NEW ECONOMICS:
Alternatives to markets, privatisation and competition

Shann Turnbull

A new economic paradigm is required to win the votes of an electorate which is increasingly being alienated by the current ideology accepted internationally and by our major political parties. The existing paradigm is based on a belief in markets, privatisation and competition. However, this ideological framework is not based on any economic theory.

Economic theory in fact supports a contrary view that firms exist because markets fail to govern transactions efficiently. Markets fail because they only provide information in the form of a price, which is simply a number. To efficiently organise the production of goods and services, much richer qualitative information is required. This demands far more complex communication in the form of signs, symbols, words and language rather than just numbers.

A corollary of firms existing because markets fail is that markets exist only because society has not adopted the most efficient forms of social organisation. The political result is that the electorate feels exploited by business, alienated by insensitive bureaucracies, depressed by environmental degeneration, powerless to take control of their lives and cynical about the interest or the ability of politicians to make things better.

To make things better, a new political architecture is required, not just new policies and programs. The new architecture would be based on the principle of subsidiarity. This principle requires that no level of government undertake those functions which are better carried out by a lower level. It creates the most efficient architecture as it minimises the amount of information which needs to be communicated to higher levels of society. Minimising information minimises costs. It also minimises "bounded rationality" which is created by the limited ability of humans to process information. Socially, subsidiarity creates the most effective and satisfying political system as it maximises the power of individuals to participate in the control of their lives.

The sharing of power, information and benefits can be denied in all hierarchical organisations. Those at the apex have the power to exploit subordinates, customers and suppliers. This problem is not changed by privatisation. The problem can only be overcome by adopting a decentralised information and control architecture. This can be adopted in either the public or private sector.

Appropriate sharing of power with stakeholders can provide: (i) a basis for establishing trust and so informational efficiencies in governing transactions; (ii) advantages from specialisation in decision making labour; (iii) less information overload and "bounded rationality" for individuals; (iv) improved accuracy of information; (v) quicker responses to operating variables from distributed control; (vi) improved capability of individuals to control the variables affecting both themselves and their organisations and (vii) the ability for organisations to become self-governing to reduce the cost of regulation in both the private and public sectors.

Even monopolies can become self-governing when their customers obtain power to protect themselves from exploitation. Appropriate power sharing with stakeholders provides a basis to reduce the burden of many prescriptive laws and the intrusion of government regulators. Investor and consumer protection, fair-trading, health, safety, industrial relations, environmental protection and many other roles of government can be privatised to various degrees with appropriate sharing of power.

A division of power creates a network system of information and control within and between organisations. As the "knowledge age" takes over from the "information age", the information and control architecture of firms will need to change accordingly. The businesses of the future will be knowledge firms and their competitive advantage will depend upon the efficiency of their information and control networks.

The sharing of new specialised knowledge requires co-operation rather than competition. Co-operation requires trust. Avoiding the power differentials found in centrally controlled hierarchies facilitates the establishment of trust. Decentralised information and control networks within and between organisations provide the most appropriate architecture to nurture trust, co-operation and operating advantages as illustrated by the Mondragón Cooperatives.

In the 21st Century, firms with centralised unitary board control will be seen as un-competitive Neanderthals, with unethical conflicts of interest, not accountable to the individuals on who they depend for their existence, creating information overload and ever more government regulation, slow and unresponsive to changes in their increasingly dynamic environment.

Managing fiat money

Faith by economists and the major political parties in the existing monetary system cannot be supported by analysis. Nor can it be defended by the experiences of small businesses, farmers, Third World debtor nations and the once rapidly growing "Tiger" economies that have suffered a financial "meltdown". The system is imposed upon the world by an intellectually inbred elite of monetary priests who ridicule any who question its operations, while admitting that its operations depends upon confidence.

For religious people, the existing banking and monetary system is the biggest confidence trick perpetuated in the history of civilisation. For non-religious people, it is the second biggest confidence trick, as religion becomes the biggest trick.

Modern money is a confidence trick because money cannot be defined in terms of goods or services, yet it is used in market economies to organise the means of their production and consumption. In other words, an unreal artificial totem controls the real world. All national currencies have become "fiat" money as none can exist without being defined to exist by a government.

All early forms of money were real things like wheat, barley, salt, wampum shells, tobacco and precious metals. There was no need for governments to become involved. Public warehouses imposed charges to store and safeguard commodities used as money. The storage cost represented a negative interest rate. The notes issued by the storehouse/bank as a receipt for the deposited commodity were used as hand to hand money, redeemable by the bearer into the commodity stored by the bank. Unlike the fiat funny-money printed by governments, currency notes represented a claim on a specified real resource.

The need to charge storage costs for money was avoided when bankers began the fraud of issuing more deposit notes than the commodity they held in store. The duplicate notes were lent out at interest to generate income to pay for the storage costs and provide a profit. Being described as "fractional banking" because the commodity held in the vaults of the bank as a "reserve currency" only represented a fraction of the total bank notes issued sanitised this fraudulent practice.

The issue of duplicate notes is how the banking system creates money. When a bank makes loans, the bank creates the funds with simple strokes of a pen or computer key to print notes, establish a deposit account for the borrower to draw upon or provide an overdraft. Notes and accounts, which provide the borrower with funds, become a liability in the balance sheet of the bank. To keep the books balanced, the bank creates a matching asset, which is the loan agreement with the borrower to pay back the funds.

