Is Money Itself a Ponzi Scheme?

Here’s an alternative view of economics that I heard in a talk, written up by Douglas Rushkoff. The most interesting point to me is this one:

Local currencies favored local transactions, and worked against the interests of large corporations working from far away. In order to secure their own position as well as that of their chartered monopolies, monarchs began to make local currencies illegal, and force locals to instead use “coin of the realm.” These centralized currencies worked the opposite way. They were not earned into existence, they were lent into existence by a central bank. This meant any money issued to a person or business had to be paid back to the central bank, with interest.

What does that do to an economy? It bankrupts it. Think of it this way: A business borrows 1000 dollars from the bank to get started. In ten years, say, it is supposed to pay back 2000 to the bank. Where does the other 1000 come from? Some other business that has borrowed 1000 from the bank. For one business to pay back what it owes, another must go bankrupt. That, or borrow yet another 1000, and so on.

An economy based on an interest-bearing centralized currency must grow to survive, and this means extracting more, producing more and consuming more. Interest-bearing currency favors the redistribution of wealth from the periphery (the people) to the center (the corporations and their owners). Just sitting on money—capital—is the most assured way of increasing wealth. By the very mechanics of the system, the rich get richer on an absolute and relative basis.

The biggest wealth generator of all was banking itself. By lending money at interest to people and businesses who had no other way to conduct transactions or make investments, banks put themselves at the center of the extraction equation. The longer the economy survived, the more money would have to be borrowed, and the more interest earned by the bank.

Does that make sense? Opinions please? Counterarguments?

Although Rushkoff has a substantial Google footprint I was unable to turn up a rebuttal. (This may be symptomatic of how thoroughly we talk past each other these days.)

To me it seemed compelling at first blush, but when I tried to convey it to others I was not altogether convincing. On further consideration, I conclude that it MUST be an oversimplification, because a Ponzi scheme can’t work for 400 years, and after all, the system DID succeed in increasing wealth vastly since medieval times.

But there’s a real question here for those of us (like me and Rushkoff) interested in economics, skeptical of it, and not especially well-versed. Is growth built in? Because if it is, we have a problem. Given that wealth has environmental impact, given that there is no particular constraint that causes environmental impact per unit wealth to fall as fast as aggregate wealth increases, we eventually hit a brick wall.

There is certainly a case to be made that eventually is now, and accordingly Obama’s efforts to reboot the economy are doomed to failure. But that’s not what I am trying to address here.

The question I would like to raise is whether unsustainability is built in; whether as Rushkoff suggests we are institutionally incapable of a steady state economy, or whether it might be workable.

The alternative, which I find very intriguing, is the idea that somehow we constrain environmental impact per unit wealth to fall slightly faster than wealth increases. This would be the least disruptive path to sustainability if it were possible. Admittedly this is a vague idea. I got the germ of it from Robert Rohde on a very interesting thread on the globalchange list a couple of years back, when he just calmly asserted that it could naturally emerge that way. Now with all respect to Robert I thought that was a bit, hmm, overoptimistic. But maybe there is a way to make something like that work with some careful design effort.

Maybe we can have a steady state impact constraint atop a nominally growth-based economy by design.

I don’t know of anyone (besides myself) trying to envision how such a thing might be constructed. The concept that sustainability could be constructed as a layer on top of an unsustainable system came to me almost two years ago under the influence of a (mostly very technical) Google talk, but I haven’t made much (OK, any) progress with it. I find it hard to communicate these sorts of ideas to the sorts of people who might be able to get a grip on the details. Maybe it’s just not feasible, but I’d like someone who knows why to acknowledge what I am saying and then reply with an explanation of why it couldn’t be practical.

I have a couple of grounds for skepticism myself.

It seems to me that eventually production is actually negatively correlated to wealth. First of all there is the lawnmower problem.

Then there is the fact that I, for one, measure my own wealth in social and artistic and intellectual experiences. This decreases my net impact but doesn’t really promote growth at all. If the society moves to an economic metric that values low impact wealth, that means information will be monetized (DRM and such). Recent trends are not indicative that this will work. What’s more, there are strong reasons to believe that they shouldn’t. In other words, the attention economy doesn’t map very well onto traditional economics.

