Wednesday, 13 March 2013

Frederick Soddy, and Economics

Life Before Credit Cards...

Some of us are old enough to remember what life was like before the introduction of credit cards and electronic money. Back then, there were only two forms of money: demand deposits (i.e. checking accounts) and government-issued coins and currency. Things had changed little since the 1921 Nobel prize winning chemist Frederick Soddy looked at the world and asked why it wasn’t a better place. He believed science and technology had provided the possibility for a world of universal abundance. Instead of prosperity and leisure, however, he saw only war and growing poverty with periodic bouts of speculation-induced prosperity followed by economic collapse. The explanation, he believed, had to be in the way society distributed wealth not its ability to produce it. It had to be about economics and money.

Soddy’s contributions to the discipline of economics and specifically to our understanding of money may be more important than his contributions to science. He is known as ‘the father of nuclear fission’ for his work with chemical isotopes – he coined the word isotope. His grounding in the physical sciences and the laws of thermodynamics provided the intellectual foundations for a direct assault on orthodox economic thought about money and the nature of wealth.

The function of money, Soddy concluded, is to allow us to delay the consumption of real wealth to a place and time of the money holder’s choosing:
WHAT is Money? Let us commence our study of the role of money by a comprehensive definition of what modern money is. Money now is the NOTHING you get for SOMETHING before you can get ANYTHING.[[#_edn1|[i]]]
To acquire money, its legitimate owner must give up SOMETHING in the here and now – property, personal services, etc –for the NOTHING of money. The money serves as a claim to an equivalent share of real wealth to be produced and consumed sometime in the future. It represents society’s debt for the wealth presumably given up. It is, however, nothing but a token of society’s debt for wealth surrendered for the inherently worthless forms of modern money, hence the NOTHING of money.

Soddy’s views of money and economics are based upon an energy theory of wealth and the laws of thermodynamics. He uses the first law of thermodynamics - law of conservation of energy, extended to matter by Einstein’s theory of relativity - to ridicule the notion that real wealth can be created simply by capitalists’ money or annotations of debt in bank ledgers. The real creator of wealth is energy from the sun.

Here is Soddy’s energy theory of wealth:
LET us see from the standpoint of modern knowledge, whether light can be thrown on the difficult and vexed question of the real nature of wealth rather than on the particular modes by which its quantity or value may be measured. The physical or material necessities of the body must be satisfied before any of the further necessities of life-whether sexual, intellectual, aesthetic or spiritual are even called for. A definition of wealth must be based upon the nature of physical or material wealth, in the sense of the physical requisites which empower and enable human life-that is, which supply human beings with the means to live, and, as an after consequence of living, to love, think and pursue goodness, beauty and truth. The enabling requisites of life, in this sense, constitute a short definition of wealth.

These enabling requisites are derived from and produced by the flow of available energy in Nature, and represent drafts upon or deductions from this flow, in that for the production of all forms of wealth available energy is required from the natural flow, and either enters into the wealth produced or is used up in producing it-that is, is converted into waste heat. The term available in this definition has the same meaning as in the second law of thermodynamics, which divides energy into two categories, useful, available or "free" energy, and useless, unavailable or "bound" energy, the latter also being designated entropy.

So how do you apply the energy theory of wealth to money and economics? It appears we can safely conclude money is not a perpetual motion machine producing wealth with a valid claim on society to the end of time:
…it is only necessary to point out that a. perpetual motion machine is an impossibility. A man with, say, £20,000 invested at 5 per cent is in perpetual enjoyment without work of an income of £1,000 a year, and his heirs and successors after him. Consuming wealth every day of their lives, they always have the same amount as at first. This is not physics and it is not economics. Like all alleged examples of perpetual motion, it is a trick.[[#_edn2|[ii]]]

Real wealth requires energy to maintain over time, as well as to create. Debt and interest do not; they are social and mathematical constructions. Real wealth is subject to entropic forces, e.g. rot and rust, as its material components revert over time to a state of maximum entropy. As Soddy puts it “… wealth, unlike debt, rots if it is accumulated.”[[#_edn3|[iii]]]

It is the perpetual motion view of money, capital and debt deeply imbedded in orthodox economics – to which Soddy objected, particularly to the way money is created under the system of fractional reserve banking:
The common sense of these laws is that a perpetual motion machine is not possible. To produce wealth energy must be expended or consumed. … To this common sense truism that, in the world ruled over by physical laws, it is impossible to get something for nothing, modern money is an apparent outstanding exception, the elucidation of which throws a flood of light on the nature of money and suffices to rob it for ever of its robe of mystery and let us hope, of its power of evil. Money to most people still conveys the idea of coins, but, except as small change, coins are obsolete. In so far as modern money has any tangible physical existence, and by far the greater part has none, it is a paper token, which like a postage stamp, costs next to nothing to make, and which has some value printed on it. Its owner for the time being is entitled to that amount of wealth in exchange for it. Strictly he is empowered by the law to make any creditor take it as legal tender for that amount of debt, which in practice comes to exactly the same thing.

