Economy flagging?

Get a new one!

I was pondering this general idea for a while, and then along came a challenge presented by the Boyd Institute: “How can America improve its problem-solving capacity?” …So, here goes

What President Nixon did, seemingly haphazardly, in 1971, revealed something, if not to economists then certainly to the wider public: Money is not a value system; it is a belief system.

The “Shock” came about because the USA found itself with the kind of foreign debt that Nixon might have insisted required IMF involvement, austerity, and debt restructuring, had it belonged to another country due to a costly and unpopular war in Vietnam and growing reliance on outsourced manufacturing. The existing Bretton Woods system was, as Robert Triffin cautioned, coming unstuck, as swelling demand for the US dollar as a global reserve currency was unsettling its convertibility into something physical and tangible: namely, a finite gold supply.

Nixon wasn’t prepared to give up any economic momentum, so he changed the game. He secured the US$ as fiat, making it unmistakably clear that our economic systems are not preordained. He laid out a new world where anyone holding a US dollar, and anyone owed one, was now in possession of nothing more than “belief in the perpetuity of the United States of America”.

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When I started thinking about how to improve our problem-solving capacity, my first thought was that the kinds of problems worth trying to solve right now are only really big ones, because we already have a mechanism for solving little problems, called “capitalism”.

Unfortunately, capitalism isn’t nearly as successful at problem-solving as it could be, and once was. The expansion of financialisation and the vast web of arbitrage and profit opportunity have caused it to lose focus on that problem-solving purpose in ways that now regularly prioritise fossil-fuel profits over climate health, or pharmaceutical profits over human health. In my opinion, outside of effective (read: contentious) regulation, the best way to restore that focus is by removing the distractions of ‘big’ problems. That effectively means insulating it from the infrastructure it needs to succeed: both the literal roads, schools, police, etc., and also the metaphorical social licence and political games. Only then can it be allowed to do the work of polishing off annoyances, inefficiencies, and perceived human boundaries. All of which is to say, we need to approach those big problems in a way uncoloured by individual aspiration.

Big problem-solving requires big system thinking.

Money never really had an inherent value; regardless of what it is made of, it serves as a convenient, generic way of place-shifting actually-valuable things. The result is that most money users understand it as a generic “IOU”, and assume there’s an ultimate “U” in existence to validate this.

But that’s clearly not the full story. Money itself comes into existence through all manner of creative means, but the durability of its value is traceable back to its demand from some “taxation” authority (for example, the State), which can impose violence or imprisonment on you if you don’t have it when tax day arrives.

As this imposition spreads to all citizens, the shared desire to ‘avoid jail’ creates a shared value proposition for that money. And this in turn allows money to become ubiquitous and useful in the way it can, for better or worse, be: a store of value, a medium of exchange, and a unit of account.

While we have largely forgotten where the value of money comes from, we have become quite sophisticated in our understanding of its potential. Its capacity to be these things gives it an impressively large range of uses. As a medium of exchange, it lets one act on desires that they, as a single, negligible human, otherwise couldn’t. As a unit of account, it reductively keeps track of who is ‘winning’ in a world so elaborate and interconnected that we haven’t yet found a better way to measure each other. And, its ability to store value gives it a kind of gravity of possibility, where the weight of “capital”, “equity” or “wealth” can sit dormant, yet still discernibly ready to benefit (or harm) those in its orbit, such that its mere existence is complicit with its holder’s goals.

And so, what starts as belief becomes a coordination of behaviour—an operating system—that can shape and reward society.

With so many tempting ulterior possibilities, should we be surprised that, even with seemingly abundant capital drifting around our economies, we can’t seem to direct it towards solving the big, shared problems that improve health, reduce suffering, and empower people? Instead of building share market value, political careers, and sci-fi press releases, building collective productivity basics should appeal to any “medium of exchange”. However, money stopped being spent on those things when those things stopped aligning with the incentive structure.

In simple terms, when money measures you against your peers, imposes your will, and fulfils your individual desires (without you even needing to spend it), the ambition becomes to “get as much as possible” rather than to exchange it for any collective good. And, when you can secure the same benefits, regardless of whether your money comes from commerce, cons, crime, or charity, the system that solves problems in the economy will be stunted.

