The Economic Realms: August 2015

Friday, 28 August 2015

Better Markets

The newsletter below is produced by a Washington firm that lobbies Congress on the opposite side from Wall Street. Several years ago Speaker of the House Newt Gingrich reduced the size of the Congressional staff. The result is that legislation that was earlier written and checked by Congressional staff is now produced by lobbyists. Not surprisingly Wall Street ends up writing legislation governing the financial industry. The newsletter below shows that even very small changes in wording can have a significant effect. It seems to me that there is a serious problem of requisite variety (the variety in a regulator must be at least as great as the variety in the system being regulated). That is, if one team has many more players than a second team, the first team has a clear advantage. Combine the subtleties of semantics with requisite variety with the Matthew Effect (the rich get richer...) and there is a serious problem.

Stuart Umpleby
Ref Cybcom hermes.gwu.edu Blog Ref http://www.p2pfoundation.net/Transfinancial_Economics

http://www.bettermarkets.com/

Financial Reform Newsletter: August 27, 2015

Must-read investigative report highlights Wall Street's taxpayer-backed too-big-to-fail banks latest lobbying to avoid key financial reforms designed to protect U.S. taxpayers from having to bail out Wall Street again: Reuters' Charles Levinson has written a must-read investigative report on Wall Street's latest scheme to avoid critically important financial reforms: change a few words in their derivatives contracts and pretend that they are not guaranteeing their overseas affiliates. Wall Street's handful of biggest banks merely erase/delete the word "guarantee" from one or more of their foreign affiliates and then claim/pretend it is not guaranteed by the gigantic U.S.-based parent bank (backed by U.S. taxpayers) and, voila, their trades are not subject to U.S. regulations. (BTW, these activities really only involve Wall Street's four biggest banks - JPMorgan Chase, Citigroup, Goldman Sachs and Morgan Stanley - which control more than 90% of all the derivatives trading in the U.S.)

This scheme (which we discuss in this fact sheet) is called "de-guaranteeing," but it is really just a form-over-substance loophole that allows the largest financial institutions in the U.S. to get "light touch" regulation overseas. Why? Because merely deleting the word "guarantee" does not mean that the foreign affiliates are not guaranteed or, as we at Better Markets call it, de facto guaranteed by the U.S. bank. Why? Because the U.S.-based bank directs its customers, clients and counterparties to its purportedly non-guaranteed affiliate overseas which always not coincidentally uses the same name as the U.S. bank.

Those customers, clients and counterparties understand they are doing business - albeit indirectly - with the U.S. bank and expect the U.S. bank to stand behind the foreign affiliate regardless of a deleted word. More importantly, the U.S. bank will have to stand behind the foreign affiliate (i.e., guarantee it) if it gets into trouble because the U.S. bank has directed its customers, clients, and counterparties to the foreign affiliate and will suffer serious - if not lethal - reputational damage in the markets if the U.S. bank failed to de facto guarantee its foreign affiliate in trouble.

This is a really serious issue, not a theoretical matter or theoretical risk to U.S. taxpayers. There are numerous examples of where Wall Street banks and other U.S. financial institutions have shipped their business overseas, but the risk and costs have come back to the U.S. taxpayer. (Oh, and by the way, when the U.S. banks ship their derivatives trades overseas, they also ship U.S. jobs overseas and the revenue and taxes generated by those jobs. Thus, U.S. taxpayers pay in two big ways: first they lose jobs and revenue, then they have to bail out the bank when their overseas affiliates - explicitly guaranteed or not - blow up and drag down the U.S. parent company.)

