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Issue XIX - Autumn 2012
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VOX | The Student Journal of Politics, Economics and Philosophy
Editorial Money places the individual in a choosing quandary: as more and more commodities have a monetary denomination, and as everything tends to get commodified, life is reduced to an oscillation between spending and saving money, and implicitly, objects, necessities, emotions. This ‘choosing man’ is a recurrent theme in the present issue of VOX and the featured articles explore the limits of this choice in interesting and unconventional ways. Our Market of Ideas debate revolves around a topical aspect of development policy, namely the questionable status of the pledge of developed countries to commit 0.7% of their GNP to aid; our contributors disagree on definitional terms and thereby develop arguments from different, yet relevant, perspectives. In a similar vein, Dreyer and Dimitriadis present the benefits of microfinance and its implementation in Bangladesh, as they beautifully link the reality of money with the possibility of human realization. Next, Prof. Monacelli of Bocconi University addresses the well-known controversy of the effectiveness of low interest rates in reviving sluggish crisis-struck economies. In his essay, Field departs from the practical application of the concept and delves into its sociologic implications by underlining the subjective dimension of money and its mirror-like quality. Finishing off in similar undertones, Dr. Read ingeniously constructs an argument that predicts the future demise of money altogether. Lastly, we thank Professor Kevin Dowd for answering our questions on the role of money in a political economy and for presenting his unique perspective on a possible return to the Gold Standard. Varied and multi-facetted, the broad topic of ‘money’, as this issue addresses it, stays under the sign of the human factor far more than under economic calculations. It must therefore also be a sign of hope which underpins an uncompromising faith in what man can achieve when unconstrained by money.
Editorial Team Editors: Kathrin Eichinger Madalina Secareanu Layout Editors: Widya Kumarasinghe Tørris Rasmussen 2
Kathrin Eichinger & Madalina Secareanu Editors Sub-Editors: Dominic Falcao Alex Fullerton Rohit Maini James Paton Amna Riaz Judith Weiß
Reviewers: Irina Florea Matthew Kilcoyne Peter Smith External Liaisons: Andrea de Mauro
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The Student Journal of Politics, Economics and Philosophy
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ISSUE XIX - Autumn 2012
Money Market OF IDeas What’s in a Number? Alberto Pecoraro & Madalina Secareanu
ESSAYS
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From Making Baskets to Making a Living Dmitris Dimitriadis & Phillip Dreyer
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Are Interest Rates Too High or Too Low? Dr. Tommaso Monacelli
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The Worthlessness of Money Tom Field
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What is Money? Dr. Rupert Read
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Interview
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Prof. Kevin Dowd James Paton
VOX is a student academic journal that aims to provide a platform for the exchange of ideas and insight into the debates relating to Politics, Economics and Philosophy (PEP).
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Photo byVOX Lucas| TIncas he Student Journal of Politics, Economics and Philosophy
“Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver.’’
- Ayn Rand
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What’s in a Number? A debate between Alberto Pecoraro and Madalina Secareanu The first official mention of a 0.7% quota of the overall GNP to be devoted to international aid was made by the World Bank-sponsored Pearson Commission in 1969. Since then, the 0.7% target has been reinforced on a regular basis as a benchmark for donor countries. Despite this apparent consensus, to this day, only five countries have achieved this level, with
most other states far from committing this amount. Four decades after its introduction, the 0.7% proposal still divides the international community and is fervently debated in National Parliaments, G20 Summits, and UN assemblies. Our contributors will independently take up arguments for and against this controversial aid policy.
The debators in this issue are presented below:
Alberto Pecoraro is a thirdyear Politics with International Relations student at the University of York.
Alberto Pecoraro Before arguing on the 0.7% of the GNP quota, one should look at the number of victims that poverty makes every day and the paucity of the resources used to fight it. Today, one fifth of the world’s population
Madalina Secareanu is a third-year Politics and Economics student at the University of York.
lives with less than one dollar a day and almost half of it makes ends meet with less than two dollars a day (Riddel, 2007). This population is very vulnerable: UN agencies such as the Food and Agriculture Organisation estimate that up to 34.000 children 5
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Market of Ideas and 16.000 adults die every day from hunger or diseases which have their origins in poverty (ibid). Those deaths
Today, one fifth of the world’s population lives with less than one dollar a day are easily preventable and occur only because poor countries are unable to devote enough resources to meet the basic needs of their inhabitants. In such circumstances, many argue that external resources are urgently needed to attenuate this scarcity of resources (Riddel, 1995). Unluckily, to this day, donors haven’t provided enough resources to meet those needs: a UN team working in view of the 2002 World Summit on the Financing of Development estimated that in order to reduce by half the number of those living in poverty it would be necessary to double the amount of official aid (Zedillo, 2001). Similar findings were put forward by the UN Millennium Project in 2005 (Riddel, 2007). The resources employed by donors to fight poverty in the Third World are insufficient, but the questions is: do governments have a moral obligation to increase aid to 0.7% of their GNP? I will argue that there is such a moral obligation and that it is based on the rights to which the inhabitants of the poorest countries are entitled. 6
Extreme poverty is a gross violation of those rights that people have by virtue of their humanity: for example the rule of law, or even free elections, won’t have the same value in a context of general misery. All human rights are viewed as indivisible and interdependent, so that equal attention must be given to their fulfillment everywhere. This is not merely a personal opinion: it is articulated in international covenants such as the Vienna Declaration and Program of Action of 1993 (Vienna Declaration and Program of Action, 12/07/1993). Human rights are rights to which we are entitled because of our humanity, a
