New Money for a New World

by Bernard Lietaer

  Indisputable economic benefits were realized through industrialization. It provided greater assurance and regularity of wages in comparison to the erratic harvests, outright crop failures, and other vicissitudes of agrarian-based economies. Many new jobs, professions, and opportunities for upward mobility emerged that were previously unavailable. Economist Alec Tsoucatos explains that prior to modernization, the principal means of enrichment “was through war, by plunder, inheriting it by death, or acquiring it through marriage. For the first time, money and wealth were now possible through work and enterprise.”131

  Economic progress was gradually accompanied by a host of social improvements. These included lower infant mortality, decreased death from starvation, eradication of some fatal diseases, universal primary education, the birth of the middle classes, and eventually, though accompanied by many struggles and sacrifice, more equal treatment of people from different backgrounds.132

  Yet, for all the improvements it wrought, modernization and its accompanying worldview were laden with limitations. Many of today’s critical issues can be traced back to the shift to this dominant intellectual framework, and to the fact that it was not only progressive but also profoundly reactionary. Modernism set its sights on the future while denying many important and valuable elements of our past. It would take centuries to realize that a more optimal approach to healthy transformation was possible, achieved not by a process of reaction and denial, but rather by inclusion, integration, and a deeper appreciation for the power and influence of systems.

  A Rational New World

  Modernism was rooted in the determination to form a new society based on reason and the precision of 18th-century empirical science. It was also fashioned by a resolve to prevent a return to the conditions that had plagued past centuries. This resulted not just in many innovations, but in an extensive process of exclusion as well. Practically anything premodern or nonscientific in nature came to be considered primitive, antiquated, and inferior. “If something couldn’t be measured, it was considered irrelevant.”133 Entire realms of human experience that did not lend themselves to modern analysis or quantification were partially or wholly discounted. Discounted as well were many time-tested customs and the notion that the past could contribute in any meaningful way to the formation of modern society. This precluded any insight into the role that complementary currencies played during the Central Middle Ages. There was, in fact, little if any common knowledge regarding the very existence of a medieval Golden Age.134

  Similarly, the prevailing mindset of the time did not lend itself to inquiry into the functional dynamics of money, particularly the notion that different types and particular features of money could induce specific behavior and investment patterns. Different types of money and their impact upon society were simply not taken into consideration. The principal focus vis à vis the new monetary system was that it be streamlined, efficient, and codified.

  These exclusions point to one of the great ironies regarding Modernism. Though it developed in reaction to the narrow, rigid mindset of another age, the modernist worldview assumed its own insular monopoly of legitimacy in the interpretation of reality.

  Modernism’s new, supposedly rational understanding of the world was tainted by a skewed hyperrationality, referred to as the Technocratic Materialistic Mechanistic (TMM) model.135

  Three of TMM’s leading myths include:

  Modernism is the only legitimate approach to knowledge;

  Modernism is innately superior as it alone is capable of understanding and knowing everything;

  it is possible to be absolutely logical, rational, and objective.

  It was in this reductionist, mechanistic milieu that a one-type-fits-all national currency system emerged, which, by design or happenstance, reflected the prevailing worldview of the period. It is also under the influence of this same mindset and its inherent limitations that the development of Traditional Economics—the set of ideas that has dominated economic thinking and practices—came into being, as discussed next.

  CLOSING THOUGHTS

  Our present-day banking and monetary systems arose as part of a massive societal shift during the 1700s in Western Europe. The new banking and monetary paradigms that emerged during the Enlightenment enabled industrialization, nation-states, the emergence of a middle class, secularization, and commercialization. The new accompanying worldview was itself a reaction to the pre-scientific, religious mindset which preceded it. Though Modernism brought with it many benefits, the new mode of inquiry rejected many of the beliefs and customs that preceded it. Ironically, by pursuing knowledge in this analytical manner, substantial pieces of human experience and history were ignored, including many valuable monetary insights and practices that benefitted society in the Central Middle Ages.

  CHAPTER EIGHT - Economic Myopia

  Economics has never been a science.

  And it is even less now than a few years ago.

  ~PAUL A. SAMUELSON

  Economics participated in a unique, profound way in the transformation of modern society. Like the current monetary system, economics was not only influenced by, but also became a key replicator of, the modernist perspective and the quest for a society based on Enlightenment ideals.