But most money nowadays has no existence except as a statement of account or bank-balance upon which the owner draws by cheque.[[#_edn4|[iv]]]

According to Soddy, honest money represents a genuine claim to wealth. But bankers and the financial community create money - more precisely, debt – out of thin air by simply entering numbers in their ledgers or creating pieces of paper entitling their possessor to a claim on the future stream of wealth produced by the real economy.

So the way we create money violates basic precepts of science and common sense. But how does it hold back the age of abundance Soddy thought science and technology could deliver?

The Problems with a Debt-based Money System

Unstable money

The essence of the problem is a system for creating money that invites erratic swings in its value. When more money is created than wealth for it to purchase – or even if it is increased proportionally BUT BEFORE that wealth is available, the result is inflation. If there is insufficient money to circulate the real economy’s products, the result is deflation. Soddy agreed deflation is highly undesirable. In fact, he strenuously objected to the use of ‘monetary policy’ to deliberately cause ANY changes in the value of money:
we are now committed to an almost pure credit-debt money, but instead of any definite standard we have entered upon a stage of " monetary policy " in which the price-level is modified deliberately from time to time by irresponsible judges according to what they conceive to be " policy ", and without the slightest regard to the elementary principles of justice and fair dealing to those who own money, and that is to everyone in common, who have given up equivalent value for it.[[#_edn5|[v]]]
Why “everyone in common”? Because with inflation that NOTHING of money you received in exchange for the real wealth you provided will be worth less than the SOMETHING for which you exchange it when you cash the money in. Deflation allows you to exchange money for more wealth than you created or surrendered for the money. Here is how ”monetary policy” looks from Soddy’s perspective:
Monetary policy would be better described as "weights and measures policy ", for it is simply a universal means of juggling with the standards of weight and measurement. … The economic use of them is purely relative to money - how many pounds of coal to the (British pound), how many pence for a pint of beer. Making the (British pound) buy less or more of pounds (of coal) or pints (of beer) is the same in all economic affairs as making the pound and the pint weigh and measure less or more than before. It substitutes for false scales and measuring vessels a universal and inescapable swindling mechanism.
This passage is worth quoting at length because it helps clarify what has been written above and exposes flaws in proposals to attempt to achieve a stable currency by backing it with precious metals or other commodities.
Books could be and have been written for and against the system of linking the exchange value of commodities to the one commodity, gold, without even attempting to answer the real question of what it is that does give money its exchange value. It is true that simple barter-currencies can keep money constant in value relatively to gold or silver. But that by itself has no meaning, unless an answer can be found for the question, what fixes the value of these relatively rare metals, almost completely confined in use to luxury purposes, in terms of the things universally necessary for life to continue at all ?

All the common phraseology of money stresses only the something you get for it by getting rid of (spending) it, rather than the prior consideration of what you give up (the real wealth you owned or created) by acquiring and retaining it. From the first standpoint peoples' demands for it are insatiable; from the second it would be truer to say, misers excepted, that people keep as little of it as is safe. … They want enough to buy what they can afford to buy as they need it. If they have more than this they spend or invest it.
What Gives Value to Money. Its exchange value depends, in fact, simply on the amount of wealth people voluntarily prefer to go without rather than to possess. The value of money depends to be sure on how much people want money, but the prevailing loose and confusing meaning attaching to any such phrase as "people wanting money" makes it necessary to add "instead of wealth". Again, "demand for money," "abundance or scarcity of money," "price of money," and so on, are technical expressions of the loan market. In genuine loan transactions of any kind the lender gives up the credit that is money (society’s debt to the possessor of money for real wealth that could have been consumed) to another who expends it in his stead, and in national economics it is not the individual who spends it but the fact of it being spent that is of importance. [[#_edn6|[vi]]]

The expression “monetary policy” implies an exaggerated degree of control over the value of money - even before the advent of Wall Street’s ‘shadow banking system’. The quantity of money is, in reality, not under the control of one central authority but “thousands of commercial banks which now act like so many private mints.”[[#_edn7|[vii]]]

In any case, without fundamental changes in the current monetary system based upon fractional-reserve banking practices, Treasury Secretary Geithner’s attempts to get control of money and credit creation (they are basically synonymous) are probably doomed. Irving Fisher, perhaps the most celebrated early 20th century American economist, explains why:
The individual banker is tempted by the lure of profits to reduce his "idle" reserves; the law then applies, as remedy, higher reserves or consolidation of reserves; the banker responds by finding a way to evade these safeguards, which brings us back to the original abuses in some new form.[[#_edn8|[viii]]]