Human rights are rights to which we are entitled because of our humanity, a quality which the world’s poorest don’t lack. quality which the world’s poorest don’t lack. Furthermore, rights have a peremptory quality in the sense that they demand immediate satisfaction in case of breaches (Riddel, 2007). This would not matter if the only carriers of duties toward people were the states to which they belong, but this is not the case: the ultimate guarantor of the respect of human rights is the international community. For instance, any state can summon another one to halt violations
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Market of Ideas of human rights, even if its nationals are not involved (Cassese, 2005). To summarize all what has been written above, human rights are a moral and human category characteristic to every individual and which carries obligations that are addressed to the whole international community in the virtue of its universality. Obligations of redistributive justice apply only between members of the same moral community. In order to exist, this moral community has to be underpinned by a set of peremptory rules justifying the application of cosmopolitan principles of distributive justice (Opeskin, 1996). This moral community is the international com-
munity and the peremptory rules are the human rights described above. That the current body of human rights encompasses aid becomes clear once one reads the International Covenant on Economic, Social and Cultural Rights: “The States Parties to the present Covenant recognize the right of everyone to an adequate standard of living for himself and his family, including adequate food, clothing and housing, and to the continuous improvement of living conditions. The States Parties will take appropriate steps to ensure the realization of this right, recognizing to this effect the essential importance of international co-operation based on free consent.� (ICESC, 16/12/1966, Photo by Oxfam East Africa
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Market of Ideas Art 11(1) This means that the peoples living in the poorest countries are entitled to more aid from the international community if the resources provided were to be insufficient, as it is the case. The discrepancy between the resources provided and the situation on the ground must end, and independent, uncoordinated donors must abide by international standards if this is to be achieved. This is exactly what the 0.7% quota purports to do and it should be welcomed as the availability of a greater and more constant flow of resources will get the world’s poorest closer to the enjoyment of their rights. Bibliography
Cassese, A. 2005. International Law. Oxford University Press. International Covenant on Economic, Social and Cultural Rights, 16/12/1966, United Nations, Treaty Series, vol. 993, p. 3 available at http://www2.ohchr.org/english/law/cescr. htm Opeskin, B.R. 1996. The Moral Foundations of Foreign Aid. World Development Volume 24, Issue 1, January 1996, Pages 21–44 Riddel, R.C. 2007. Does Foreign Aid Really Work ? Oxford University Press Riddel, R.C. 1995. Moral Case for PostCold War Development Aid, The The New Development Debate. International Journal 51 Int’l J. (1995-1996) Vienna Declaration and Program of Action, 12/07/1993, A/CONF.157/23 , available at : http://www.unhchr.ch/huridocda/huridoca.nsf/(symbol)/a.conf.157.23.en Zedillo, E. 2001. Financing for Development, Report on the High-Level Panel (New York: United Nations)
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Madalina Secareanu Increasing the Official Development Assistance (ODA) target as a fraction of a country’s GNI through what has come to be known as the ‘0.7% solution’ contains a classic example of ‘more is less’. A 45-year old pledge that has superseded its essentially political function of increasing donors’ contributions has evolved into a policy standard meant to eradicate poverty. There is no wonder that this political mantra has never fulfilled its overwhelming mission: the number is more of a gratification of rich-country effort than an expression of poorcountry progress. With this view in
There is no wonder that this political mantra has never fulfilled its overwhelming mission: the number is more of a gratification of rich-country effort than an expression of poor-country progress. mind, what is argued here is that the 0.7% target corresponds to an unacceptable, incorrect, and harmful approach to aid and development for two reasons. Firstly, it relies on what has been proven to be a flawed economic model, with little contemporary relevance. Secondly, and perhaps most
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Market of Ideas importantly, it advances an anachronistic definition of aid that under no conditions can serve as a tenable policy instrument nowadays. As noticed, the considerations above apparently overlook the moral arguments behind increasing aid; in response to that, unless the 0.7% represents a quantification of guilt, then morality succumbs to utility and efficiency: there is nothing moral behind persisting in error. On the contrary, it is diabolical, as Canguilhem once said. The 0.7% aid goal is underpinned by an early economic growth model designed by Harrod and Domar which starts from the concept of the ‘financing gap’- the difference between the necessary level of investment to reach a desirable growth rate and the country’s own resources (Domar, 1946). The gap is filled by donors through aid-financed investment. It thus appears obvious that a working assumption of the model is that there exists a ‘desirable’ rate of growth, most likely along the lines of what Rostow called the ‘takeoff into self-sustained growth’ (Rostow, 1956). Using this methodology, a 5% growth rate in the developing countries in the 1960s required approximately $10-17 billion in capital flows by 1970 (Chenery, Strout, 1966), which equated to 1% of rich-country income at the time . However, economists such as Bill Easterly show that the relationship between investment
and growth is less straightforward in practice than the Harrod-Domar model had assumed. Even more worrying, there are myriad examples of aid that never turned into investment in
By maintaining the obsolete 0.7% standard, we are ignoring any progress made by less-developed countries since 1960. the first place: as the conditionalities that were built into the loans focused on deficit reduction and stabilization, not investing in maintenance and infrastructure was just a way to discount the future, thereby signaling that a ‘country that eats away the future through public debt will also eat away the future in other ways’ (Easterly, 2008). On a somewhat different level of analysis, a group of economists from The Centre for Global Development showed by plugging current figures in the original model that the ‘financing gap’ narrowed and that keeping the 0.7% target would mean to expect the growth rate in developing countries to surpass an unrealistic level of 11%. In other words, “if today we were to use the same techniques used to arrive at the 1% capital goal and consequent 0.7% aid goal, we would find that the goal was met years ago” (Clemens, Moss, 2005). Consequently, by main9
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Market of Ideas taining the obsolete 0.7% standard, we are ignoring any progress made by less-developed countries since 1960 and assume they have the same capital
Is there any harm in promoting nonsensical ideals? When the lives of 1.29 billion people living in extreme poverty depend on it, it should be.
