot of the poor, without taking from anyone else?
  • Grow the customer base for all businesses, without the need to increase the population, or expand export markets?
  • Improve the productive capacity of a large section of society (those who simply lack the life-skills and knowledge required in the ever-changing economy)?
  • Create a real ‘Knowledge Economy’ that supports life-long learning?
  • Make the rich, and the poor, both richer… at the same time?
 
This paper explains one way we could achieve this result:
To comprehend how, we need to understand the central role of money in the economy. This is the topic of the next post.
 
Origin of Money

As most people recognise, ‘money’ alone determines what gets done and what gets made - directly, as we spend our own money, or indirectly, as we try to influence how others spend theirs.  It also determines who gets what share of our output - based on income.

 

As such, it is the single most important factor in the 'economy'... so it may be surprising that its creation, allocation and destruction does not figure in most economic models!

 

To really understand money, we need to go back to its origins, to see how and why it was first created and allocated, and also destroyed.

 

On one account, ‘new money’ was created by the King issuing ‘tokens’ to his soldiers and household for ‘services rendered’. These ‘tokens’ did not have to be ‘funded’. They were simply created (out of sticks, clay, shells, stones, metal, etc.).

 

His subjects relied on the King’s capacity to honour the promise attached to the tokens: “that the money issued, could be redeemed for value” (namely, goods from his store)[10].

 

It is this promise that turned the ‘tokens’ into ‘money’.

 

When the tokens were redeemed, they were re-deposited in the Kings strongbox.  At this point the tokens ceased to be money, as the 'promise to pay' had been extinguished.

 

In essence, the money was created 'out of thin air' (upon issue of the tokens to recognise the value of 'work done' by his soldiers and household), and destroyed upon redemption.

 

The tokens again became 'money' only as when re-issued to signify the Kings promise to pay for new work done by his soldiers and household.

 

Creation of Money in the Modern Economy

Today, it is very different. Quantitative Easing aside, the king (or government) does not create our new money.

 

Now, most ‘new money’ is created as ‘debt', mostly by banks as they lend[11][12].

 

And, instead of the King, we now rely on the whole of society to make good on the promise to give fair value (in goods and services) in return for the tokens (Coins, Notes and eMoney).

 

Which raises the question:

 

What if, in addition to lending new money into existence, we could again create new money ‘out of thin air’ (like the King) to recognise new work done?

 

In this case, the payee would have no obligation to repay the money, just as the king’s soldiers and household did not have to repay the money (as it was created to recognise the value they had contributed).

 

But what work, and who would decide who gets how much?

 

Clearly, we don’t want the government just printing money for its own use. By forcing governments to raise taxes (or borrow and repay the money with interest out of future taxes), we impose some limits on ‘pork barrelling’.

 

Nor do we want the government just dolling it out to a section of the population… no matter how ‘deserving’. We all know where that leads: to fraud and corruption, and a sense of ‘entitlement’ that destroys the incentive to work.

 

If we are to create ‘new money’ for a section of the community…it needs to be for ‘new work’ that is valuable, and not yet monetised.

 

So, what is ‘valuable’ that is not yet ‘monetised’?

 

[10] This is illustrative only. The history of money is not so straightforward. Wikipedia http://en.wikipedia.org/wiki/History_of_money

[11] As Sir Mervyn King (ex- Governor of the Bank of England) explained in 2012: “When banks extend loans to their customers, they create money by crediting their customers’ accounts” Bank of England p3. http://www.bankofengland.co.uk/publications/Documents/speeches/2012/speech613.pdf

[12] Bank of England: Money Creation in the Modern Economy http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q102.pdf

 

The Knowledge Economy

We talk of the ‘knowledge’ economy. Yet, there is no such thing at present.

 

A true 'knowledge' economy involves paying people to create new knowledge, just as in the 'applied' economy, we pay people to use their knowledge to create and deliver new goods and services.

 

That is, the ‘creation of knowledge’ is not ‘monetised’ in today's economy, satisfying the first condition for payment using 'new money'… but is it ‘valuable’?

 

To put the problem in context, we need to understand the difference between inputs, workers and outputs in the ‘learning’ process.