For example, this is exactly what Citigroup did in the middle of the 2008 financial crisis when it took $59 billion in assets back onto its balance sheet from non-guaranteed so-called "bankruptcy remote" SIVs that it had created and sponsored years before. Citi had absolutely no legal obligation to do it, but, to avoid asset fire sales and reputational damage, it nonetheless "had to" take the impaired assets back at 100 cents on the dollar. Citi had to then write down the values which reduced Citi's capital and contributed to the creditor run on the bank. The result? Citi had a liquidity crisis and was insolvent, ultimately requiring more than three bail outs to prevent its collapse into bankruptcy. Those government and U.S. taxpayer bailouts to Citi totaled almost $500 billion, more than any other single institution (and Citi remains the only too-big-to-fail U.S. bank that did not repay the taxpayer TARP funds it received).

Citi isn't the only example. There are lots of them. Remember AIG? It was a gigantic insurance company based in New York, but did its credit default swaps (CDS) gambling in "light touch" London in the years leading up to the financial crisis. But who was left on the hook to bail out AIG when its London CDS operations blew up and kick-started the financial crash? U.S. taxpayers and the U.S. government, which ended up having to provide $185 billion in a series of bailouts. (Bear Stearns and Lehman Brothers are two other prominent examples of using overseas affiliates to avoid U.S. regulation.)

Better Markets has been fighting Wall Street on this evasive, if not fraudulent, gambit for years. Much of our work, including the presentation we used in meetings with the Chairs, Commissioners and staff of the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC), can be found on our website here. As the Levinson investigative report points out, so far the CFTC and the SEC have failed to protect taxpayers as the law requires. Wall Street's four biggest and most dangerous banks have exploited the loophole and the regulators have not stopped them. U.S. taxpayers remain at grave risk from hundreds of trillions of mostly unregulated derivatives trading overseas by U.S. bank affiliates.

However Better Market has proposed a relative simple, market-based solution to this loophole called the "de facto guarantee test," which would enable regulators to determine which foreign affiliates are genuinely non-guaranteed and which ones are de facto guaranteed and pose an unacceptable risk to U.S. taxpayers that the law requires the CFTC and SEC to regulate. It is time for the CFTC and the SEC to adopt the de facto guarantee test and only allow genuinely non-guaranteed foreign affiliates to avoid U.S. laws and regulations.

New research shows once again that the costs of the 2008 financial crash have been devastating to American families and that those crippling costs continue to cause economic wreckage across the country: A new National Bureau of Economic Research working paper by Henry Farber, Job Loss in the Great Recession and its Aftermath: U.S. Evidence from the Displaced Workers Survey, outlines how, "[t]he Great Recession from December 2007 to June 2009 is associated with a dramatic weakening of the labor market from which, by some measures, it has not completely recovered." As NBER summarized:

"Of the workers who lost full-time jobs between 2007 and 2009, Farber reports only about 50 percent were employed in January 2010 and only about 75 percent of those were re-employed in full-time jobs. This means only about 35 to 40 percent of those in the DWS (Displaced Worker Survey) who reported losing a job in 2007-09 were employed full-time in January 2010. This was by far the worst post-displacement employment experience of the 1981-2014 period.

"The adverse employment experience of job losers has also been persistent. While both overall employment rates and full-time employment rates began to improve in 2009, even those who lost jobs between 2011 and 2013 had very low re-employment rates and, by historical standards, very low full-time employment rates. In addition, the data show substantial weekly earnings declines even for those who did find work, although these earnings losses were not especially large by historical standards....

"Farber concludes that the costs of job losses in the Great Recession were unusually severe and remain substantial years later. Most importantly, workers laid off in the Great Recession and its aftermath have been much less successful at finding new jobs, particularly full-time jobs, than those laid off in earlier periods. The findings suggest that job loss since the Great Recession has had severe adverse consequences for employment and earnings."

This should really surprise no one because the 2008 financial crash was the worst since the Great Crash of 1929 and the economic catastrophe it caused was the worst since the Great Depression of the 1930s. In addition to the latest research, Better Markets detailed this in its recent Cost of the Crisis report showing tens of millions of Americans from coast to coast have suffered and continue to suffer, including millions of American families still struggling with lost jobs, homes, savings and security. This is going to cost the United States more than $20 trillion in lost GDP.