Neither Fisher nor Soddy were what today would be called ‘flaming liberals’ or ‘radicals’. Fisher believed in the integrity and competence of Benjamin Strong, Governor of the Federal Reserve Bank of New York and, some say, the head of the Federal Reserve System in the years leading up to the Great Depression. Ironically, the working group of the G20 meeting held in November 2008 to discuss the current financial crisis was named the Irving Fisher Committee [IFC] workshop[[#_edn9|[ix]]] - ‘ironic’ because nowhere does there appear to have been any discussion of the 100% reserve requirement Fisher and a group of this country’s most prominent Depression era economists suggested after analyzing what caused the Depression and formulating proposals, collectively known as the Chicago Plan, to insure it never happened again. For a modern incarnation of the Chicago Plan, see the American Monetary Act,

Fisher believed what the Chicago Plan economists were proposing was actually in the bankers’ best long term interest. In any event, both he and Soddy were interested in technical fixes not political ideology. According to Fisher:
In fact, an unstable monetary unit breeds radicalism, whether the movement be it up or down, deflation or inflation, if it goes far enough. French had an aphorism "after the printing press, the guillotine."…
I am convinced that, without stable money, the private profit system will some day go. This means that the bankers, as long as they insist on operating or are permitted to operate, their 10% system, will be playing with fire. [[#_edn10|[x]]]
According to Soddy:
The differences between one political system and another are far less fundamental than is commonly supposed. Thc system which is usually called capitalism is in reality the scientific civilisation.”[[#_edn11|[xi]]]
(and, of the social costs resulting from an unscientific if not fraudulent way of creating money) The economist saw in it nothing deeper than desire for " profit " on the part of a competitive horde of acquisitive individuals. The sociologist fills volumes with the discussion of " -isms ", personifying in the time-honoured guise of gods and demons, and giving capital letters to imaginary protagonists conjured into existence to explain nothing more human than errors of counting and economic swindling, grosser (because more universal), than the falsification of weights and measures.” [[#_edn12|[xii]]]

“The Main Reason Why The Mastery Of Man Over Nature Has Hitherto Resulted In So Meagre A Contribution To The Perfection Of Human Life”[[#_edn13|[xiii]]]

Following WW I, Soddy wrote:
Whereas men, with resources at their disposal ample to build up a civilization of a magnificence and liberality the world has never known, are now at their wit's end to invent new forms of destruction and waste lest this new civilization should displace the old.
He believed this old civilization was founded upon scarcity, both of wealth and the money to circulate it. By manipulating its value, the Money Power can affect a transfer of wealth from those don’t understand money games or lack the means to protect themselves. This concentration of wealth is certainly part of the explanation for the persistence of scarcity.

Add to this the diversion of science and industry from the wealth to weapons production. Those who believe a military-industrial complex is uniquely the product of capitalism should explain its presence in the former Soviet Union. Even if these weapons are not used to destroy wealth already created – and the temptation to use or threaten to use them becomes overwhelming when they have become the principle product of a country’s industry, the enormous cost of their production becomes another impediment to an Age of Abundance.

There is a more profound impediment arising from a conception of wealth deeply rooted in human nature. In 2003 linguist and social critic Noam Chomsky published a book titled “Hegemony or Survival: America’s Quest for Global Dominance”. ‘Full spectrum dominance’ is or until recently was the official military strategy of the United States. In it, Chomsky suggested but did not adequately articulate an economic motive – the desire to control other people’s resources. But why would a nation with so much wealth its economy is powered by an enormous waste of those resources, a nation that prides itself on its respect for human rights and the dignity and sanctity of life, permit its leaders to undertake in their names acts of unspeakable savagery and oppression?

Soddy would suggest the answer can be found in the ideas of John Ruskin, a 19th century British art critic and social thinker:
Ruskin appears to have had a very much clearer conception of the real nature of wealth than either earlier or later economists. He pointed out, … that the art of becoming rich was to get more relatively than other people, so that those with less may be available as the servants and employees of those with more. In this acute and original analysis of the real nature of the individual's wealth-power over the lives and the labour of others-Ruskin disclosed probably the most important difference between the interests of the individual and the interest of the State, and the main reason why the mastery of man over nature has hitherto resulted in so meagre a contribution to the perfection of human life. For this reason the community in its struggle with nature resembles an army officered almost entirely by the enemy. Of what use are the discoveries of scientific men into new modes and more ample way of living so long as the laws of human nature turn all the difficultly won wealth into increased power of the few over the lives and labours of the many![[#_edn14|[xiv]]]

Ruskin’s definition of wealth is implied in the Council of Europe’s definition of poverty: “The poor are ‘those persons, families and groups of persons whose resources … are so limited as to exclude them from the minimum acceptable way of life in the Member State to which they belong.”[[#_edn15|[xv]]] If that is the way we continue to define wealth for ourselves, is there really an “important difference between the interests of the individual and the interest of the State” – at least if the interest of the state is defined in terms of political expediency rather than survival?

