Fine Control of Economic Systems
Economic policy makers have a poor track record in controlling economies. Economies should have continuous growth in sustainable goods and services by achieving more with fewer resources. Every person who wishes to work should have a job and societies should have the tools to address existential threats like climate change. Science and technologies derived from our scientific understanding make all these possible. It is our unscientific economic systems that fail us. But we can use scientific methods to change our economic systems.
Economists use money as the main tool to predict and reason about the economy. Money is a hybrid. It is both a store of value and a measure of value. Unfortunately, the two uses of money interfere with each other and reconciling the two increases costs and lead to unwanted social distortions. The poor implementation of money systems makes it difficult, if not impossible, to reason successfully about economic systems.
Having money as both a store of value and a measure can work well if money does not increase in value by earning more money through interest, dividends or capital gains. Money creating more money leads to extraordinary costs and distortions in any economy. Costs increase because the value of money changes so changing the value of all goods and services for no reason. The financial system struggles to cope with the changes, and the system is made worse by the interlocking of currencies. When the value of money traded is many times the value of goods and services traded the system is at best inefficient. A world where the top 1% control more wealth than the remaining 99% is at best dysfunctional and inefficient.
What can be done
We can fix the financial system by using what we have learned from the study of evolution and complex adaptive systems.
Complex adaptive systems are decentralised systems. Economies use banks to create money but under centralised control. Finding a decentralised method of creating new value and hence new money will create a robust, lower-cost economy.
Money is created when banks create loans. The financial system attempts to control the money banks create. All money created by banks is the same as the money created by the government but we allow the banks to give the tokens they create a different value by charging different interest rates for different loans. This is extraordinarily hard to control. We could reduce complexity by requiring banks to lend new money at the same rate as the government charges but that would nationalise banks and it would be too difficult both operationally and politically.
Another way of achieving the same goal for some loans is to change the way we give a return on investment. Instead of earning more money the saver can receive a return in more tangible goods and services. Tangible goods and services are simpler and easier to track than returns on Capital or money. It is easier because the cost of money tokens is zero as we remove the need to charge interest. Not all loans need to change for the approach to be effective but where it is used, it reduces costs by a minimum of the cost of interest.
Using money as a surrogate for goods and services makes it easier to reason about economics, but unfortunately, the simplification comes at a cost in accuracy and control. Having fine control over loans for different goods and services replaces the blunt instrument of monetary control through interest rate changes. It is easier to change the returns in a decentralised system and to target different areas of the economy.
If there is a lack of investment in infrastructure, the returns on infrastructure can increase. If too much investment is going into housing leading to a glut, we reduce the returns on housing. If some schools are disadvantaged, the schools can receive investments or other incentives with higher returns. If Waste Collection is lagging, then people who reduce their waste are rewarded with investment incentives in Waste Recycling. If there is a drought, those who reduce their water consumption receive rewards of investment incentives in water savings infrastructure.
It is no longer necessary for policy makers to consider the interactions between different sectors of the economy. There is no longer the need to make tradeoffs between building more houses or more hospitals.
Our scientific understanding of evolution, of the brain, and of social systems are far enough advanced for us to create a responsive, adaptable, efficient economic system for much lower cost. The savings from the financial system are used to increase the production of goods and services and to invest in long-term prosperity and invest in more science to understand the economic system.
Swarm Investing versus Capital Investing shows one way of dramatically improving the economy by reducing the cost of investing through decentralisation of money creation that allows all to participate in wealth creation.