needs that need to be ‘filled’, whereas in reality their domestic savings rose to 20.3% by 2003 (World Development Indicators 2005). Apart from the fact that the discussed policy is ridden with economic inconsistencies and uses methods and figures valid four decades ago, it also imposes a perspective not suitable for this millennium of development. It has been argued several times that defining recipient country’ goals and growth through an unrelated indicator in a different set of countries will not yield relevant results. Subjecting the level of aid to a fraction of a donor’s GDP does not reveal anything about the aid requirements of the recipient economy; equivalently, fluctuations in the French economy, for instance, would inherently alter the financing needs of poor countries, in spite of the fact that those needs have been formulated in absolute terms. Placing this contradiction in a grater context, it becomes evident that recent efforts 10
to transfer ownership of reforms and structural programmes from donors to recipients and give any meaning to the concept of partnership are jeopardized by this limited, colonial-age reminiscent formulation. The writer of this article is not against aid; she is against the arbitrary 0.7% and the lack of tangible results this policy has triggered. Instead, the arguments presented above hint towards a more result-motivated approach, to tailor-suited programmes, and to better, not necessarily more, aid. But is there any harm in promoting nonsensical ideals? When the lives of 1.29 billion people living in extreme poverty depend on it, it should be. Bibliography
Chenery, H., Strout, A.M. (1966). Foreign assistance and economic development. American Economic Review 56 (4): 679-733 Clemes, M., Moss, T. (2008). Ghost of the 0.7%: Origins and Relevance of the International Aid Target. Centre for Global development. Working Paper 68 [Online]. Available at: http://www. cgdev.org/files/3822_file_WP68.pdf Domar, D. (1946), “Capital expansion, rate of growth, and employment”, Econometrica 14 (2): 137-147 Easterly, B. (2008). Reinventing Foreign Aid. Cambridge, Mass. ; London : MIT Press Rostow, W.W. (1956). The take-off into self-sustained growth. Economic Journal 66 (261): 25-48 World Development Indicators 2005. World Bank Data [Online]. Available at: http://data.worldbank.org/products/databooks/WDI-2005
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Photo by ctsnow
From Making Baskets to Making a Living By Dmitiris Dimitriadis & Phillip Dreyer For Sufia Khatun, a widow with two daughters, providing minimum standards of nutrition presents a daily challenge (Hussain et al., 2001). In Jobra, a village in Bangladesh, making baskets only yields a chilling $0.02 a day. The worth of Sufia’s industry and creativity is systematically stifled by loan shark middlemen, who monopolise supply materials at the expense of desperate women. Muhammad Yunus, a then economics professor, meets Sufia on one of his visits to Jobra. He becomes deeply invested with her plight and notices the vast disparity between conventional economic theories and the realities outside the Western paradigm. Intricate financial models suddenly look empty and detached in the face of a country plagued by severe poverty,
famine and natural disasters. Disillusioned and failed by abstract theories, Yunus goes against the odds and offers $27 out of his own pocket to Sufia and forty other villagers to the end of liberating them from the coercive market forces. Remarkably, the entire
Intricate financial models suddenly look empty and detached in the face of a country plagued by severe poverty, famine and natural disasters. amount is returned to Yunus. Hence, microfinance was conceived, resting on the idea that poor people should 11
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not, by default, be excluded from access to credit. On the contrary, what should matter is good faith and honesty in dealing. It is precisely the fact that microfinance is informed by local dynamics that has conferred success to the programme in tackling the roots of poverty. Microfinance is not only efficient, but it importantly also offers a rethinking of development studies by
ownership of land, livestock or other assets. Second, the loans are traditionally small to mitigate the risk involved and to kickstart small ventures like businesses and other productive activities. Third, there is an absence of collateral to serve against the risk of default. This presents a worry as microfinance banks do not a have a guarantee of repayment. To avoid problems
Photo by Philipp Dreyer. School in Shariatpur where most villagers are Grameen Borrowers focusing on the people and harnessing their capabilities. Fundamentally, money is seen as an instrument used to the end of empowering people to realise their aims and aspirations. This challenges the orthodox perception behind foreign aid which views money as a sole means of alleviating short-term suffering and hardship. Microfinance consists of four important elements. Firstly, loans are reserved for the poorest people of a mostly rural background, but with no 12
of adverse selection and moral hazard, the Grameen Bank, which was founded by Yunus, introduced the concept of group lending whereby cooperatives are set up; borrowers enter collectively into a contract and debt is therefore shared by all (Rankin, 2011, p2). Fourthly, microfinance encourages long-standing and intimate relations between borrowers and creditors. This works by way of continuously overseeing various business aspects as well as consultancy in investment decisions.
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The success and expansion of microfi- viewing credit through a Western lens, nance over the last thirty years is owed that is, as a service reserved only for to the fruitful interaction between mostly middle-class, well-off people. those four elements and local environ- This system of credit has erected a ments. permanent barrier for people excluded Anti-poverty theories and poli- from it who find themselves dependcies are often designed with biased ent on sporadic donations and unacyardsticks and interests. Foreign aid, countable middle-men. for instance, is unproductive on at It is no wonder then that, against least four counts. Firstly, the recipient this background, the microfinance government might be corrupt or klep- revolution had to come from within tocratic, meaning by engaging the funds will tend to grassroots of Fundamentally, money is c o m m u n i t i e s be misappropriated, misallocated and, seen as an instrument used to and villages. For in fact, strengthen the end of empowering people instance, what those regimes guards against to realise their aims and the absence of (Murdoch, 1999, p1570). Secondly, aspirations. collateral is the aid hinges on the way co-operaconception of people in the recipient tives become embedded in commucountry as objects of humanitarian nities. In relation to the social capital salvage. One problem with this is that theory of Putnam (2000), those proit fails to capture the capabilities and grammes are underpinned by incenpotential in people that is to be reaped, tives in the social space of communities and consequently deters them from but also within the groups (Ito, 2003, seeking to take their livelihoods in the p323). Negligence and carelessness reown hands. Someone who is treated sult in social penalties, i.e. the public like a victim will, in all likelihood, in- stigma of the ‘free-rider’ or the ‘slacker’ ternalise this and continue to live like and perhaps even being blamed for one. Thirdly, the recipient country is the failure of the entire co-op. In the thereby shackled to the whims of don- microcosm of these villages, broad ours who might cut aid short during expectations add immense pressure to recession or use aid to advance political individuals to conform, but also the agendas, like the US did over the Cold cooperative nature of the programme War (Cameron, 2005, p52). Fourthly, will force individuals to be prudent. this donour-recipient paradigm has Therefore, as presumably no one wants narrowed the intellectual focus of de- to become ostracised, from neither the velopment studies by systematically group nor society, co-ops will tend to 13
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work. In fact, the Grameen Bank has it affords women the chance to cona remarkable repayment rate record of duct their business in a non-coercive, 98 percent, despite the lack of collat- male-free environment. Though eneral or market knowledge (Armendatiz tirely culture-dependent, such working & Morduch, 2007). conditions are a progressive developAside from adapting to existing ment in predominantly Muslim counsocial structures, microfinance also tries like Bangladesh, that are regarded transforms gender dynamics in devel- as culturally conservative and maleoping countries. The loans and services dominated (Morduch, 1999, p1571). commonly tend to have a pro-female For example, the enduring success bias and, in fact, the banks can be run of the Grameen Bank, that won the by an all-female committee. This is im- Nobel Peace Prize in 2006, is due to portant because it improves the social the fact that its management is largely status of women in a number of ways. in the hands of women (Bornstein, Firstly, it provides a means for women 2012). Female entrepreneurs worldto pursue their professional aims and wide draw inspiration from them and aspirations. This is often prevented by consequently feel empowered. By and the psychological effects of a patriarchy large, there is the ingrained perception which essentialises women as submis- that banking is a male-dominated area sive and trusted only with raising chil- while credit and finance echo greedy dren whereas men alone win the bread. Wall Street bankers with fat bonuses Another way it empowers them is by and a flagrant disregard of the social utilising virtues that tend to be present consequences of their labour. Addimore in women such as care, patience, tionally, financial structures are assoand creativity. On the other hand, the ciated with the West and are bound field of development studies realised to suffer from a colonialist hangover. that men generally made less effective The irrational yet important thought use of microcredit, because their focus here is that credit brings back coloniwas rarely on their children’s health or alist memories, when the white man education (Bornstein, 2012). Further, exploited local communities by such Photo by Philipp Dreyer. Group meeting with women.