 

The output produced by ‘knowledge work’ (learning) is an ‘educated person’.

 

The inputs include: professors and tutors, as well as IT professionals, accountants and ground staff (and everyone else) who work in ‘education institutions’. They also include the people and materials used in the construction and management of the facilities, as well as the equipment, materials and energy, used by everyone in the process.

 

And what do these inputs provide?

 

Essentially, they provide information to the student (directly via various media, or in answer to questions); they also provide facilities, equipment and resources used by students to explore (on their own, with other students and under guidance); and they test and certify students’ understanding.

 

The only worker in the process is the student.

 

Until information is absorbed and integrated in the mind of the student, there is no ‘new knowledge’ created. Only the student can do this work.

 

That is, the student is both the ‘knowledge worker’ in the education process, and the 'good produced'.

 

We pay everyone in the ‘education’ process (all the ‘inputs’), except the worker!

 

Up to now, we have regarded ‘learning’ as a private activity, with your reward coming when you begin to ‘apply’ your new knowledge… to make or do something 'valuable for society'.  At which time, the person again changes their role to become: a ‘factor of production’ in the ‘applied’ economy.

 

However, the pay you receive in your new job is compensation only for the work done in applying your knowledge. It does not compensate you for the time spent learning.

 

If it is good enough to pay teachers and accountants and ground staff who work in education, surely it is right to also pay the only worker (the student) for their efforts in creating an 'educated person' (some of the hardest work we do)?

 

If we don’t pay people for this work, it is hardly surprising that the end result is a lack of learning.

 

It may be OK to work for nothing when you are young and supported by your family, but once you have a family of your own, your time is precious and so is your income… especially at the ‘low end of the scale’. Even the unemployed have to spend time looking for work, to get benefits and find a job.

 

These constraints make it very difficult to devote time to learning.

 

The whole dynamic changes however, if people with the aptitude can take on paid ‘knowledge work’ (learning). By giving up their current ‘jobs’ (including time spent looking for other work), they open opportunities for others, while expanding their own.

 

With the amount of new information we need to absorb, increasing at super-exponential rates, it is clear we will all have to spend more and more time learning and re-learning.

 

Imagine if we could create money to pay people to do this new ‘knowledge work’.

 

Everyone could move back and forth seamlessly between the knowledge economy and the applied economy (or working part-time in each) throughout their lives, without loss of income:

 

  • The individual reward for ‘gaining’ new knowledge and skills would be the pay a person receives as they learn.

  • The individual reward for ‘having’ the new knowledge would be a new job, with new pay..

  • The social reward for an individual ‘applying’ their new knowledge would be the output they produce, and the saving on the unemployment benefits that would otherwise be payable.

 

We have companies that require people with new higher skills, people who can train them, and people who want to be trained.

 

So what’s stopping us?

 

The one common denominator quoted by everyone is ‘lack of money’ to pay for the ‘knowledge work’.

 

However this idea of 'lack of money' is based on a false premise. It assumes that to pay someone, you have to take money from someone else. In fact, we can create as much money as we need for ‘knowledge work’, without taking it from anyone.

 

The only question is: how do we do it without distorting the economy and creating inflation?

 

Expanding the Mandate of the Central Bank within a new Legal Framework

The Central Banks'/Federal Reserve’s power to create new money ‘out of thin air’ can be applied to create it specifically for ‘knowledge work’, as part of its mandate to keep unemployment in check x region.

 

The question is: ‘how much’, ‘to whom’ and on ‘what conditions’?

 

These questions are answered by looking at the role of each party in the 'creation' and 'allocation' process.

 

Representative Bodies

To ensure the ‘knowledge work’ is of value to the community, under the proposed legislation, every business, arts, sports and research representative body that wished to participate, would be required to survey its members (and use other data from the market) to determine the need and content for 'learning jobs' in their sector, in each region.

 

The representative bodies would also be charged with ‘aptitude’ testing of prospective candidates and agreeing progress goals with those appointed. They would also be responsible for paying the students (with the money provided by the Federal Reserve).