In just one example that relates to the new NBER research, the number of unemployed and under-employed Americans (forced to work part time because they couldn't find full time work, the so-called U-6 rate) peaked for five out of seven months between October 2009 and April of 2010 at 17.5%, which is almost 27 million individual Americans:

In addition, many of those 27 million Americans were heads of households, which means that the impact of just this one cost of the crisis touched more than 50 million Americans.

Reflecting the depth and breadth of the damage from the 2008 financial crash, since the recession officially ended in June 2009, growth has averaged only around 2%, which is low by historic standards and inflated by extraordinary monetary policies by the Fed. That means that many Americans still can't find good work, start a business, pay their debts, or save for college and retirement.

This is yet another reminder that Wall Street's too-big-to-fail banks must be carefully regulated to prevent their reckless trading and investments from endangering the country's financial system and economy as well as Americans' standard of living. That's why it's critically important that the Dodd-Frank financial reform law is fully implemented and aggressively policed as soon as possible, as strongly as possible, and as thoroughly as possible. The American people cannot afford another devastating financial crash.

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Wednesday, 26 August 2015

Rogoff on negative rates, paper currency and Bitcoin

Izabella Kaminska /Blogger Ref http://www.p2pfoundation.net/Transfinancial_Economics

| May 20 2014 12:27 | FT Alphaville

Ken Rogoff wades into the negative rate debate this month, in a paper that discusses the costs and benefits of phasing out paper currency — a topic previously explored by Willem Buiter and Miles Kimball (and of course Satoshi Nakamoto).
Among his observations is the somewhat provocative point (at least judging by the replies on Twitter) that…

Paying a negative interest rate on currency, or on electronic reserves at the central bank, may seem barbaric to some. But it is arguably no more barbaric than inflation, which similarly reduces the real purchasing power of currency.

Meaning that a good bout of inflation could be just as good as a negative rate regime.

That said, while Rogoff refers to Blanchard on that point, he ultimately concedes that negative rates may be much more effective in the long run:

The idea of raising target inflation to reduce the likelihood of hitting the zero bound is indeed an alternative approach. Blanchard et al. point out that if central banks permanently raised their target inflation rates from 2% to 4%, it would leave them scope to make deeper cuts to real interest rates in severe downturns. Arguably, paying negative interest rates is a better approach if, as many believe, inflation becomes more unstable as the general level of inflation rises. Robert Hall (1983) argues forcefully that the central role of monetary policy should be to provide a stable unit of account, and in principle the ability to pay negative interest rates facilitates its ability to achieve this in today’s low inflation environment (Hall, 2002, 2012).

(For further discussion about the Blanchard plan see here.)
In any case, this leads Rogoff to the dreaded subject of how best to substitute paper cash for electronic cash.
As Rogoff notes, the key problem is the uniquely anonymous nature of cash, something which facilitates tax evasion and illegal activity all round. Electronic money may be private but it’s certainly not anonymous (and that applies to Bitcoin as well).
As Rogoff further explains:

Standard monetary theory (e.g., Kiyotaki and Wright 1989) suggests that an essential property of money is that neither buyer nor seller requires knowledge of its history, giving it a certain form of anonymity. (A slight caveat is that the identity of the buyer might be correlated with the probability of the currency being counterfeit, but until now this is a problem that governments have been able to contain.) There is nothing, however, in standard theories of money that requires transactions to be anonymous from tax- or law-enforcement authorities. And yet there is a significant body of evidence that a large percentage of currency in most countries, generally well over 50%, is used precisely to hide transactions. I have summarized the international evidence in earlier research (Rogoff 1998, 2002). Other than the introduction of the euro, rather little has changed except that, if anything, anonymous currencies have continued to grow at a faster rate than nominal GDP.

