Fiat Currency is Backed by Public Services (And Basic Income Doesn’t Work)

I vaguely touched on an idea in my debt book that I didn’t develop. I didn’t realise there was a controversy around it. I am now aware of the controversy, and so I think I’d better develop the idea.

The controversy concerns the nature of fiat money. Fiat money is money, issued by a state authority, that isn’t officially backed by any real commodity.

On one side are those, including the MMT school, who say that fiat money is effectively government debt. On the other are those, generally of a more orthodox persuasion, who deny this; for them, money is an intrinsically (nearly) worthless token, which possesses value only because it is socially accepted in exchange for goods and services.

The view that money is government debt, I call the push theory of fiat money: money is ‘pushed’ into having value by what backs it, namely the full faith and credit of the state authority that issues it. The other view I call the pull theory: money is an intrinsically worthless token ‘pulled’ into value by society’s habit of accepting it in exchange for real goods and services.

You can see this controversy played out in the comments on a very interesting blog post by Randall Wray, which I highly recommend. But I think there’s a lot of talking at cross-purposes here, and I wonder whether my idea could help towards finding a point of agreement between the push and the pull theories.

Eric Lonergan argues that the push theory rests on a logical fallacy. Push theorists argue that since fiat money can be used to settle debts to the state – mostly tax debts – it must therefore consist of debts from the state. Semi-formally, the fallacious argument looks something like this:

  1. Anything that is a debt fromto Y can be used to settle an equivalent debt fromto X.
  2. Money can be used to settle a debt from citizens to the state.
  3. Therefore money is a debt from the state to citizens.

The argument is indeed fallacious; there is an undistributed middle. From 1 we can infer that anything that is a debt running state -> citizens – call this an SC debt – is something that settles a debt running citizens -> state – call this a CS settlement. We can infer that anything that is a SC debt is a CS settlement. But we cannot infer the converse, viz., anything that is a CS settlement is an SC debt.

What we would need to make the argument above valid is an extra premise: only an SC debt can be a CS settlement. But what would justify this extra premise? Certainly we don’t want a general principle holding that only an XY debt can be a YX settlement. Suppose that we are both potters, and you make a pot for me today, while I promise to make you a pot tomorrow. My pot is then used to settle my debt to you, and on the general principle proposed here, we should conclude that my pot is a debt from you.

If the state were still on a metal standard, the push theory would be easier to defend. We could agree at least that currency, as such, is government debt. Each banknote (and each entry in a bank’s reserve account) is the promise of a certain amount of precious metal. It is important to recognise that this does not mean that the currency has value only because of its capacity to be redeemed for precious metal. The currency can be exchanged for goods and services. And it can be used to cancel tax debts. But there is nothing wrong with saying that it is debt, so long as we are clear on what we mean: the state owes precious metal to each and every holder of currency, if she chooses to redeem it. We can call the metal the item owed, or we can call it the collateral against which the loan is securitised; either way, we are clearly talking about a debt.

Lonergan would not, I think, find any fallacy in the following argument:

  1. A note from X, legally entitling Y to be provided with something other than another note of the same sort, is a debt from X to Y.
  2. Currency (on the metal standard) is a note from the state, legally entitling the bearer to be provided with something other than a note of the same sort.
  3. Therefore currency is a debt from the state to the bearer.

It is only when currency stops being redeemable for metal that the trouble begins. The structure looks very similar to how it looked when the currency was backed by metal, which gives succour to the push theorist. And yet the currency appears not to be backed by anything, which gives force to the arguments of the pull theorist.

My idea is as follows. The currency is backed by the public services the government provides. While the central bank issues currency, it is redeemed at the tax offices. What do you get when you redeem currency by paying your taxes? You get all the public services the government provides to its taxpaying citizens: national defence, infrastructure, health services, education, etc. etc.

Here the pull theorist might object. On the metal standard, people have a choice whether to redeem their credit notice, hold onto it, or exchange it with somebody else. If fiat currency is debt redeemed in taxation, then people have no choice but to redeem it. Normally with a debt, the creditor has the power to forgive the debt. But the earner of currency has no choice about tax payments. This could be the basis of a new distinction between currency and debt.