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things as cash crops and divide-andrule policies by, e.g. targeted rape of tribal women (Hayter, 1971, p5). This means that women have reasons to be averse to reaching out for credit as they see it as something hostile. Against this background, microfinance seems to break down perceptions of male dominance and alleviate credit’s ‘bad press’. At the point at which women, who themselves were once poor and climbed up the ranks with perseverance and resilience, run those projects, trust can be promoted (Bornstein, 2012). You are more likely to trust someone when you’ve seen and experienced her plight and hardship through her very lens. This is part of the reason that the Grameen Bank has pioneered such successful policies as pension funds, higher education loans and life insurance. All those have emerged as a result of the wisdom that experience imparts, namely that the women on the Grameen Bank’s board can relate to the struggles of fellow villagers. Also, it has a role model effect as these women become something to aspire to and the image of credit becomes humanised. Therefore, microfinance has a positive influence on women’s role in society in developing countries. Sufia, along with another 665 million people owe their newfound livelihood in large parts to microfinance. Contrary to orthodox development thinking, microfinance understands the person, the mother, the farmer, the basket-maker and treats her like
an end in herself, an agent capable of determining her own future. Poverty subsides when people take authoritative control over their own lives and microfinance is a step in this direction. Bibliography
Armendariz, B. & J. Morduch. (2009). The Economics of Microfinance. In ‘Journal of Asia-Pacific Business’, 10:1, 97-106. Bornstein, D. (2012). An Attack on Grameen Bank, and the Cause of Women. In ‘The New York Times’. Available at http://opinionator.blogs.nytimes.com/2012/08/22/an-attackon-grameen-bank-and-the-cause-of-women/ [Accessed 30 October 2012] Cameron, F. (2005). US Foreign Policy After the Cold War. New York: Routledge. Hayter, T. (1971). Aid as imperialism. London: Penguin. Hussain, M., Maskooki, K., Gunasekaran, A. (2001). Implications of Grameen banking system in Europe: prospects and prosperity. In ‘European Business Review’, 13:1, 26-42. Putnam, R. D. (2000). Bowling Alone. New York: Simon & Schuster. Ito, S. (2003). Microfinance and social capital: Does social capital help create good practice?. In ‘Development in Practice’, 13:4, 322-332. Morduch, J. (1999). The Microfinance Promise. In ‘Journal of Economic Literature’, 37:4, 1569-1614. Rankin, K. N. (2002). Social Capital, Microfinance and the Politics of Development. In ‘Feminist Economics’, 8:1, 1-24.
Dmitiris Dimitriadis is an undergraduate student reading Philosophy, Politics and Economics at the University of York Philip Dreyer is an undergraduate student reading Philosophy, Politics and Economics at the University of York 15
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Are Interest Rates Too High or Too Low? By Dr. Tommaso Monacelli A timely economic policy question is: are interest rates too high or too low? Rarely a matter of such technical content has ignited a more forceful debate, reaching beyond the normal boundaries of the academic circles. Proponents of the “too low” view usually also contend that too low interest rates in the early 2000s were the main cause of the financial crisis that hit the US in 2007 and propagated globally afterwards. According to this view, interest rates were kept “too low for too long” by the US Federal Reserve between 2000 and 2004, inducing many financial institutions to mas-
One possible definition of the that it consisted in disruption of the safe assets.
unifying crisis is a massive supply of
sively increase leverage. When a confidence crisis hit the interbank market in 2007- best defined as a run on the repo markets (Gorton, 2011) - the same institutions were forced to sell their assets (the securities they had been able to purchase via the inflated leverage), inducing a vicious Photo by Dick Thomas Johnson 16
spiral of massive sell-offs, followed by a fall in asset values, further sell-offs and so on. This deep deleverage process in the financial sector has then propagated to the rest of the economic system (both in the US and throughout the world) in the form of a widespread credit crunch. In many developed countries (US, Euro Area, UK) official interest rates have reached exceptionally low levels, certainly unprecedented in history. Many therefore fear the resurgence of a new leverage cycle (Geanakoplos 2009) in the financial sector, and that current interest rates become once again “too low”. In economic theory, the concept of an interest rate - or of any price for that matter- being “too low” is difficult to rationalize. The natural objection that arises is: too low interest rates relative to what benchmark? Answering such a question requires the aid of a conceptual model, able to assess which level the interest rate should be at given the current economic fundamentals. What do economic fundamentals suggest in the current state of the global economy? A defining feature of global financial markets during the last fifteen to
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twenty years has been a persistent excess demand for safe assets (Caballero et al. 2008). This phenomenon started to emerge in the early nineties in the aftermath of the asian financial crisis. At that time many developing countries experienced (as a consequence of contagion) disastrous financial crisis and decided to become more “prudent�, i.e., to transform theirselves from chronic borrowers to savers. But,
count. Hence a growing excess demand of safe forms of saving developed in the years towards the global financial crisis of 2007-08. In the rapidly evolving financial markets of the nineties the appetite for safe assets simply reflected the search for adequate forms of collateral to fuel the upward leverage cycle described above. Put differently, during the boom
Photo by Images of Money due to the inefficiency of their financial system (rooted in the crony features of their capitalism), it proved increasingly difficult for the same countries to translate their accumulated savings into higher investment (Rajan 2010). This is the main cause of the emergence of the widely discussed global imbalances: a massive flow of capital from asian and oil producing countries (starting in the early nineties) towards the US financial system that financed a widening deficit in the US current ac-
years of the leverage cycle (2000-2007) the excess demand for safe assets was the result of demand outstripping supply. The excess demand for safe assets exerted an upward pressure on the price of many of these assets, keeping long-term interest rates extremely low during that period. Noticeably, this happened despite the Fed increased (short-term) interest rates consistently between 2004 and 2006. The global excess demand for safe assets was the driving force of long term yields: the 17
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Fed had somewhat lost control of the long-term portion of the world yield curve. Then came the global financial crisis, the worst in eighty years. One possible unifying definition of the crisis is that it consisted in a massive disruption of the supply of safe assets. First it was the supply of agency debt, such as asset-backed securities, mortgage-backed securities, collateralized debt obligations and the like. Then, and more recently, it has been the euro are sovereign debt crisis, that has transformed the sovereign bonds issued by Italy, Spain, Portugal, Ireland and Greece from genuinely safe assets to risky ones. Hence the global financial crisis, far from solving it, has intensified the same phenomenon that had emerged in the early 2000s: an excess demand for safe assets. While that excess demand was the result of too much demand in the run-up to the crisis, it is the result of too little supply relative to demand now. Regardless of the interpretation, the outcome is the same: a global downward pressure on real interest rates. Thus a second possible defining feature of the financial crisis is that the disruption of supply of safe assets during financial crisis has made the required (“equilibrium�) real interest rate so low that it actually has reached negative territory. A low and negative real interest rate is precisely what is required, in light of 18
the enormous pressure on the ultimate borrowers in the economy (households in primis, but also firms) to reduce their leverage, to convince savers to reduce their lending.