The most surprising thing about cash in that context is probably just how much of it there remains in circulation considering the efficiency of modern electronic systems.
Here, for example, is a chart for the euro system:

To summarise:

…in the US the currency supply is 7% of GDP, in the Eurozone 10%, and in Japan 18%.

Which means, despite the fact that the use of currency in the legal economy is dwindling due to advances in cashless payments, the world still remains hopelessly addicted to cash for black economy reasons.
The problem this poses for the public purse is that even though the substitution of paper cash for electronic cash should not theoretically affect seigniorage revenue for the government — because phased-out paper currency demand would be replaced by demand for electronic central bank reserves — the non-anonymous nature of electronic money would likely lead to a large shrinkage in demand.
In Rogoff’s opinion, Treasuries or other anonymous vehicles would have to absorb that loss instead.
The only caveat would be if the government managed to introduce a fully anonymous electronic money in its own right.
As he notes:

The government would continue to garner seigniorage revenues from the underground economy and the problem of the zero bound on nominal interest rates would be effectively eliminated. That said, it is far from clear that the government can credibly issue a fully anonymous electronic currency and even if it could, anonymous electronic fiat money has all the drawbacks of an anonymous paper currency in facilitating tax evasion and illegal activity.

Rogoff also suggests that any attempt to introduce a fully anonymous state currency would probably transform the central bank into a universal bank — something we’ve suggested is already happening due to the Fed already expanding its balance sheet to money market funds.
Rogoff says that might not be so bad if there were rules and protocols in place to ensure the government could not abuse its unique information advantage in that regard.
Nevertheless, none of this spares the country from the risk that another country’s paper currency might end up becoming used more commonly in the economy instead.
Overall, Rogoff concludes further study of the costs and benefits of phasing out paper currency is necessary, especially since we may already live in the “twilight of the paper currency era anyway”.
In any case, a few points we’re left confused about:
1) First, Rogoff claims that if there were concerns about anonymous digital central bank cash, people would likely park money in Treasuries instead and that this would reduce seigniorage income.
Surely, this thinking doesn’t make sense? Wouldn’t the money redirected from zero-yielding cash, which is provided by the government on demand (especially so that it is always zero yielding), be redirected into yielding securities in such a way that it would have negative yielding effects? If that’s the case the negative rates provided to the government would be a form of seigniorage revenue, and could be exploited by greater borrowing at zero rates.
2) Second, doesn’t Rogoff neglect the seigniorage revenue that’s already being lost — irrespective of anonymity — due to the shortage of safe assets problem? The market also has a preference for creating private money substitutes — whether they’re bearer notes collateralised by art, collateralised commodities in no-man’s land stores or bitcoin — rather than taking on more free debt. After all, the former currently allocates the money much more questionably than structured public policy might do.
3) Why has no-one yet made the connection between anonymity — which is injected into the system by means of anonymous bearer currency which “neither buyer nor seller requires knowledge of its history” — and our inability to model or control systemic risk?
All thoughts appreciated.

Monday, 24 August 2015

Prominent Economists Who Advocate a Different Type of Quantitative Easing

Blogger Ref http://www.p2pfoundation.net/Transfinancial_Economics

Home » Blog » 2015 » March » 15 » Prominent Economist…

Written by Frank Van Lerven on March 15, 2015.

Both John Maynard Keynes and Milton Friedman proposed a style of Quantitative Easing (QE) that was aimed at the real economy. In effect they advocated a different form of QE than that which we are experiencing today: one that would be relayed away from the banking sector and speculators and towards consumers, non-financial businesses and low income earners – and one that could directly back investment projects, rather than create risky asset price bubbles. But who are Keynes’s and Friedman’s contemporaries?