It is, however, not true that earners of currency have no choice about tax payments. Tax evasion is always an option, even for those who can’t afford to hire dodgy accountants. It’s just that if you don’t pay your taxes, the state might haul you off to prison. So we can include not hauling you off to prison as among the services provided by the government in redemption of tax payments. You might object that this is not a service, being an omission rather than a commission, and I am sympathetic to this line of thought. Nevertheless, it is an omission for which taxpayers are very willing to redeem their currency.

This version of push theory is immune to Lonergan’s critique. It also has some fairly important consequences, of which I’ll mention two here.

No Free Market

First, it means that in an economy with a fiat currency, there is no free market. There is nothing even remotely resembling a free market. Free markets exist when there is competition and prices are a function of supply and demand. When prices are set by a single authority then there is no free market.

But the state clearly sets the relative price of the services it provides. If it doubles taxes while providing the same amount of public services, it has doubled the price of its services, not just in terms of money, but in terms of whatever you gave up – usually labour – to get that money. Textbook supply and demand analysis says that we should then consume less of the costlier services. But of course we don’t, since among those services is that of not hauling us off to prison, for which most people will pay whatever the price demanded.

It is also well-known by economists that as soon as a price is set in one market, the distortion carries through to every connected market. So once the state sets the price of its currency, every other price in terms of currency is affected. Worse still, there is no reason to believe that the distortion in other markets will be directly proportionate to the size of the market affecting them. The relative importance of that market matters. But the market for public services is, in a modern society, just about the most important market there is. We all have varying dependencies on public services, but there will always be people for whom they are the difference between life and death – or between prison and freedom. So even a small government with a small tax base is incompatible with the existence of a free market, wherever there is a fiat currency.

What if we went back to a gold standard? Once you recognise that currency is backed by public services, you realise it was never really backed by gold. It was always backed by public services, offered at a price set by the state; it’s just that once upon a time those services included the storage and delivery of gold. When that service stopped being offered, it mattered very little, since another service offered by the state – that of not hauling us off to prison for tax evasion – turns out to matter a lot more to people than easy access to gold.

Alright, well what if we privatised the currency, through some sort of ‘free banking’ arrangement? So long as there were still any sort of state at all, we wouldn’t have got rid of fiat currency. It would just look like we had.

In other words, where there is a state, there is no free market, and nothing like one. There is no ‘market mechanism’. There is no ‘law of supply and demand’. Or at least the extensions of these concepts are to be found only in the abstract models of economists.

Basic Income Doesn’t Work

The other thing this new push theory helps us to realise is that the basic income idea is largely a sham.

Push theorists and pull theorists can both agree that there are certain situations in which it can benefit just about everyone for the government to issue and spend more money into the economy without raising taxes. Whether we are in such a situation is always, of course, a very controversial empirical question. But few deny that it is always a theoretical possibility.

Such a situation will be one in which private spending is insufficient to purchase everything produced in the economy at current prices. The result would be deflation… if only prices were market-determined and thus a function of supply and demand. But since, with a fiat currency, prices aren’t market-determined, the real result is unemployment, unused capacity, and stockpiled inventories of unsold goods. There is also likely to be a piling up of debt, as businesses find that they can’t sell the things they took on debts to produce.

In this case, it makes sense for the government to issue and spend more money, so that people have more disposable income and increase their spending. The question is: what should the government spend the extra money on?

Push theorists tend to support the idea of a job guarantee: the government should spend its money hiring all the unemployed workers, at a living wage, to provide extra services (extra public services are always nice to have, even if they’re not strictly necessary). Once spending picks up again, the private sector can hire these workers back out of the public sector.

Pull theorists tend to support the idea of a basic income: the government should just hand everyone a cash payment. This has the advantage of not requiring a complex bureaucratic structure to determine how to employ a bunch of newly-hired public sector employees. It has the disadvantage of being a sham.

Various versions of the cash payment idea – ‘basic income’, ‘basic income guarantee’, ‘citizens’ income’ – have generated buzz in the media lately (here is a recent example). The job guarantee idea is almost entirely overlooked in the British media. Many very eloquent and knowledgeable people I know have pitched articles explaining it to various newspapers, and they’ve got nowhere.

I think this is because understanding the job guarantee proposal requires a far more radical revision of our economic understanding. The basic income proposal is grounded on a reversion to the comforting myth of the free market. Somehow, it is thought, prices have got stuck so that there is a surplus of goods and services and a shortage of money to buy them. The solution is to create and hand out money until we get back to the ‘market clearing’ price.