  Following the great scientific discoveries of Newton and others, all efforts were made to transform economics into a science and strip it of the kinds of inquiries and concerns that it upheld previously as a field of applied moral philosophy. This was mainly accomplished through the fields’ attempted integration with mathematics. From the Scientific Revolution onwards, mathematical language was increasingly used to describe an ever-growing range of natural phenomena. “Problems that have baffled humankind since the Greeks, from the motions of planets to the vibrations of violin strings, were suddenly mastered.”136 There was hope that, fueled by precise empirical data, economics could provide modern society with the same predictability and order as was found in physics.

  At the time of its founding in the mid-1700s, however, economics was limited to algebra and a few numerical examples, nothing more. Advanced mathematics and economic theory did not converge until the latter half of the 1800s in conjunction with the concepts of supply, demand, balance, and the equilibrium theory.

  THE EQUILIBRIUM THEORY

  From Smith’s day to our own, economists have studied how the supply and demand for goods and services affect their price. Many economists argued that in a free, competitive marketplace, the quantity of goods demanded by consumers, and the amount supplied by producers, would come into balance with one another.

  This concept of balance was of particular interest to late 19th century economist Léon Walras, who saw a parallel between equilibrium points in physics and balancing points in economic systems. He asserted that given the available resources, participants in a free and fair market economy trade their way to a state of equilibrium—a natural resting point where supply equals demand, resources are allocated to their most efficient use, and the welfare of society is optimized. Walras also believed that this equilibrium point could be mathematically computed.

  Using sophisticated, physics-based differential equations, Walras immortalized the equilibrium theory in his magnum opus, Elements of Pure Economics (1874). This work became foundational to the ideas and mathematical direction that have dominated traditional economic theory for more than a century. Unfortunately, the math and many of the assumptions used to formulate the equilibrium theory were fundamentally flawed.

  The equations derived entirely from the First Law of Thermodynamics (Conservation). This law states that energy can be converted from one form to another, but it is neither created nor destroyed. This first law is, however, only one part of the thermodynamic story.

  Entirely missing from Walras’s formulation was the Second Law of Thermodynamics, which states that entropy—a measure of disorder in a system—is always increasing. Over time, all structures and patterns break down and decay. “Cars rust, buildings cru
mble, mountains erode, apples rot and cream poured into coffee dissipates until it is evenly mixed.”137

  Entropy is inevitable in systems that are self-contained, at rest, and in equilibrium, that is, closed. But we now know that the economy is anything but in equilibrium, at rest, or closed. It evolves, adjusts, expands, contracts, and is inextricably linked to a changing environment, absorbing massive amounts of energy from outside the system (such as solar, mineral, human, and animal inputs) and emitting equally massive byproducts into the universe (such as gases, waste, and pollution). The economy actually has little in common with mechanical models found in Newtonian physics. The economy instead exhibits many traits and emergent properties common to complex, adaptive, open systems found in nature and the biological sciences.

  Additionally, to ensure that his mathematical theories worked, Walras made use of impractical idealized assumptions. These included perfectly functioning free markets, perfectly efficient corporations, brilliant players who knew everything taking place in the markets, and more. In reality, however, corporations, shareholders, and many others who constitute the marketplace and economy are, at best, interacting in a complex, imperfect, ever changing, dynamic world.

  In his book, The Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics (2006), Eric Beinhocker details many of the inherent misconceptions in the equilibrium theory and in Traditional Economics—the economics found “in university textbooks, discussed in the news media and referred to in the halls of business and government.”138

  Among the many important consequences of the misclassification of economics and the exclusive use of the First Law of Thermodyamics was the assumption that new wealth, like energy, is neither created nor destroyed. Rather, “the world begins with a finite set of commodities that are allocated among users.”139 Citing Philip Mirowsku of Notre Dame, Beinhocker writes that, “In general equilibrium models, the economy can’t create new wealth any more than a lump of coal can reproduce.”140

  With respect to Walras’s implausible assumptions, Beinhocker cites Axel Leijonhufvud, an economist at the University of California, Los Angeles, who comments that, “[Traditional Economics] models incredibly smart people in unbelievably simple situations while the real world is in fact more accurately described as ‘believably simple people [coping] with incredibly complex situations.’”141

  Walras, like his contemporaries, was driven by noble intentions—to imbue economics with mathematical certitude and to provide society with a field of science to ensure order, stability, and predictability in the marketplace. But these lofty ends were never realized. The misclassifications and reductions inherent in the general equilibrium theory instead, “acted as a straightjacket, forcing economists to make highly unrealistic assumptions and limiting the field’s empirical success,” leading Beinhocker to conclude that, “Walras’ willingness to make tradeoffs in realism for the sake of mathematical predictability would set a pattern followed by economists over the next century.”142

  The same pattern of reductions found in the general equilibrium theory and in traditional conomics would also come to inform our systems of national accounts.