The fact that they are too high, rather than the reverse, is probably the biggest threat to the resilience of growth in the global economy. The fact that the equilibrium real interest rate is largely negative puts enormous strain on monetary policy in many developed countries. Central banks can help the economy achieve a low real interest rate by lowering the short-term nominal interest rate. But the nominal interest rate cannot fall below zero. In many developed economies, starting with the US, that lower bound has already been reached, in a similar fashion to what happened in Japan in the ‘90s. The zero lower bound on the nominal interest rate is effectively a binding constraint. If possible, central banks would like to reduce the nominal interest rate below zero, to accommodate the required negative equilibrium real interest rate that fundamental forces in financial markets require. But this is not feasible. Keynes among the first ones defined this situation as one of a liquidity trap. What happens in a liquidity trap?
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Usually a central bank injects money in the system by purchasing government bonds. The main difference between money and bonds is that the latter pay a rate of interest. But when the nominal interest rate reaches the lower bound of zero (as currently in the US) the difference between money and bonds vanishes. At a zero interest rate, buying bonds for 100 Euros is equivalent to purchasing 100 coins of 1 euro with a banknote of 100 Euros. A neutral transaction. If the interest rate cannot do its job to restore the equality between the demand and supply of savings, what can? The answer is: a global fall in output, i.e., a global recession. This is in fact what the world witnessed since 2007. In light of this interpretation we can now resume our initial question: are current interest rates too high or too low? Which is equivalent to asking: is monetary policy excessively loose or tight in the developed economies? The advantage is that now we have a
conceptual benchmark: the equilibrium real interest rate, which is largely negative. Hence despite the fact that interest rates appear exceptionally, and to some even dangerously, low, the opposite is true: they are in fact still too high. The fact that they are too high, rather than the reverse, is probably the biggest threat to the resilience of growth in the global economy. Bibliography
Caballero R.J., E. Farhi, and P.O. Gourinchas (2008), “An Equilibrium Model of Global Imbalances and Low Interest Rates”, American Economic Review 2008, 98:1, pgs 358-393. Geanakoplos J. (2009), “The Leverage Cycle”, NBER Macroeconomics Annual, Volume 24, Daron Acemoglu, Kenneth Rogoff and Michael Woodford, editors Gorton, Gary B. (2012). “Slapped by the Invisible Hand: The Panic of 2007”, Oxford University Press. Rajan R. (2010), “Fault Lines: How Hidden Fractures Still Threaten the World Economy”, Princeton University Press.
Dr Tommaso Monacelli is Professor of Economics at Università Bocconi Image by Vectorportal
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The Worthlessness of Money By Tom Field Our society is obsessed with money in a way that is actively harmful. Western culture in particular no longer sees currency as simply an objective, universal value of exchange butas an entity worthwhile and desirable in itself. A number of psychological studies have investigated the effects of emotional attachment to money and I shall argue that we have changed the way we value it. After establishing this I will contend that the increased wealth this causes us to pursue is failing to bring us happiness but still remains the less troublesome concern. Of far greater worry is the continued effect of this attitude on merit goods like education and health that may not be able to produce the levels of monetary profit so desired by society. My conclusion shall consider how this obsession with money could actually cause serious harm to our society, whose preoccupation with profit risks losing out on much of benefit and worth. The True Value of Money To evaluate the shift in what we value about money a consideration of value itself must first be undertaken. As Plato suggests in the Republic we value things in three different ways:for what we can use them for (instrumen20
tal value), for their own sake (intrinsic value), and for what we can use them for and any intrinsic value they possess (1992: 33-34). Money would appear to initially belong to the first category of goods as, traditionally, it has three functions: use as a medium of exchange, a store of value, and a unit of account. Its use as a medium of exchange makes it an item of instrumental, not inherent value, as its only use isto make trade possible by eliminating the need for a double coincidence of wants in a barter based economic system by acting as a ‘middle man’ for those wishing to do business. The second and third functions of money also lend it no intrinsic value, but are instead attributes that aid money’s use as a means of exchange. Therefore, it is apparent that given the intended functions of money, its value is purely instrumental and physically, money, even commodity money, is little more than a collection of paper or stylised metal; it holds no more intrinsic worth than what we, as beings capable of making judgements of value, give it. A Confusion of Values It is a change of the above mentioned value from instrumental to intrinsic that causes many of the is-
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sues I will detail later. Studies by psychologists Tyszka and Przybyszewski show how such a shift has come about in their research into the perceived value of the US dollar in Poland.