But a market that can clear is one that can adjust supply to demand by way of the price mechanism. And we’ve just seen that, where there is a fiat currency, no such mechanism can exist. Adding spending power is very likely to just push up the prices of goods and services already being sold while leaving the unsold goods yet unsold. Again, this would violate the law of supply and demand, which holds that a fall in the price of unsold goods relative to that of goods already being sold will shift spending away from the latter and towards the former. But we have seen that the jurisdiction of that law does not extend beyond the realm of economic abstraction.  (A tax-financed basic income is a different thing entirely – aimed at solving a different problem; the justification for it also depends on belief in the free market, but this is a topic for another post).

With the job guarantee, by contrast, the state buys the unsold goods and services and converts them into public services. It then ensures that people buy those services, through the tax mechanism described above. It makes the situation of unsold goods and services an impossibility rather than hoping that a non-existent market will render it improbable.

Most people focus on the question of whether the public or private sector should get to use existing resources. But the fact is that the private sector has no mechanism for preventing a huge volume of resources from going entirely to waste. Remember that the resources in question are human lives – stores of untapped talent, energy, and ingenuity that are born only once and will never live again.

If this were, as people say, a matter of market failure, then the solution might be to repair the market mechanism. But you can’t repair a mechanism that doesn’t exist. State planning is the only option. There Is No Alternative.


34 thoughts on “Fiat Currency is Backed by Public Services (And Basic Income Doesn’t Work)

    1. axdouglas Post author

      Thanks very much! It’s the best I could do to try to move the argument on in philosophical terms.

  1. grkstav

    Consider the following stylized contrast:

    Situation A:
    The status and associated roles of “supreme leader” are ascriptively allocated to the first born son (or failing that, to the husband of the first-born daughter) of the previous incumbent of the same status


    Situation B:
    The status and associated roles of “supreme leader” is allocated to the final winner of a series of contests (military, poetic, athletic, whatever) in which only males 35+ years of age are eligible to participate.

    Does situation B entail MORE ‘competition/achievement’ (relative to ascription) than situation A? It does. Therefore, and by analogy, there are always degrees to the existence and operation of so-called “free markets” in the allocation of scarce resources.

    Market allocation mechanisms do exist. The absence of concrete instances of the abstract model of “free market allocation” is not a sufficient basis upon which to declare that the market mechanism does not exist (at all).

    1. axdouglas Post author

      No price mechanism in either case is operating to match supply to demand, though, which is what I think most people mean when they talk about ‘the market’ doing this or that.

  2. NeilW

    It’s not the pot that is money. It is the promise to make the pot that is money. We swap promises with each other.

    We’ve got to a stage of development where the promises are never redeemed for the actual thing promised and instead we make further stuff on the promise of a promise.

    1. axdouglas Post author

      I’ll have to think about that last point.

      The first applied to a mistake in my argument, which I’ve corrected. But here is the original mistaken passage for future reference:

      “Suppose that we are both potters, and you make a pot for me today, while I promise to make you a pot tomorrow. My pot is then used to settle my debt to you, and on the general principle proposed here, we should conclude that my pot is money.”

  3. Raoul

    Most basic income models assume tax financing, running balanced government budget. At least on a several year time horizon.

    You should throw the disclaimer in that this consideration only applies to venezuela style state spending, at the beginning, too.

    As for the concept of a JG, you’ll have to realize that most things people create nowadays, are either good enough, or fill a special need to warrant a premium. A JG proposes to inflate the stock of good enough items, something we have abundance of anyhow. Unless it somehow enables people to seek out greatness in producing a one of a kind item, that speaks to very specific communities and groups of people.

    I see a tax financed basic income as more likely to enable such, since it allows people to create things radiaclly out of their own accord.

    1. NeilW

      “A JG proposes to inflate the stock of good enough items,”

      It doesn’t.

      Mostly it is additional ‘nice to have’ services. If you can’t think of ‘nice to have’ services that would just make life that little more enjoyable, then I suggest a course in creativity is probably in order.

      1. David Merrill (@DavidMerrill21)

        If you think of the ideal, that is, social justice, as the state where everyone is part of the middle class in some rough equality and fully accepting ecological constraints, one becomes immediately aware of how much more economic activity is required even for a place like the UK. Furthermore, as is generally acknowledged the middle class is never sated, so no fear about what to do with a JG. These are insights one can find in the section on ‘civil society’ in Hegel’s Philosophy of Right.