Banks expand the money supply by lending notes. This process creates both notes (which are a bank liability) and loans (which become a matching asset). If the loans are not used to expand the production and consumption of goods and services then inflation results. Too much money becomes available for too few goods and services. To avoid inflation, the banking system requires a mechanism to channel the expansion of credit into activities, which increase productivity. Today, none exists. As a result, much of the new money created by the banking system is used to finance changes in ownership of businesses, or the purchase of non-productive or speculative assets. To avoid fuelling inflation in this way, selective monetary policies are required to insure that a sufficient proportion of loans are used to increase productivity.

Selective monetary policies could be used to provide interest free money to expand business activities, be they small businesses, farmers or large corporations, provided safeguards were introduced to protect the integrity of the financial system. Any risk of default would need to be fully covered by non-bank private sector loan insurance, to guarantee a contraction in the money supply when a loan did not increase the output of goods and services.

The cost of obtaining loan insurance would introduce a market price for allocating loans, as occurs to some degree with housing finance. While loan insurance would increase the effective cost of money, the overall cost of money would still be around 5% less than current levels.

Both Japan and the US financed their rapid economic development at the beginning of the twentieth century without significant foreign equity or borrowing. This was achieved by the costless expansion of credit by their commercial banks to fund business growth directly, and indirectly through financing investment banks who subscribed to new share issues. The investment banks acted as loan insurers by averaging the risk of loss against the profits of the most rapidly growing sectors of the economy. In this way, costless credit expansion financed equity formation from savings created by the investment rather than relying on either foreign finance or savings created by reducing domestic consumption.

Selective monetary policies could not only be used to reduce the cost of loans for small businesses and farmers, but also to reduce the need for foreign debt and equity throughout the economy. This would reduce the export of dividends and interest to increase the income of residents, while reducing the risk of a currency meltdown.

Self-financing development

There are sound reasons for the electorate to vote against politicians who promote or acquiesce to the belief of economists in the globalisation of the financial system and other nostrums such as the Multilateral Agreement on Investment (MAI). Most economists do not possess either the language or concepts to provide the intellectual tools for understanding how real-world development works.

A fundamental concept missing from the paradigm of economists is the fact that development must be self-financing. Development is the process by which the incomes per person in a community is increased. The only way in which this can be achieved without people working harder or for longer hours is to increase their productivity through the use of technology. This means that the technology itself must become self-financing. Unless it can pay for itself, it cannot generate additional income to produce development. In other words, development creates a "free lunch", a possibility widely denied by practitioners of the "dismal science".

Take for example a third world fisherman who buys an outboard motor for his sailing boat to allow him to double his catch. The income of the fisherman is doubled to provide sufficient cashflow to payback the bank loan used to finance the technology, while also raising his income. By canning the fish and earning export income, the country can earn more foreign currency than it needed to spend in importing the outboard motor. The introduction of appropriate technology can allow a country, or any small community, to undergo development on a self-financing basis in either local or foreign currency.

If a foreign bank lends money to the fisherman, then development will be reduced or even reversed. This is because resident income will be exported in the form of interest payments rather than being kept in the country when the credits are internally created. In addition, the cost of servicing the foreign loan will reduce the foreign exchange reserves of the country.

A vital point in the above example is that the fisherman did not need to save money to invest in the outboard motor. The savings created by using more productive technology financed the investment. Many economists overlook the fact that investment can be financed from saving produced by the investment. Many people assume that investment can only be financed from savings accumulated before the investment is made. This severely limits investment and so the rate of economic development.

When people save money by reducing their consumption they reduce the demand for goods and services and so reduce the incentive for investment in productive assets, to generate development. The size of the investment is also limited by using past savings, as it is restricted to the savings which individuals can make from their personal exertion. This limitation is avoided when the savings produced by the investment finance the investment.

The ability for countries to enjoy rapid, self-financing development is obscured by economists who use ambiguous words like "capital". The word may mean money, credit, equity investment, or know-how in the form of productive technology embedded in machines and/or people. Economists compound the confusion by claiming that foreign investment is required to make up for a shortage in domestic savings. This is nonsense because the necessary savings to finance productive investment can be generated by the investment. The only type of foreign "capital" that is possibly required by any country is the technology needed to increase productivity.

The existing economic paradigm promotes the financial colonisation and exploitation of countries by foreign investors and bankers. Instead of being party to this exploitation, the World Bank should stop burdening countries with debt and teach them how to build financial institutions, which will allow their economies to grow rapidly on a self-financing basis. This would also promote political self-determination.

Central banking is but a form of central planning. Central planning has proved not to be an efficient way to promote development. At a national level, governments should change the role of their Central Banks, as is proposed for the World Bank. That is, to teach local communities how to establish institutions to promote self-financing development. This would liberate communities from financial colonisation and exploitation by external financiers.

Banks operating at a national level insidiously suck out the income of regional communities. This is because a third of people's income is typically used to pay either rent or interest on their home loans. The income, which can be recycled through the community, is reduced to the extent that the housing stock and home loans are owned external to the community. Interest paid by businesses to bankers situated outside the community exacerbates the leakage of value from the community. The best way to overcome this problem is by communities establishing their own local currencies with self-financing institutions as proposed for a nation. A nation of self-financing communities would create a self-financing nation.

The political attraction of adopting the paradigm of new economics is that it would liberate communities from financial colonisation. It would achieve this by showing how to make communities self-financing so as to promote local self-determination. By enabling local self-governance, communities would obtain the power to adopt technology appropriate for nurturing their bioregion. By this means, decentralised banking would augment and reinforce the development of an environmental sustainable, participatory, stakeholder democracy.

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Shann Turnbull (sturnbull@mba1963.hbs.edu) is author of Democratising the Wealth of Nations and other writings on reform linked to (http://members.optusnet.com.au/~sturnbull/index.html). To access this web site, simply click on SHANN TURNBULL