The use of debt by those who have money or the right to create it is, like a government’s privilege to issue the world’s reserve currency, ultimately an instrument of power – an instrument which can only be exercised over a population in poverty. If our definition of wealth requires other people to be poor, at least relative to us, we can never be without scarcity and poverty.

Some Conclusions

So whether our debt-based monetary system and the orthodox economics that attempt to justify it are the products of a clever group of bankers trying to get something for nothing, the world’s wealthy attempting to enslave humanity or all of us trying to beat the laws of thermodynamics, the tool is the same - debt:
This, then, is my main quarrel with orthodox economics, that it confuses the substance and the shadow. It mistakes debt for wealth and is guilty of the same mistake as the old lady, who, when remonstrated with for overdrawing her account, promptly sent her banker a cheque for the amount. [[#_edn16|[xvi]]]
Orthodox economics has never yet been anything but the class economics of the owners of debts. If its writers ever attempted any wider social applications, they made themselves simply ridiculous, as when one solemnly looked forward to the millennium arriving through the accumulation of so much capital that everyone would be well off and comfortable, presumably by living on the interest of their mutual indebtednesses.[[#_edn17|[xvii]]]
If human civilization fails, the cause can not be more aptly described than allowing itself to be “an army officered almost entirely by the enemy.” In pre-industrial eras, the consequences of this mistake were arguably more benign given the limited power at the disposal of the ‘officers’ and the relatively small scale of civilization. With the dawn of the Atomic Age, the enormous draw-down in the earth’s “capital” of fossil fuels – a draw-down upon which, to date, the Industrial and Green Revolutions are almost solely dependent, with the very scale of human civilization grown so large it threatens the ability of the earth and its resources to accommodate it, finding the right ‘officers’ has become essential for our survival not just for a “more ample way of living”.

Instead of harnessing the power of science and technology to provide the energy required for the wealth to support a growing population or at least permit it to live within its income of solar radiation, instead of sharing the benefits of rapidly advancing productivity of technology with its ‘army’, instead of allowing the rank and file to use at least part of their lives for something other than servitude and producing wealth, the ‘officers’ have harnessed the benefits of science and technology to the pursuit of ever more power.

For close to a century, we have had solutions for the problems that threaten to destroy civilization and perhaps the earth itself. The responsibility for failure to implement them rests partly upon our leaders . But it is also shared by an academia and mass media that have failed to educate and inform. In the final analysis, it is shared upon all of us for accepting a definition of wealth founded upon at least relative poverty and power over the lives and fortunes of others.

[[#_ednref1|[i]]] Frederick Soddy, THE ROLE OF MONEY, GEORGE ROUTLEDGE AND SONS, LTD., 1934, p. 24.
[[#_ednref2|[ii]]] Frederick Soddy, WEALTH, VIRTUAL WEALTH AND DEBT, E. P. DUTTON & CO., INC., 1933, pp. 86-87.
[[#_ednref3|[iii]]] ibid, p. 87.
[[#_ednref4|[iv]]] Frederick Soddy, MONEY versus MAN, ELKIN :MATHEWS & MARROT, pp 30-31.
[[#_ednref5|[v]]] Soddy (THE ROLE OF MONEY), Op. cit., p. 32.
[[#_ednref6|[vi]]] Ibid, p. 32-34.
[[#_ednref7|[vii]]] Irving Fisher, Ll.D., 100% MONEY, Adelphi Company, 1936, p. xi.
[[#_ednref8|[viii]]] Ibid., p. 52.
[[#_ednref9|[ix]]] Alfred Mendes, Bankers to the rescue, Global Research, March 19, 2009,
[[#_ednref10|[x]]] Fisher, op. cit., pp. 218-219.
[[#_ednref11|[xi]]] Soddy (MONEY versus MAN), Op. cit., p. 104.
[[#_ednref12|[xii]]] Soddy (THE ROLE OF MONEY), Op. cit., p. 138.
[[#_ednref13|[xiii]]] Frederick Soddy, CARTESIAN ECONOMICS, HENDERSONS, 1922, p. 15.
[[#_ednref14|[xiv]]] Ibid
[[#_ednref15|[xv]]] Herve Kempf, How the Rich are Destroying the Earth, Chelsea Green Publishing Co., 2007, p. 40.
[[#_ednref16|[xvi]]] Soddy (CARTESIAN ECONOMICS), Op. cit., p. 15.
[[#_ednref17|[xvii]]] Soddy (THE ROLE OF MONEY), Op. cit., p. 7.

Ref to the above MODEL-ECONOMY WIKI.

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