  4. Hugo Evans

    The word debt makes it hard to see the wood for the trees. I apologise for the length of this comment, but I believe it complements the post.

    Start with two classes of legally recognized documents, one recognizing that an obligation has already been fulfilled (OAF), the other recognizing an obligation that has not yet been fulfilled (ONYF). The state issues the former in return for goods and services rendered towards its democratic program. They must be handed back by citizens at a later stage as evidence that they have met their obligations to this program, which they themselves voted for. ONYFs are created by the citizens themselves in return for a third class of documents produced by banks – promises to pay OAFs, which we can term PTPs. These are fully negotiable throughout society because the state central bank will defend the payment system by ensuring that each separate bank’s PTPs trade at par with OAFs. There is one last feature of this hybrid credit/chartal system of note – price transmission. The state can set the overall price level by simply determining the volume of goods and service it requires and then stating a price. However unless it sets specific limits to the emission of PTPs by banks, it cannot directly control the endogenous demand for them and the resulting potential effects on the price level should citizens attempt to bid away resources away from each other and the state. To solve this issue it breaks up its issue of OAF into two subclasses: Spot OAF and Future OAF. This allows it to construct a liquidity schedule, which it can manipulate at will to influence the price offered by banks to swap their PTPs with ONYFs created by the public. The job of the banks in the system is to underwrite public ONYF issue, by examining the prospects of future income. Their possession of distributed knowledge and their willingness to use it to underwrite production of the goods and services which the state may wish to purchase for its program is the only reason the state is justified in delegating this function.
    The only true debt in this model is the PTPs created by the banks, because the moral hazard ultimately sits with them. Everyone else has to use them to gain access to the payment system.

  5. Charles Como

    I like your approach here. I’ve always said that the value of money comes from all of the goods and services an economy’s work-force can create. Which is why you can use full employment as your barometer for how much money the government should create and pay people to create things.

    If the private sector is not hiring, and you have a bunch of unemployed people sitting around (which has an actual cost to society that can be computed, by the way) you get the gov’t to pay people to create things for society and the gov’t should create the money from scratch for those things. (Which is does, as we know.)

    It should NOT be called a debt to the government, because people will then think the debt needs to be paid back and if that were the case, everything the government paid for and created (assets that society then owns, like bridges, roads, buildings, etc.) would end up begin sold off to private enterprises to “pay off those debts” and society would end up owning nothing at the end. And for no reason other than a misunderstanding.

    So I think your thinking is more in line with what’s really going on… as I truly hate the whole DEBT obsession as well.

  6. Eric Lonergan

    I have a simple observation – under fiat money, the issuer of money owes you nothing. Therefore money is not a debt. It really is that simple. Randall Wray’s ‘argument’ is extraordinary. He says ‘show me the balance sheet’. That’s easy, you can represent money on a balance sheet in lots of ways – that’s why accounting standards boards exist – accounting is agreed (and contentious) convention. Accounting convention is to show money as a liability of the central bank – but that is not an ‘argument’, Wray assumes convention is uncontentious. It would be much more accurate to treat base money as a liquidity service produced by central banks at zero cost. Creating CB money shows up as revenue on their income statement and assets purchased create ‘equity’. I can only assume that if the accounting standards board accepted this treatment Wray would change his mind? The correct question therefore is which treatment is most accurate. The answer is obvious: the issuer of fiat money owes nothing but creates something extremely valuable.

    1. axdouglas Post author

      You’re begging the question by saying that the government owes you nothing. I’ve proposed that you can think of the government owing you all the services you get when you pay your taxes, especially the service of not imprisoning you. If the government didn’t ‘back’ its currency with that service, if it didn’t even agree to accept its fiat currency for tax payments, then the fiat currency wouldn’t be extremely valuable at all. Arguably, it would cease to be a currency altogether.

      1. Charles Como

        I like what you are saying Eric, that the issuer of money owes you nothing.

        axdouglas, I worry about your statement that the gov’t owes you all the services you get “when you pay your taxes” runs into the potential perception by people that the government then has to tax in order to provide those services which we all know is incorrect, the government provides far more than the taxes pay for.