Most economists treat these as aberrations, but both of them are core features of my experience, which may have something to do with why I regard economics with considerable skepticism. But maybe these things can be worked around too.

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Bill Clinton Accused of Violating Taboo

In a cogent if demoralizing screed, the World Climate Report quasi-blog (no comments allowed, please and thanks) argues (ignoring any contradiction with its other articles, but so what) that exceeding 2 C warming is unavoidable. You’ve heard it all before, of course, and in spite of everything I am afraid it’s basically more likely than not to be how things pan out. I wouldn’t even call your attention to it, except insofar as it reflects on the growth taboo. It is so unacceptable to question growth that even mentioning questioning growth in a discarded hypothetical is grounds for punishment in the political arena.

Here’s how it goes. Step 1: Mr. Clinton (whom I otherwise greatly admire but who is definitely not a person who violates the taboo) spoke as follows:

“Everybody knows that global warming is real,” Mr. Clinton said, giving a shout-out to Al Gore’s Nobel Peace Prize, “but we cannot solve it alone.”

“And maybe America, and Europe, and Japan, and Canada — the rich counties — would say, ‘OK, we just have to slow down our economy and cut back our greenhouse gas emissions ’cause we have to save the planet for our grandchildren.’ We could do that.

“But if we did that, you know as well as I do, China and India and Indonesia and Vietnam and Mexico and Brazil and the Ukraine, and all the other countries will never agree to stay poor to save the planet for our grandchildren. The only way we can do this is if we get back in the world’s fight against global warming and prove it is good economics that we will create more jobs to build a sustainable economy that saves the planet for our children and grandchildren. It is the only way it will work.

In the lead paragraphs of the very same ABC article, this is summarized as follows:

Former President Bill Clinton was in Denver, Colorado, stumping for his wife yesterday.

In a long, and interesting speech, he characterized what the U.S. and other industrialized nations need to do to combat global warming this way: “We just have to slow down our economy and cut back our greenhouse gas emissions ’cause we have to save the planet for our grandchildren.”

At a time that the nation is worried about a recession is that really the characterization his wife would want him making? “Slow down our economy”?

Then we see the official Republican position quoted as an update to that same article:

“Senator Clinton’s campaign now says we must ‘slow down the economy’ to stop global warming,” said Alex Conant, RNC Spokesman. “Clinton needs to come back to Earth. Her ‘tax-it, spend-it, regulate-it’ attitude would really bring the economy crashing down. No amount of special effects will hide Clinton’s liberal record.”

Finally, it is reflected this way in WCR:

And conservation is limited—after all, we can only roll energy usage back so far before we are unable to sustain our current lifestyle (and no government on earth is going to purposely role back the standard of living of its people—or at least they won’t be governing very long if they do—Update Jan. 31, 2008: Although apparently this is precisely what Bill Clinton proposes that we do!).

Note the implicit syllogism: energy rollback = reduced economic activity = roled [sic] back standard of living. No effort to question any of these identities will be tolerated. Even mentioning the possibility will be severely punished in politics by sound bite.

At least the WCR article acknowledges the obvious: eventually the carbon intensity of our lives will be rolled back. Apparently we are not allowed to think about how to make that happen before the carbon runs out. Apparently after the carbon runs out we will think of something, but before the carbon runs out we are not allowed to, because that would reduce our “standard of living”.

Everybody knows that well-being is synonymous with money which is synonymous with spewing all available carbon.

Any questioning of any of this is Communist. (Of course it isn’t, but it’s sort of implied to be.) Stalin was a Communist. Stalin was very bad. So you’d be wise to shut up.

Well, I’ve got some news for you all. The concept of a party line that it’s subversive to question even in a rejected hypothetical is pretty much the key weapon of totalitarianism. I would think it is not considered subversive in a free country to question widely held ideas, even the idea that total wealth can in any meaningful sense grow forever, and it’s not sufficient to answer the question by adopting an expression of hostility and suspicion and disgust, effectively pointing out that the question itself violates a taboo.

I’d still like to see something resembling a serious answer to the question that Clinton was so foolish as to raise in passing. Anything at all.

I’d also like to know why this taboo exists. I think it’s a back-formation from the growth addiction. The tenacious attachment to it on all sides combined with the lack of a well-known rational defense of it strikes me as symptomatic of something severely out of kilter.