actual instrumental value is not limited to this one case either. Research by Bruner and Goodman show the disproportionate size attributed to money relative to other items by children,
Photo by SqueakyMarmot Their studies showed not only that the Poles’ ‘emotional attachment to the US dollar caused the prices expressed in US dollars to be perceived as disproportionately high’, but that it was perceived to be a ‘nicer’ currency too (2006: 528). This placement of greater worth on money independent of its
particularly those from poor backgrounds (1947) and is supported by similar research by Dukes and Bevan (Dukes and Bevan cited in Tyszka & Przybyszewski, 2006). This led Tyszka and Przybyszewski to conclude that the more positively an object is valued the ‘higher it wasplaced on a descrip21
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tive dimension of size or weight’ as well as attractiveness (ibid: p. 520). These studies highlight how emotional attachment to money has caused considerable fluctuations in both the perceived real instrumental value and possibly intrinsic value of money, particularly for those from a lower socioeconomic class. This attachment is of great concern because it has resulted in society seeing exchange as being a means of making more money, with value then derived from this making of profit (Marx and Engels cited in Thomas, 2009: pp. 482-3). Economic Growth and Measurements of Happiness Despite this desire for greater wealth, its pursuit is not always beneficial as, ‘twenty years of studies consistently show that once basic needs are met, increases in income produce short-term pleasure, but have almost no lasting impact on happiness’ (Ahuvia. 2008: 495). In short, once a given standard of living is attained continued appropriation of money holds little personal benefit; yet despite this minimal or even nonexistent increases in personal happiness people still pursue greater wealth. This ‘Easterlin Paradox’ helps explain why less economically dominant Nordic nations are able to top happiness ‘league tables’ (Levy. 2010), and why continued economic growth does not necessarily correlate with increasing happiness. It also explains why in spite 22
of this GDP, GNP, and other measures of economic activity continue to be used as a measure of success, though their use is inappropriate. Despite its economic pre-eminence, the US happiness ranking is relatively low, with a UN report stating that ‘[life] satisfaction has remained nearly constant during decades of rising GNP per capita’ (Helliwell, Layard, & Sachs, 2012: 3), the same report concluding that a new measure of quality of life is required. This latter point is particularly important as failure to attain greater happiness despite economic growth is not just characteristic of developed nations. Extensive research by Easterlin suggests that such findings are typical of all nations, developed, developing, and transitional, and are not simply a result of cultural or local phenomena (2010: 22,466). Therefore, a change of this manner would be of particular benefit as the fixation of using macroeconomic monetary factors to determine the success of a nation has seen Photo by Tax Credits
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policies judged on the same grounds. This has resulted in governments failing to appreciate non-monetary gain, thus harming public well-being. Policy Cases that Suffer from this Confusion of Value This wealth fixated critique of nonmonetary gain is apparent in a number of contemporary cases: the 2012 Olympic Games, the ‘worth’ of higher education in the Humanities, and the distribution of expensive drugs by the National Institute for Health and Clinical Excellence (NICE). Though this essay shall in no way even begin to be a comprehensive defence of any of
Modern discourses’ use of wealth aggrandising terms like these posit money as something of worth in itself. these policy areas, it will, I hope at least put into perspective this more popular argument levelled against them. All of these examples have at some point been criticised for being overly expensive, a waste of resources, or unprofitable. Modern discourses’ use of wealth aggrandising terms like these posit money as something of worth in itself, questioning the value of the above examples not just on legitimate grounds of opportunity cost, but monetary worth too. The benefits of sporting
events, improvement of society’s intellectual calibre, and improved longevity of life do not always generate wealth and, by failing to do so, fall foul of this modern obsession, as profit is not their overall aim. This ideal of abandoning schemes that do not necessarily bring about supernormal profits is a serious issue, for, by taking it seriously, society loses out in overall utility thanks to the illusion of benefiting from money itself, which as I argued above has been shown not to increase happiness. Though society as a whole could gain from many activities that do not make a monetary profit and whose advantages are felt more directly, they remain contemptible for this lack of return. Disagreement on Spending Priorities Nevertheless, there is a serious moral debate about where to spend tax revenue. Many contend that it is not possible to find policies agreeable to the majority. This view is mistaken however, and exaggerates differences of what we value as a society whilst also failing to appreciate that many preferences are the result of incomplete information surrounding the issue. Ultimately, many merit goods in education, health, and leisure are fundamental to human life. Reasoned consideration of this fact and our misplaced value in money will see more convergence than critics suppose; after all it was just such considerations that gave rise to universal basic education, 23
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health care, and social welfare. Though the exact specifics may at times be debatable, support for the broad ideals of certain non-profit policies are evident.
Such an emphasis can only be best reminded of the old saying, ‘money does not buy happiness’, for it is the belief held by many that this is otherwise that best highlights the true poverty of wealth. Concluding Thoughts Whether they be artistic, cultural, intellectual or sporting, there are many activities that bring about utility not through the medium of exchange but through cutting out this ‘middleman’, thus bringing benefit to many directly. A contemporary fetish with money as an aim in itself has seen most, if not all, aspects of human life expressed in monetary terms (Marx cited in Thomas. 2009. pp.474-89), leading to a culture of dismissal for those aspects not deemed profitable. In the UK especially, this emphasis on wealth and the widening inequality and materialistic ideals this has brought about has seen violent backlashes with the 2011 riots (Riots Communities and Victims Panel, 2012:4-5). Ultimately, such an emphasis can only be best reminded of the old saying, ‘money does not buy happiness’, for it is the belief held by 24
many that this is otherwise that best highlights the true poverty of wealth. Bibliography
Ahuvia, A. (2008). If money doesn’t make us happy, why do we act as if it does? Journal of Economic Psychology, Volume 29, Issue 4, Pages 491–507 Bruner, Jerome S.; Goodman, Cecile C. (1974). Value and need as organizing factors in perception. The Journal of Abnormal and Social Psychology, Volume 42 Issue 1, Pages 33-44. Easterlin, Richard A et al. (2010) The happiness–income paradox revisited.Proceedings of the National Academy of Sciences, Volume 107, no. 52, Pages 22463-22468 Helliwell, J, Layard, R & Sachs, J. (2012) World Happiness Report. http://issuu.com/ earthinstitute/docs/world-happiness-report?m ode=window&backgroundColor=%23222222 [Accessed 12/09/12] Levy, F. (2010) Table: The World’s Happiest Countries. http://www.forbes. com/2010/07/14/world-happiest-countrieslifestyle-realestate-gallup-table.html [Accessed 13/09/12] Plato. (1992). Republic. USA: Hackett Publishing Company Riots, Communities and Victims Panel. (2012) After the Riots: The Final Report of the Riots, Communities and Victims Panel Thomas, P. (2009). Marx and Engels. In: Boucher. D & Kelly, P. (Eds). Political Thinkers from Socrates to the Present, New York: Oxford University Press. Pages 475-490. Tyszka, T &Przybyszewski, K. (2006). Cognitive and emotional factors affecting currency perception. Journal of Economic Psychology, Volume 27, Issue 4, Pages 518–530.