        Since Wray wants a balance sheet way of looking at things, maybe there is something to be said for the fact that the GOVERNMENT IS THE PEOPLE. And the government gets money INTO the economy by PAYING its own people to PROVIDE A SERVICE OR MAKE A GOOD that then is OWNED BY ALL THE PEOPLE. So maybe there is some way to look at the government DEBITING the value of the money it creates from the value of the LABOR of the people, which then results in an ASSET owned by the people.

        It runs full circle and balances itself out.

        Money created = labor required to build an asset => the public ends up with an asset = to the money created.

        (I’m just working through an idea here, not totally flushed out yet, as I’m personally trying to get away from this whole DEBT obsession, since even using the word DEBT plays right into the hands of the deficit hawks.)

        I think the money created and the asset received should CANCLE EACH OTHER OUT for the following reason:

        You COULD keep track of all the money created if you wanted to have an overall idea of how much value of assets the government has provided the public over the years, but over the years that number will just get bigger and bigger since some of that value will be in buildings, bridges, roads, but also in things like education, military protection, etc.. which will just keep accumulating.. then people will get confused and start thinking that those government investments need to be “paid back” which is COMPLETELY incorrect and we will then find ourselves in the same predicament that we find ourselves in today where people think government investments (“deficits”) need to be paid back.

    2. NeilW

      “I have a simple observation – under fiat money, the issuer of money owes you nothing”

      The issuer of a bank advance owes you nothing. Therefore a bank advance is not debt. Doesn’t really work does it.

      The problem here is forgetting that there are two sides to a balance sheet. In both the bank case and the state’s case the entity splits the zero to create a bunch of financial assets and liabilities.

      The bank’s asset becomes a liability to the individual who voluntarily asked for the loan to be created, and the bank’s liability is assigned to whoever the individual wanted to pay becoming that individual’s asset. Those bank liabilities then become active bouncing around the system causing work to be done until enough of them eventually end up spare in the hands of the initial individual that he can clear the loan.

      Similarly in the case of the state, it allocates its assets to numerous individuals who have voluntarily signed up (by their political actions) to the notion of a state. The state’s assets become liabilities (tax demands) in the hands of the individuals, and the state then distributes its own liabilities to individuals it wishes to hire to serve the public good – and they become those individual’s assets. Those state liabilities then become active bouncing around the system causing work to be done until enough of them eventually end up spare in the hands of the individuals with tax demands so they can clear those demands.

      The value of any financial impulse stream is the work that it causes to come about within the real circuit.

      In the state’s case that’s not just the public services initially purchased, but the entire cascading multiplier stream that is generated in its wake.

      To me the value of a currency is determined by what the state pays for real things, and that is a complex interaction to do with the desire not to be jailed for tax evasion and the perceived worth of other offers with this one – particularly ones underwritten by bank advances.

      1. Eric Lonergan

        1. A bank deposit is a loan to bank. They can default – ie not pay when you try to withdraw.

        2. The issuer of a $10 bill does not owe u anything.

        They are fundamentally different things.

        I think 1 & 2 are uncontroversially true. What’s curious is why people refuse to accept this. Is this another form of unwillingness to accept that a) money is unique, b) we don’t like the fact that the government just produces it for free and we use it?

      2. NeilW

        “A bank deposit is a loan to bank. They can default – ie not pay when you try to withdraw.”

        They can’t default in their own liabilities. They can only default if you demand something else – i.e. state money. That’s an exchange, not a withdrawal. A bank, in its raw state, is under no obligation to deliver anything other than its own liabilities (including paper notes for its own liabilities) and therefore can only really pay other people who bank at the same bank.

        It’s only when a bank enters into arrangements with other banks – either directly or via a central bank clearing house that default can occur – just like any other fixed exchange rate system.

        “The issuer of a $10 bill does not owe u anything.”

        The issuer of a $10 bill can become worthless in the same way. I hate to use the Zimbabwe example, but that is what happened there. The state scrapped the money.

        Similarly if you ask for the $10 bill in rubles then that depends upon whether there is liquidity in the system to allow the exchange – and no capital controls.

        So your points are not ‘uncontroversially true’. What you have stated is a point of view, a point of view that is contradicted by the operations of banks and the interaction between them. In particular you have ignored the implicit liability peg between the individual banks. One that doesn’t necessarily have to be there (at which point default is impossible – as it is with floating currencies).

  7. amanasleep

    Why exactly does basic income not result in more goods and services purchased while jobs guarantee does?