So, what do we do? That’s where we can loop back to Nixon’s revelation that, because money is belief, we can change how it acts. But to do that, we need to design our money to serve problem-solving beliefs.

To be clear, I have no ambitions of fielding an argument for authoritarian communism here! The dollars we already have may not be as well distributed as they should be, but the freedom their generic spending capacity gives us is still worthwhile. So, let’s leave that existing economy, of sports shoes and tacos and content subscriptions and pick-up trucks, alone, and build another alongside it.

What would this look like? Let’s get the fun part out of the way first: we’ll need new money for our new economy, so let’s call it something like “ProducÇoïn” (pronounced “production”, of course!). To stimulate the belief in its value, our new “PÇ” would need a similar value proposition as existing dollars, so we’d loop it into the tax system—‘demand creation’ if you like—for those who use it.

Who are these new currency users? Where is this new economy? In the USA, as in many similar economies, public spending represents nearly 40% of the economy. Clearly, that is an influential amount of money if we direct just a fraction of it towards productive problem-solving. What would happen if we split off a gradually-expanding portion of transactions to PÇ? We could, for example, pay the income-taxable portion of a public-sector worker’s salary in ProducÇoïn, with the remainder in US dollars. They’d still pay the same amount of tax, but wouldn’t have to weigh their tax bill against the opportunity cost of spending on some other trifle.

Gresham’s Law does warn that more ‘appealing’ money will get hoarded, while less (perceptively) valuable money will get spent, so we would want to rebalance the value proposition of PÇ a little, as it can’t be spent as freely as $. Our new economy needs to be sustainable, right? So, maybe we fix PÇ1 to be worth US$1.10 for the payment of tax debt?

And now, maybe your negotiating position changes if you’re willing to accept more of your salary in shared (problem-solving) ProducÇoïn?

Public roading and other infrastructure contracts might require some proportion of the cost to be invoiced in ProducÇoïn, which the contractor can use to pay approved local suppliers and public expenses like levies and regulatory costs, rather than using conventional dollars, which might otherwise be lured into productivity-sapping mischief like sloppy outsourcing, labour exploitation, or siphoning off to shareholders.

It’s still reasonable to question why we couldn’t just do this with existing money and appropriate law. To my mind, there are two considerations: First, the value of money is not just founded on belief but on very particular beliefs. The US dollar’s usability is tightly wrapped around ideas about ‘freedom’ and ‘markets’, so it represents a powerful blank slate on which imagination can build. The same freedom also means the US dollar can be used just as imaginatively to suppress and enclose. An alternative currency can have its own belief system: that the freedom we collectively value must be secured with unimpeachable foundations. In other words, PÇ is not an accounting tool but an incentives one.

AI obligingly created this image when I prompted it with this entire essay. Random stuff.

Freedom is an obvious good. But, for the continuation of modern civilisation, there is equally obvious spending we all (eventually) accept is required; if not now, then in the future, once all the can-kicking-down-the-road has made it a more expensive and more desperate proposition.

This all sounds like a huge political lift. But it’s not quite as crazy as it might initially seem. After all, we already somewhat do this with central bank reserves. Bank reserves are a kind of currency designed for almost the singular purpose of settling transactions between banks. This reserve currency is essentially infrastructure, allowing banking in a world where we can choose different banking suppliers and have confidence that our transfers between them will work. Weirdly, as essential as these are for the operation of commercial banking, many central banks pay risk-free interest on reserve balances. This, to my mind, is akin to paying truck drivers to use public roads; however, it is justified by the ‘signals’ it sends to dis/encourage economic lending activity.

I’m not alone in being sceptical of turning ‘infrastructure’ like this into a profit opportunity. But that perhaps reinforces my wider point.

Like those excess bank reserves, there would be a facility to convert excess ProducÇoïn to dollars, but, like reserves, it wouldn’t be something you do at a local ATM or on an iPhone app. Your ability to convert ProducÇoïn to dollars would include a ‘transparency test’ and, by extension, a test of agreed public good delivery. Again, we do this already when we approve commercial banks, but it’s a long process and not conducive to energising a new economy! Fortunately, we now have a wide range of efficient tools to do this. For example, we might put all PÇ currency exchange on a public blockchain, or convene representative local citizens’ assemblies to certify any new organisations that want to deliver public goods in exchange for PÇ. Corruption is devious, so this area does require diligence and good regulation, but key to it will be preventing PÇ from being tradable, convertible, or collaterisable like dollars, and ensuring any exchange of PÇ to $ involves both friction and public visibility.