 

The cost of operating the scheme (excluding the knowledge wages) would have to be met by the representative bodies. This requirement is to demonstrate ‘industry commitment’ to the need for the ‘knowledge jobs’.

 

The operation of the scheme could be outsourced.

 

Central Bank/Federal Reserve

The data gathered by the representative bodies (by sector by region), would be made available to the Federal Reserve, to set the initial number of ‘knowledge jobs’ to be advertised in each region - having regard to the regional unemployment rate.

 

For example, if ‘unemployment’ indicated capacity to absorb only 1,000 ‘knowledge jobs’ in a particular city/region (vs say 1,500 requested by all the bodies in the area), the 1,000 would be allocated in proportion across the sectors seeking funding within that region.

 

As the money to pay the ‘knowledge income’ is created out of thin air, the only constraint is that the amount be set by the market.

 

To achieve this, the 1,000 ‘learning jobs’ would be advertised at differential pay rates set to attract the required number of suitable applicants… in each sector, by region.

 

If the total number of learning jobs on offer led to a tightening of the labour market. The Fed could restrict the total amount of money available for ‘knowledge work' in any particular region. They would not cut back on pay to those already appointed. They would simply reduce the number and pay rates of new jobs on offer at the time.

 

If the 'applied economy' was losing jobs (say due to automation, including automation of services), the Fed could release more money to pay for additional ‘knowledge jobs’… until the excess labour was absorbed. Again, this could be done sector by sector & region by region.

 

If unemployment was particularly severe in a region, it may be appropriate to extend knowledge jobs beyond the numbers needed in the immediate area. This would allow the Fed to soak up the unemployment, while developing more people with new skills that are in short supply elsewhere, even globally… encouraging re-location, or more likely, work on-line.

 

Education Institutions

These institutions (physical and on-line) would advertise their offerings and cost, as now.

 

Knowledge Workers

In the ‘Knowledge Economy’, the only true ‘knowledge workers’ are those paid to create new knowledge (not to apply it).

 

Individuals (employed, or not, in the applied economy) would be free to apply for the available knowledge jobs at an agreed pay rate, and would be assessed as suitable or not.

 

The 'knowledge worker' could choose their own education provider(s), perhaps under advice from their employer body, and would be required to pay their own education costs out of their ‘knowledge wage’.

 

As with any job, knowledge workers must meet their performance goals, or get the sack (unless there are mitigating circumstances, as determined by the employing body).

 

Overall

Payment for ‘knowledge work’ (learning) could be used for all tertiary education, trades and professional development, including internships, with all knowledge workers buying their education services out of their ‘knowledge work’ income.

 

The proposed system ensures competition for knowledge jobs, and competition in the provision of education services that are designed to meet the needs of business, research, arts, sports, etc.

 

By targeting short courses that aim to meet specific needs, we could create a dynamic society where people spend their whole lives moving back and forth between the knowledge and applied economies, or part-time in both, depending upon life’s circumstances.

 

By offering a market salary for all knowledge work (learning), we also create signals to improve the allocation of our human resources… subject to the overriding requirement that it is the ‘applied’ economy that drives the overall demand for labour.

 

The Risks

The primary risk is that the additional money created for ‘knowledge work’ creates inflation.

 

The secondary risk is fraud and corruption, as well as ‘pork barrelling’.

 

Risk Mitigation: Inflation

First, the circulation of the new money paid as ‘knowledge wages’ may reduce the need for borrowing, partly reducing inflationary pressures, as well as ‘debt’ pressures… not a bad thing.

 

More importantly, it is proposed to give the Central Bank/Federal Reserve additional powers to keep unemployment and inflation to a minimum, namely: to create new money to pay for ‘learning work’, and to levy a ‘Money Supply Tax’ (MST).

 

The MST would be a variable % on all transactions made for consideration (eg. it would not apply to loans or gifts, but it would apply to interest, and to the price of any securities, goods or services).

 

The MST would not go to the Central Bank, or to the Government. It would be simply ‘written off’ to reduce the amount of money in circulation.

 

If inflation starts to take hold because too much money is in the system, the MST rate could be increased gradually from zero.