    Also, I find the contention that the mere existence of a fiat issue system and gov set price distortions means that there are no “free markets” totally unsupported. Markets may be distorted, but there is still supply and demand, which is easy to see empirically.

    1. axdouglas Post author

      Thanks for this.

      Suppose the market worked in such a way that increased income (from either a job guarantee or a basic income) pushed up prices rather than increasing sales.

      The state could then increase taxes to counter the inflationary pressure. MMT describes this as ‘controlling aggregate demand’, but you could also think of it as increasing relative demand for public services (including, crucially, the ‘service’ of not jailing us for tax evasion).

      But with the job guarantee, there would be more public services. So while the higher taxes would be forcing us to pay more for those services, we’d also be getting more services. With a basic income, there wouldn’t be more public services, so the increase in tax would really just be an increase in the price of non-imprisonment.

    2. axdouglas Post author

      I may have overstated my case in saying that the law of supply and demand doesn’t hold. It may approximate the truth in some cases. That is, prices might move in response to changes in supply and demand. But the distortions mean that there is no market-clearing equilibrium price.

      By the way, you can’t empirically verify the law of supply and demand. Supply and demand are held to explain prices. But the only hard evidence we have of the level of demand (except in cases where there’s a shortage and you can see queues forming) is the price the market will bear. To infer, however, from a higher market-borne price to a greater demand is to already assume that the price is a function of supply and demand (if people paid higher prices for things they wanted *less*, then the empirical evidence would mean exactly the opposite of what it is taken to mean). You can’t empirically test the theory itself, since the crucial observations against which it is tested are themselves laden with the theory.

      1. Simon

        Could you expand on what you have just said? Your first paragraph seem to confirm that it does hold (to a degree), then your second paragraph seems to deny the first. That is ‘prices might move in response to changes in supply and demand’ and then: ‘To infer, however, from a higher market-borne price to a greater demand is to already assume that the price is a function of supply and demand.’

        Have I missed something here?

      2. axdouglas Post author

        My first paragraph admits that it might hold to a degree, but not up to the point of market clearing.

        My second paragraph asserts that whether it holds or not, we’re certainly not going to empirically prove that it does.

  8. Simon

    In the case of supply and demand there is also the case of the ‘Giffen Paradox’ where, with certain commodities the demand increases as price does usually things that are bubble-prone like housing and other essentials.

    Supply and demand curves (they are usually straight lines!) and other graphical representations of economics textbooks always strike me as inherently tautological-though I’m not clever enough to point out why!

    1. NeilW

      In terms of supply and demand, there are is the Sonnenschein–Mantel–Debreu theorem which states that a *market* demand curve can be any polynomial shape you can draw.

      There is nothing in theory or empirically that states that when the price goes up, the demand comes down. That only happens in an economy with one person and one good.

      1. axdouglas Post author

        ‘That only happens in an economy with one person and one good.’

        Or, if you like economic theology, when: ‘a benevolent central authority … redistributes wealth in order to maximize social welfare’ (Mas-Colell, Whinston, et al, p.117).

        🙂 🙂 🙂

      2. Eric Lonergan

        Neil – not being able to honour a debt with ‘state money’ is what ‘default’ means. That’s neither an analytical nor an empirical point. It’s a definition. If you start using the word ‘default’ in a completely different way we need to be clear that you mean something else.

        As a aside, it is worth noting Randall Wray does this a lot – he uses the same word to refer to two distinct phenomena. If one does this systematically, one can of course, literally say anything!

      3. axdouglas Post author

        In what dictionary is ‘default’ defined exclusively in terms of state money? Traditionally it has referred to a failure to fulfil an obligation, which can be the duty to honour a debt in state money, or it could just mean a duty to accept back one’s own liabilities in settlement. The definition on its own doesn’t make any arguments for you.

  9. Pingback: Different Theories of Fiat Money, with Balance Sheets | Origin of Specious

  10. Nathanael

    Oh. I was about to argue with you a lot, until you stated that a tax-financed basic income was a different project, solving a different problem. That’s the version I support.