In essence, conventional dollars allow creative problem-solving to build behind a protective layer of opacity, but that usefulness can be misused. PÇ is a currency not designed to protect secrets but to build resilient foundations, so we can allow entrepreneurs to creatively burn down an industry without allowing it to burn through the social stability beneath. And it is that visibility, in turn, that makes it democratically constrained and far less hospitable to oligarchy, capture, corruption, and greed.

With a slow ramp-up, a significant portion of public spending—bar a reasonable profit margin—could eventually transact in ProducÇoïn. After all, if public money is being spent on our behalf and without our explicit oversight, don’t we deserve to judge whether the priority is profit or public good?

Unlike regular dollars, only public spending can create new ProducÇoïn, so although it doesn’t create new problem-solving capacity, it does redirect incentives towards building it. Your local government official can’t spend them on a turkey roll for their lunch, but might spend them redeveloping a derelict carpark into a community hub with space for—among other things—a turkey-roll-selling food truck. When a new PÇ is created, it is done to stimulate the existing-dollar economy without being consumed by it.

Individuals with PÇ can use it for taxes and levies, car registrations or passport renewals, local democratic initiatives, public school and public transport costs, and so on. But it is intentionally insulated from spending on our own little desires. It can’t be flimflammed into private transactions, share buybacks, dividends, or the purchase of other financial assets. But, as this new economy expands, opportunities will emerge for those willing to accept PÇ for the provision of public healthcare, infrastructure, energy, and community services. Those willing to work openly towards shared good, with democratic oversight, will find themselves in high demand.

Governments, commercial banks, and the private sector would still create, lend, exchange, and hoard dollars and dollar instruments. Your personal consumption, investments, and even crime, can still be purchased in dollars. You’d pay your mortgage with dollars and, if you choose to, pay your taxes with dollars. You can still use dollars for political donations—although, if your ‘donation’ is designed to smooth the path to some lucrative government contract, you’ll be aware that contracts are increasingly paid for using ProducÇoïn. The good news is, though, ProducÇoïn is government-backed, liquid tender, so it can pay for approved subcontractors and producers, state and local taxes, and public health and education initiatives.

ProducÇoïn is a parallel economy, but not an attempt to evade the existing economy. It would exist to build a shared foundation over which private market freedom can soar, without the distractions of public spending corruption or the inertia of whether to save or spend. Indeed, it may even help diffuse some of the divisive politics around public debt, simply by being a debt obligation without the same incentives for private sector hoarding or individual tax resistance.

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The project of neoliberalism was built on the assumption that the private sector, through the profit motive, inherently delivers efficiency. Decades on, this ideology, and especially who benefits from that efficiency, is understandably the subject of reconsideration and debate. But, regardless of which side you land on, it’s undeniable that modern civilisation requires a minimum collection of assets for transport, education, accountability, protection, shelter, energy, community, facilitation of commerce, care, communication, and democratic governance. These are problems we, for now, have concluded should still largely be voted for with our wallets, but—given that—maybe the currency used shouldn’t be the same one available for crime, exploitation, influence, and grift.

Building an economy-by-essay naturally invites hard questions, like what constitutes ‘public good’? That changes over time, but also perspective. We may soon face a future where technology can deliver huge productive potential alongside a turbulent loss of human purpose. Dollars, as they exist today, can measure one side of that equation and reward those able to ride that wave. Still, the very freedom they represent may be compromised by trying to use them to maintain coherence and stability in a population that can’t ride it. This sort of challenge requires a different approach to building infrastructure, which waves can break over without demolishing us.

Everything we’ve achieved with money—so far—proves that belief is not just a powerful force, but an operational one. Now imagine a new currency encoded for big problem-solving; a currency we can slip in under our existing economy without disturbing the creative top.

That’s changing the game.

-T