  THE GNP, GDP, AND THE FLOW OF MONEY

  The crash of 1929 and the depression that followed forced economists and nations to question their assumptions about how the economy actually worked. In 1932, the U.S. government hired a young economist and statistician to develop a set of measures on which to base a new national accounting scheme. Simon Kuznets created the Gross National Product (GNP).

  The GNP computed the value of goods and services produced by businesses and citizens, both at home and abroad. Though more comprehensive and sophisticated than any previous accounting system, its underlying assumptions reflected the same type of reductionist thinking as that found in the general equilibrium theory.

  The GNP assumes that all economic activity can be measured simply and accurately by price and value, and thus by the flow of money. Accordingly, the lone criterion used by the GNP to indicate the economic wellbeing of nations is the use of money. In 1991, the GNP was replaced by the Gross Domestic Product (GDP), which modified slightly who is included in the metrics, but not what it measures—monetized transactions.143

  According to the rationale of the GDP, each and every monetary transaction is considered a gain, while any exchange of a good or service that does not involve the direct use of money is disregarded. Barter exchanges, for example, are not tracked. Nor are domestic care and volunteer work taken into account. Yet, the same work performed by someone paid in dollars (or any other national currency) is measurable and, therefore, does count. It has been estimated, for instance, that if parents were paid for all the services rendered in raising a child, they would bring in $134,000 a year.144 This figure compares with average annual earnings of $52,000 by a registered nurse and $34,000 by a firefighter.145 The dramatic difference in wages is not due to higher pay per hour for parents, but to the extra hours of work they put in.

  The consequences of not taking into account nonmonetary activities are unfortunate and significant. Many such exchanges are critically vital to the social fabric of society and comprise a significant portion of overall economic activity in communities and nations. Yet, they remain invisible to conventional economics because no money changes hands.

  The decline of a nonmarket economy, such as the social breakdown of a family or community, is a negative prospect for society. Yet, from a strictly monetized economic perspective, it is not measured and therefore has no value. If, however, the breakdown gets to the point where paid intervention is needed, the costs of social decay are then registered as profit.

  As economists Clifford Cobb, Ted Halstead, and Jonathan Rowe have pointed out, “The GDP not only masks the breakdown of the social structure and the natural habitat upon which the economy—and life itself—ultimately depend; worse, it actually portrays such breakdown as economic gain.”146

  Costs associated with psychological counseling, social work, and addiction treatment, which arise from the neglect of the nonmarket realm, are tallied as economic gains. Crime adds billions to the GDP due to the need for prison buildings, increased police protection, and repair of property damage. Similarly, the depletion of our natural resources, the clean up and medical treatments associated with industry’s toxic byproducts, the costs of ecological disasters such as the Exxon Valdez and recent British Petroleum oil spills, the terrorist attacks of 9/11, relief efforts following Hurricane Katrina, the devastation caused by wars, and the hundreds of billions of dollars allocated in emergency stimulus packages—all register as improvements to a nation’s economy by the curious standards of the GDP.

  Economists and politicians alike have long been aware of the shortcomings in our economic accounting systems. Criticism can be traced back to the 1930s, and to the GNP’s principal architect, Simon Kuznets, who cautioned that: “The welfare of a nation can scarcely be inferred from a measure of national income. If the GNP is up, why is America down? Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run.”147

  Seven decades later, critical analysis continues. Former World Bank economist Herman Daly put it this way: “The current national accounting system treats the Earth as a business in liquidation.”148 Many others have echoed similar sentiments (see insert).

  Robert F. Kennedy and the GNP

  The following critique of the GNP was given by Robert F. Kennedy at a rally for Friends of the Earth in New York in 1963. It was reechoed in large part by the Senator in one of his last speeches in March 1968.

  “The Gross National Product includes air pollution and advertising for cigarettes, and ambulances to clear our highways of carnage. It counts special locks for our doors, and jails for the people who break them. GNP includes the destruction of the redwoods and the death of Lake Superior. It grows with the production of napalm and nuclear warheads…and if GNP includes all this, th
ere is much it does not comprehend.

  “It does not allow for the health of our families, the quality of their education, or the joy of their play. It is indifferent to the decency of our factories and the safety of our streets alike. It does not include the beauty of our poetry or the strength of our marriages, or the intelligence of our public debate or the integrity of our public officials…GNP measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile.”149