    I think of the purpose of basic income (mail a check to everyone every year) as being purely redistributive, which has two purposes:
    (1) Capitalism has a roulette-like effect where the money concentrates at the top, where it stops circulating and stops doing its job, and creates a dangerous elite with the power to corrupt the government. Progressive taxation takes the money out of the top, but if you *just* do that, you could very very easily induce deflation. You want to systematically and constantly inject it back in at the bottom.
    (2) Capitalism has a tendency to fail to supply a basic standard of living for the poor. Some of these necessary services are best supplied directly by government (health care), but others (clothing for instance) are harder to bureaucratically determine in advance and it’s problematic to issue the poor with “government issue clothing”: it’s much easier to give a cash payment and allow people to figure out what they need. Fundamentally, I believe nobody should have to work merely in order to live: work should be earning extra income to pay for children, luxuries, investment, etc. etc. Basic income guarantee is part of making sure that the basics of food/clothing/shelter/healthcare is free. This is also a purely redistributive act, though it has a economically stimulative effect.

    While government should *mostly* be providing services (like health care, public water, sewers, fire protection, etc.), a cash supply of basic income should be set at a level which provides a standard of living which we are willing to tolerate. In addition, the progressive taxation of the rich should be set to prevent accumulation of politically dangerous levels of wealth.

    These things should be done *prior* to the analysis of inflation/deflation and slack capacity in the economy. Fighting inflation, or making use of idle resources in the economy, should be tweaked by interest rates or by targeted government spending.

    You’re quite right that the problem of fighting deflation and deploying idle resources can’t be solved by a basic income and can be solved by a job guarantee.

  11. Nathanael

    But wait… you said something stupid.

    “But since, with a fiat currency, prices aren’t market-determined, the real result is unemployment, unused capacity, and stockpiled inventories of unsold goods. ”
    This is simultaneous with deflation.

    And distributing a basic income *allows people to buy the STOCKPILED INVENTORIES*, so in this situation it DOES revive the economy.

    The key difference between basic income and Job Guarantee is subtler. There are two variations of basic income:
    Proper Basic Income: everyone gets the same-sized check every year.
    This is great for ending poverty. The problem is you can’t use it to deal with a recession because it happens *every year*, just he same in booms as in recessions.

    “Guaranteed Minimum Income”: people only get a government check to make up the difference between their private-employment income and the minimum income.
    This has so many distorting effects that it’s quite complicated to analyze. But it gives people a disincentive to work (the other version does not do this) and this makes it very hard for it to end recessions.

  12. Nathanael

    “Somehow, it is thought, prices have got stuck so that there is a surplus of goods and services and a shortage of money to buy them. The solution is to create and hand out money until we get back to the ‘market clearing’ price.”

    Let me make it absolutely clear that this happens all the damn time. The obvious example is this:

    — There is lots of food sitting in warehouses.
    — There are lots of people with no money.
    — There are a few people with lots of money.
    — The people with no money cannot afford to buy food.
    — The people with lots of money have eaten all the food they can eat and do not want more food.

    Hand money to the people who have no money, and the food in the warehouses gets bought. This gives money to the farmers who then can afford to pay their farm workers and you get the picture.

    If you have any understanding of the function of money as a medium of exchange, this would become obvious. If a person has a shortage of medium of exchange, they basically drop out of all activities denominated in medium of exchange, and this is what causes your typical economic disaster.

    You can actually get out of a classic “Keynesian” recession simply by handing each person a newly-printed million dollar check.

    (A resource-limitation recession, such as the 1970s oil crises, is a completely different thing, of course.)

  13. grkstav

    “What do you get when you redeem currency by paying your taxes? You get all the public services the government provides to its taxpaying citizens: national defence, infrastructure, health services, education, etc. etc.”

    You get quite a bit of those public services (being that they are public goods, and by definition effectively, excluding those who have not ‘contributed’ to their production, maintenance, prevention of spoliation, etc is impossible or prohibitively costly) independently of having or not have redeemed currency by paying your taxes.

    A sovereign issuing currency with which those who receive (or otherwise manage eventually to acquire it) can settle (extinguish, discharge, fulfill) their obligations to said sovereign thereby acquires a general and abstract means to acquire, via apparently free and voluntary exchange, resources and labor currently possessed by non-sovereign entities for its own purposes. Instead of imposing taxes or tribute in concrete kind and concrete labor, it imposes taxes/tribute in ‘money’ (preferably/ideally in the ‘money things’ it, and it only, issues or causes to be issued) and can then offer the self-same money to “purchase” whatever concrete ‘kind’ or ‘labor’ it needs, as the need arises.