Tom Field is an undergraduate student reading Philosophy and Politics at the University of York
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A Political Philosopher Asks: What is Money? By Dr. Rupert Read
Photo by Philip Taylor Why do people need to work, to labour? In an economy structured as ours is, the answer is: so that they can have money. Why do they need money? Because without money, one cannot avail oneself of the fruits of others’ labour: of food that others have grown, for instance, let alone machines that others have made. And here we come very quickly to a very important point: having more money than someone else is a matter of being able to extract work from them, in return for funny little pieces of paper or metal (or, nowadays: numbers on a computer). Other humans, whether they live a few miles away or on the other side of the world, are poor mostly because we choose to keep them that way. Having
lots of money is not some kind of right that anyone is entitled to, it seems to me. Because how could any of us be entitled to order other people around to work for us? When one of us is ‘poor’, that is invariably because others of us are ‘rich’. Money in my pocket – or in the pocket of a businessman or a burglar – means that other people can be called upon to labour for one, so that they can gain the right to extract a little labour, in turn, from others. When someone who is rich in monetary terms – David Beckham, or Oprah Winfrey, say – uses his/her fortune, what s/he is actually doing is getting lots of people to do just what s/he wants. One of them to wipe the dishes, others to make those dishes in the first place, one to drive
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his/her cars around, others to make the cars, others to wipe his/her kid’s backside and so on, almost endlessly. What is poverty, in a materialist society? This: being ordered around by others with more ‘special’ pieces of paper than you have. And what is wealth? This: having lots of those bits of paper or having the ‘right’ to get other people to labour for you. The more money you have, the more people you get to order around. How degrading, for both parties. Perhaps this is why Jesus said: it is easier for a camel to pass through the eye of a needle than for a rich man to enter the ‘kingdom’ of heaven. Is this really how we want to live? In the third millennium, do we really want our society to be based primarily on the quest to acquire more money, once we realise clearly what money is: the socially-enforced right to buy other people’s time?
In a society / a world existing with its nose pressed up against the ecological limits to growth, money is also a way in which present people exploit future people. It gets worse. In a society / a world existing with its nose pressed up against the ecological limits to growth, money is not only a tool of inegalitari26
anism among present people; it is also a way in which present people exploit future people. In a money-based economy there is no way of avoiding either eventuality without in the end transitioning to a rations-based economy, or a commons-based economy – what I call an ecommony1.
Take an example: say someone (e.g. the wonderful Aubrey Meyer of the Global Commons Institute http://www.gci.org.uk/) who gets
slightly rich through prizes that get heaped on them as a result of their key role in creating the ‘Contraction and Convergence’ (C&C) model for dealing with dangerous climate change. Such a person will not wish to spend his prize-money on heavy use of carbon-emitting activities which either increase total greenhouse gas emissions and harm the future, or (in the presence of limits on emissions) take up a disproportionate amount of the emissions budget and harm others in the present who have less available to use. And under C&C for carbon, he would not, therefore, in any case be allowed to, except through justly compensating others, up until the point, that is eventually inevitable, that all had converged at such a low level that there was little or no more scope for trading. 1 This term already exists, but is used to refer only to the digital commons. I would suggest that we need an ecommony across the whole economy – in foodproduction, for instance, and landholding.
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So perhaps a C&C scheme can rescue the money economy, preventing it from exploiting others in the present or future, at least with regard to carbon. And he can spend that money on other products. But if the same logic applies to the ingredients of those products too: if one person using more than a certain amount of them is at the cost of other persons or of persons as yet unborn, then how could a conscientious person wish to use their money thus? C&C schemes would then need to be applied to each of these if our economy is to avoid such exploitation. There would be trading as a transitional matter in those ingredients too; but, in the end, if C&C-type schemes are applied widely enough – as I am suggesting they will probably have to be – and if the convergence level is genuinely low enough that it actually does protect future generations sufficiently, then eventually there will be no things left for the rich person to spend their money on. Which is equivalent to saying: money considered as a store of wealth will then no longer be (as it now is) dangerous: it will rather be useless, and abolished. Or, better: it will simply, as Marx would have it, wither away. In a society that takes ecology seriously, we will contract and converge our usings of and takings from the Earth to a level at which we will be equal in respect of everything that matters to those that come after us. But the remarkable conclusion
of taking that suggestion seriously is: complete equality, in a stable (nogrowth) society, and the abolition of capital. This would of course mean the end of the currently-dominant worldideology, ‘neo-liberalism’; for it would mean the end of capitalism (See Read, 2011 for further argument). The question for those who
If one person using more than a certain amount of [ingredients of a C&C scheme] is at the cost of other persons or of persons yet unborn, then how could a conscientious person wish to use their money thus? find this conclusion unpalatable is: Is there any just, survivable alternative? Bibliography
Read, R., 2011. Why the Ecological Crisis Spells the End of Liberalism: Rawls’ “Difference Principle” is Ecologically Unsustainable, Exploitative of Persons, or Empty. Capitalism Nature Socialism, Volume 22, Issue 3, 2011, pp.80-94.
