Tuesday, May 11, 2004

Showing No Interest - Monbiot's Mad Economics

It is possible to change the way we live. The economist Bernard Lietaer has shown how a system based upon negative rates of interest would ensure that we accord greater economic value to future resources than to present ones.

The Future of Money
Lietaer - The Future of Money

I thought that it would be unfair to comment on this nugget of wisdom before I had actually read Leitaer's book, which as someone once said, does prejudice one so. Well, I went through The Future of Money in the Barbican library at lunchime today. Lietaer says at the beginning that he isn’t an economist: It shows! As a blueprint for redesigning the world, it's not up to much, although the community/alternative money discussion seems fairly practical. My focus was on the proposal for negative interest rates, which Monbiot obviously drew on in the passage from his Guardian column quoted above.

Lietaer's book contains plenty of historical background and a gentle introduction to conventional economic thinking about money, the banking system and the economy. However, its sloppy and indistinct analysis shows the danger of theorising and explaining the economy without using formal economic models, careful definition and rigorous testing. The danger is that while loosening some of the restrictions of formalised thinking, Monbiot's brand of economic aromatherapy will take over.

The text seems to show confusion on his part between a tax to impact physical cash in the form of bills and a negative level of interest rates in society as a whole. This question isn't resolved, which severely undermines the author's claim of consistency with the very different Keynesian concept of liquidity preference

interest has been usually regarded as the reward of not-spending, whereas in fact it is, the reward of not-hoarding.

The citing of a proposal by a Fed economist to tax holdings of dollar bills, probably suggested to help control the black economy, also seems a confused and incorrect interpretation.

I think what Laitaer has missed is an appreciation for the strong reasons for which nominal interest rates are almost always positive. In attempting to turn time's arrow backwards, he is ignoring basic facts about human nature and our knowledge, making his scheme impractical for all but the most coercive and least rational of societies.

First, as mortal and impatient beings we obviously prefer consumption now rather than in the future. The time preference is human nature; assuming this can be engineered away shows just how little Laitaer's understands about how utopian in conception and totalitarian in execution his idea would be.

I don't use the world Stalinist lightly, but an obvious parallel suggests itself. Consider that loanable funds - the savings we control through insurance companies, bank deposits, pension funds and other means - are a commodity for which one man’s demand is another’s supply: Force it to be sold at a zero or a negative cost and we can expect supply to be diminished. Agricultural policies in the Soviet Union and in China did exactly this in forcing artificially low prices on farmers to benefit city-dwellers, which led directly to famine by eliminating any incentive or even compensation for the costs of production.

Another factor putting a floor on interest rates is the problem of institutional performance, especially default and devaluation of the currency through inflation. Existing private currencies carry the risk that issuers can go bankrup, like airmiles if BA goes under, or travellers' cheques if Amex had collapsed after the salad oil swindle.

Here, I have to deviate from the classical liberal ideas of Hayek and say that I believe that since only governments have the lifespan, the ability to appropriate resources and a mechanism for representation of users, that only they can crete successful and broadly-used currencies. (I'm probably going to get hate mail for saying this, saying "You...moderate!!!") for anything other than short-term transaction purposes.

Under the extreme conditions of social collapse during civil war in Yugoslavia or Lebanon, it was neither money issued by communities nor commodities such as gold performed the role of money, which was filled by foreign currencies such as the Deutsche Mark.

My original contribution to the criticism of this idea is to point out the role of information. Interest rates should be positive to reflect our much poorer information about the future. We can’t predict social and technological change with any kind of accuracy, so the fable in The Future of Money about the myopia caused by wearing the spectacles of positive interest rates misses the point. Uncertainty about the future makes discounting necessary and not any feature of our present financial institutions.

While we can forecast quite poorly in the short-term (think of the disastrous projections that Eurotunnel or the e-commerce start-ups made) projections of economic costs and benefits, for example to carbon abatement over a three-century horizon, is more science fiction than social science.

Fifty years ago, who would rationally offer lower borrowing rates for an investment to pay off in the long-term - oh, about the year 2000 - for someone gearing up to produce rocket cars, household robots, nuclear-powered cars and videophones for the twenty-first century consumer than on a five year government bond?

Peter 笔德