    If the only or ‘bottom-line’ service that one is owed by the issuer of fiat currency is ‘freedom from suffering negative consequences’, which the argument presented here appears logically to boil down to, then fiat money is backed by its issuer’s coercive ability.

    1. mrkemail2

      Paying UK taxes is entirely voluntary — I have chosen not to pay them, and that is working out fine. I have chosen to pay taxes somewhere else where I think I get a better bargain.

      Paying taxes in the UK is a freely entered contract, where you get the benefits of UK citizenship, and you pay a yearly membership free. Many in the third world would pay MUCH for this.

      There is no coercion — you work to pay the membership fee for a housing association that you have freely chosen to be a member of. Just as working for Tesco: you think that their wages are too low and pension deductions too high? Then find a better paying job, working at Tesco is a free choice, and you can quite anytime you want. There is a long queue outside of people eager to take your job.

      You think that the UK “housing association” is not offering good value for its membership fee? Nobody is forcing you to be a member, you can always quit it, sell your flat/house there and buy one in another “housing association”. Perhaps go to the libertarian paradise of Somalia 😉


      The jackbooted thugs of UK property owners held a gun to your parents for all 18 years of your minority to force them to reside in the UK with you, imposing on them residence in the UK without their consent?

      Not only were your parents forced to reside in the UK but the same jackbooted enforcers of the UK property owners put a gun to your head on your 18th birthday to force you to be a resident in the UK and you were made to use the first world services of the UK like courts, universal healthcare, police, army protection, roads, etc. without your consent?
      Your parents and you absolutely refused to buy the residence product being sold by the UK, but you were both forced to buy it, gun to your head, for decades?

      That sounds monstrous… 😉

      What the State does not do in the UK and many countries is to *force* you to buy their services.

      If you do not want to buy and pay for UK services, shop around and buy citizenship from another State. If you don’t want to buy from the UK State shop, close down your account them, pay any contractual early termination fees, and open a citizenship account somewhere else.
      Just take personal responsibility for living in the State that gives you the best bargain that you can afford.

      “libertarians” also misunderstand the role of tax…

      It’s also important to realise that when government invests it will ALWAYS generate the same amount of taxation for any positive tax rate. Pound for Pound. Each and every time. If there is no saving in the spending chain the government will get ALL its money back. So why is there a government deficit you are no doubt screaming. Well that’s because you’ve missed the other bit of taxation.

      Taxation is about reducing spending. That is its primary purpose, in aggregate, – to stop the system overspending its capacity. Once you understand that, then you quickly realise that people actually tax themselves. It’s often called saving. That reduces the amount of spending an individual does – which is the primary purpose of taxation. So we can call saving – specifically saving in excess of investment – Voluntary Taxation.

      And that gives the simple equation: Voluntary Taxation + Compulsory Taxation = Government Investment which simplifies to: Taxation = Government Investment for those with a correct understanding of what taxation actually is.

      Libertarians state their worldview as the only one there can be. That is not the case at all.

      For example, they wouldn’t have got the assets or income in the first place but for the government investment.

      So NOBODY is TAKING ANYTHING AWAY. The system is just being cooled down so it doesn’t overheat because you weren’t thrifty enough and tax yourself sufficiently.

      Libertarians are also absolutely convinced that their gross salary magically appears because they are such an awesome individual.
      Every salary comes from other people’s spending. Initial government spending – since they are the monopoly supplier of Sterling in the UK economy.

      The libertarian myth, of course, is that if you cut taxes then your net income will increase as your net income goes up to your gross salary.
      Of course that conveniently forgets where your gross salary comes from in the first place, which is of course from other people spending. Much of it directly or indirectly initiated by government.

      So if you cut taxes then what tends to happens is your gross salary starts to drop in real terms below your current net salary as the public multiplier effect collapses due to a lack of spending.

      It doesn’t do this smoothly of course. Generally what happens is lumps of people lose their jobs, and many others lose the ability to negotiate a pay rise due to fear of losing their jobs.

      And the other way round, therefore to increase the total amount of Taxation, you just push up Government Investment – once you’ve assured yourself that there is real space in the economy to take the extra investment. If there isn’t enough Voluntary Taxation, then government can up the Compulsory Taxation or encourage more Voluntary Taxation to make space – should it so wish (or cut certain bank lending, ban luxury goods, state funded competitors to make it more efficient, etc.)


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s