 

The MST can be collected through normal taxation systems (including GST). Collection will be made easier, the more transactions go electronic.

 

Through this mechanism, any excess money created for ‘knowledge work’ can be sucked out of the economy - to reduce inflationary pressure in a way that does not distort asset allocation.

 

As soon as the cycle begins to turn, the MST rate could be progressively dropped to zero.

 

If that is still not enough to absorb unemployment, the amount made available for ‘knowledge work’ can be increased. This could be adjusted region by region and sector by sector to ensure full employment (of all capable people).

 

It would be like a rifleman aiming at a target and adjusting his aim based on the result of preceding shots. It is how the Central Bank/Federal Reserve decides on the amount of money to print, or adjustments to the cash rate.

 

Risk Mitigation: Fraud, Corruption and Pork Barrelling

By separating the ‘money printing’ and ‘money allocation’ roles, there is no one person deciding to allocate money for a specific project... removing the opportunity for ‘pork barrelling’.

 

Regulatory oversight would be necessary of course, but by using market forces as the basic drivers, the opportunity for fraud and corruption should be no greater than in any other part of our economy. And, as with any other fraud and corruption, it would be dealt with by the police and the courts.

 

The Benefits

Money flows up. The new money issued ‘out of thin air’ to pay for ‘knowledge work’ will be spent on ‘education resources’, and all the other things and services people need to support a decent life.

 

That is, all the new money will quickly flow to the businesses that provide the goods and services demanded, and thus to the owners of those businesses, enabling us to:

  • Improve the lot of the poor, without taking from anyone else

  • Grow the customer base for all businesses, without expanding population or export markets.

  • Improve the productive capacity of a large section of society.

  • Create a real ‘Knowledge Economy’ that supports life-long learning.

  • Make the rich, and the poor, both richer… at the same time.

  • Cut back taxes, by reducing the need to fund education and welfare.

  • Enable those engaged in 'Knowledge Work' (learning) to share in the outputs of the (increasingly automated) applied economy.

 

Staged Approach

Doubtless, the Central Bank/Federal Reserve, and everyone else, will take time to understand the operation of the ‘knowledge’ economy. So, we could start small, with just a few hundred paid knowledge jobs.

 

We only need a single industry body willing to determine the numbers of newly qualified people required in a certain city; to set the content for qualification; and the processes for selecting candidates, monitoring performance and certifying completion.

 

Industry could offer internships as part of the learning process, with the ‘knowledge work’ component paid under the scheme, and the company picking up the portion based on the value of any work done for the company by the candidate.

 

Initially, the Federal Reserve can create money using traditional processes to fund the ‘knowledge wages’ required to attract sufficient applicants. In keeping with traditional economics, any government bonds issued to fund the wages would be regarded as part of the government’s deficit that has to be funded through tax.

 

When the benefits of 'paying people to learn' are proven, we can go the next step to change the law to recognise that 'new money' may be created to recognise 'new work' (ie learning)... without creating a government or personal debt.

 

The only ‘debt’ is by society, which is obliged to provide goods and services equal to the value of the knowledge work… as it is obliged to recompense people for all paid work.

 

At this point, all money paid as ‘knowledge wages’ can be taken off the government’s books. It would remain indefinitely on the books of the Central Bank/Federal Reserve as ‘money in circulation’ – unless written back through a MST.

 

It would not have to be ‘funded’… just as new money first issued by Kings did not have to be ‘funded’, or money that is today created by commercial banks for loans is not 'funded'.

 

The scheme can be progressively expanded across the country, as the systems and expertise are developed. It does not need to be rushed. Making sure all participants are properly schooled in the system is more important than speed.

 

What can you do?

If you are still uncertain... participate in the debate.  Ask questions.

 

If you agree that 'paying people to learn with new money created to recognise the value of their work' is a good idea... discuss it with people in your network.  Write to your representatives and to the press.  Link this site to other sites.  Post on LinkedIn, Facebook, Google+ and other Social media...

 

To make it happen, we only need to get the idea into the minds of a few leaders in Government, Industry and the Financial Sector so they believe that it must happen.  Once they believe, it will happen.

 

Difficult, but not impossible.