Dr Rupert Read is Lecturer in School of Philsophy at the University of East Anglia 27
VOX | The Student Journal of Politics, Economics and Philosophy
Interview with Professor Kevin Dowd By James Paton
Kevin Dowd is note, or chequable deposit) or store of Emeritus Professor of value. In principle, each of these funcNottingham Univer- tions is separate from the others. So for sity Business School, example, you might have a unit of gold Senior Fellow at as the unit of account, paper notes and the Cobden Centre, deposits as media of exchange (perhaps Fellow of the Pen- along with other media of exchange sions Institute, Cass as well) and any number of stores of Business School, and value (including gold, paper currency, member of the advisory council at the houses, commodities, etc.). Institute of Economic Affairs (to name a few). Professor Dowd has degrees from the Universities of Sheffield (BA, 1980; What role has monetary policy had PhD, 1988) and Western Ontario in the financial crisis? (1981), and is still pursuing a prestigious The causes of the crisis lie partly career as an academic economist. Having in structural issues relating to the dewritten extensively on financial risk and terioration of corporate governance in management, the financial crisis, laissez- financial institutions leading to outfaire monetary systems in books such as of-control risk-taking at other people’s Alchemists of Loss: How Modern Finance expense, but also in loose monetary and Government Intervention Crashed policies (especially in the US) that the Financial System (Wiley, 2010), he stoked one asset-price bubble after annow answers James Paton’s questions in other, each more damaging and more this term’s issue on money. destabilizing than the one before. So to the extent that loose monetary policy was a cause of the crisis, then the appropriate response would have been What can money be? If I understand your question cor- to reverse that policy and raise interest rectly, money is normally defined in rates. terms of its key functions - as a unit of Instead, the monetary policy reaccount (e.g., the pound sterling), me- sponse to the onset of the crisis in late dium of exchange (e.g.., a pound coin, 2007 has been to repeat the earlier mis28
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Interview with Prof. Kevin Dowd takes but on a much bigger scale - pulling interest rates down to virtually zero and massively expanding the monetary base (the base being the money directly created by the central bank) - not to mention institutionalising the bailout of almost all institutions in difficulties. In my opinion, this ‘loose money’ policy response has been fundamentally misguided, and is only putting off the need to correct for underlying structural imbalances in the economy - the need to put insolvent institutions such as RBS into bankruptcy, for example - whilst making them worse down the road. In the process, the central bank has become the biggest gambler of them all, and has greatly destabilised the whole economy. What are the chances of a return to the Gold Standard after the financial crisis? How difficult will it be to achieve this? I believe a return to the gold standard is both highly likely and highly desirable: you need to remember that all historical experiments with inconvertible paper currency have ended either with their collapse or the return to commodity-based money. We also see many signs of a spontaneous reemergence of a gold standard across the world. These include moves to restore the monetary status of the precious metals, allow payments in gold,
gold ATM machines, restored gold coinages, and many similar developments. These reflect the mounting loss of confidence in modern central banks and monetary policies that threaten to destroy our currency and much else besides. How difficult will it be? One answer is that it is already happening, beyond the control of any government or central bank. The more difficult issue is getting any single government or central bank to adopt it. I personally think that this is just a matter of time, however, and my colleagues and I at Cobden Partners are working on this issue and in confidential discussions with senior politicians in a number of countries, some of whom are privately very open to a gold standard. Others of course are not, and the conventional policy establishment is dead against. But it is becoming ever more apparent that they don’t have the solutions and are becoming ever more discredited. A turning point will then come when the free market/gold standard position will start to become widely accepted again. How would you characterize the relationship between politics and the control of the money supply? Is it possible to have a stable politicised monetary system? The root problem with any monetary system is having a mechanism in 29
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Photo by Paolo Camera place to control the over-issue of money. The problem with central banks or any other state controlled system is that those in charge will, at some point or other, succumb to the temptation to use the money printing press for their own usually nefarious purposes. And the historical experience is that this always happens and the currency loses its value. By contrast, the principal virtue of the gold standard is that it imposes a discipline on the issue of money: if a central bank prints too many notes, the excess notes that the public wants come back to the central bank for redemption in gold, and hence are removed from circulation. As for the second question, the historical record is clear: statist systems 30
always break down eventually. But I would go further and say that a stable politicised monetary system is in essence a contradiction in terms, because it is the state involvement that destabilises it. Should we fear deflation in high debt environments as most central bankers, politicians and economists warn us about? I believe the fears of deflation are much overblown. The policy establishment has been warning of deflation for years now even though there has been obvious (and under-reported) inflation. Such fears are dangerous as they are used to justify policies that put off the painful but necessary restructuring
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Interview with Prof. Kevin Dowd that the economy must go through and create a clear and present danger of renewed inflation. This said, there is a kernel of truth to the deflation fear - that of price falls leading to an ever escalating debt burden in real terms. This was the debtdeflation hypothesis propounded by the great American economist Irving Fisher in the early 1930s. However, the answer is NOT to inflate prices to keep that burden down, but to think in terms of reducing it via default aka bankruptcy - including state bankruptcy which is now inevitable. A well managed default would also facilitate the process of economic restructuring without all the damage - not to mention ever rising debt - caused by loose money policies.�
have a full free market in money and financial services. If free trade is good, as economists generally believe, then what is wrong with free trade in money and finance? Bear in mind too that this is not some untested theory I am putting forward. On the contrary, there have been many free banking systems in the past - mostly in the 19th century - in which you had something close to financial laissez-faire based on a gold standard. These included free banking system in Scotland, Canada, the US, Australia, Switzerland and many other countries. The record of these systems was very good - and far better than that of the statist, inflation-prone inconvertible currencies that replaced them. Back to the future!
What alternatives are there to the current central banking system? Free banking, or financial laissez faire. Get rid of the central bank, financial regulation and so on, and
James Patton is an undergraduate student reading Philosophy, Politics and Economics at the University of York
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Call for Papers VOX – the Student Journal for Politics, Economics and Philosophy – is calling for articles to be submitted for the Spring Issue 2013, with the broad theme ‘(in)equality’. Articles should be between 1,000 and 1,500 words in length, and fully-referenced using the Harvard style. If you would like to write on this theme, please e-mail your article to vox@clubofpep.org by 11 January 2013. You may wish to write on a topic from the list below: • • • • • • • • •
Why are some people disturbed by inequality? Is economic inequality a necessary condition for economic growth? Distribution of political power - does it lie with the people, politicians or corporations? Equality of opportunity - will this ever be achieved? How to square economic efficiency with redistributive justice? Equality of rights - does this require equal or differential treatment? How can we achieve justice on the basis of social equality? Responsibilities of the international community in the light of global inequalities ____________ (your own idea)
You may also pair up with someone else to write a debate for our Market of Ideas section on any of the topics above. Undergraduates, graduates and academics all welcome. All undergraduate submissions will be conisdered for the Vox Essay Award. Back issues are available at: www.voxjournal.co.uk. 32
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