Ben Bernanke, former Chairman of US Federal Reserve Bank
“In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices…A money-financed tax cut is essentially equivalent to Milton Friedman’s famous “helicopter drop” of money. Of course, in lieu of tax cuts or increases in transfers the government could increase spending on current goods and services or even acquire existing real or financial assets.”
http://www.federalreserve.gov/boarddocs/Speeches/2002/20021121/default.htm

Lord Adair Turner- Member of UK Financial Policy Committee, former Chairman of Financial Services Authority
“’Helicopter money’ – by which we mean overt money finance of increased fiscal deficits – may in some circumstances be the only certain way to stimulate nominal demand, and may carry with it less risk to future financial stability than the unconventional monetary policies currently being deployed.”
http://www.voxeu.org/article/helicopter-money-policy-option

Professor John Muellbauer, Oxford University
“Clearly, the ECB must develop a strategy that works in the Eurozone’s unique system, instead of attempting to follow the Fed’s lead. Such a strategy should be based on Friedman’s assertion that ‘helicopter drops’ – printing large sums of money and distributing it to the public – can always stimulate the economy and combat deflation.”
http://www.voxeu.org/article/combatting-eurozone-deflation-qe-people

Professor Richard Werner, University of Southampton (The Economist who coined the term QE)
“This staggering £275 billion largely ended up with the banks in the futile hope that it would result in a substantial increase in UK lending to business. Instead it was used to rebuild their balance sheets and invest in commodity speculation. To ensure that this does not happen again, we need a different kind of QE, to help the wider economy directly and to implement some badly needed green projects that would enhance the sustainability of the economy and improve the environment-as well as creating thousands of new jobs.”
http://www.carolinelucas.com/latest/caroline-welcomes-report-calling-for-green-quantiative-easing

Yanis Varoufakis, Current Finance Minister of Greece
“The EIB/EIF has been issuing bonds for decades to fund investments, covering 50% of the projects’ funding costs. They should now issue bonds to cover the funding of the pan-euro-zone investment-led recovery programme in its totality; that is, by waving the convention that 50% of the funds come from national sources. To ensure that the EIB/EIF bonds do not suffer rising yields, as a result of these large issues, the ECB can to step in the secondary market and purchase as many of these EIB/EIF bonds as are necessary to keep the EIB/EIF bond yields at their present, low levels. To stay consistent with its current assessment, the level of this type of QE could be set to €1 trillion over the next few years…Moreover, this form of QE backs productive investments directly, as opposed to inflating risky financial instruments, and has no implications in terms of European fiscal rules (as EIB funding need not count against member states’ deficits or debt).”
http://www.economist.com/blogs/freeexchange/2014/11/economists-roundtable-euro-zone-3.

Biagio Bossone, Chairman of the Lecce Group, former Executive Director of World Bank Group
“Now more than ever, what the Eurozone needs is that injections of new money be directed to households, not to commercial banks and high wealth individuals, and that households be reassured that no new tax obligations will be imposed on them to foot future tax bills associated with higher debt. What needs to be done is to use monetary and fiscal policies in a coordinated manner with a view to ensuring that money is created and distributed to agents with a high propensity to spend it.”
http://www.economonitor.com/blog/2015/01/qe-in-the-eurozone-a-rejoinder-to-de-grauwe-and-ji-on-vox/#sthash.MsmX7cgc.dpuf

Professor Steve Keen, Kingston University, UK
“I would have used the capacity of central banks to create money by making a direct injection into individuals bank accounts on a pro rata basis, complicated to work out how, but basically injecting money into peoples bank accounts, on the condition that those people who are in debt pay there debts down so that way you have private debt cancellation coming out of it, not therefore not only benefiting debtors but also benefitting savers who would also get it, and rather than paying down their debts down they would get an increase in cash levels…Its a very indirect and expensive way of getting very little bang for your buck…”
http://audioboom.com/boos/2846464-prof-steve-keen-on-what-s-really-going-on-in-greece

Paul McCulley and Zoltan Pozsar, Chair, GIC Global Society of Fellows and Director at Credit Suisse in the Global Strategy and Research department
“In the cooperation framework the central bank overtly subjects itself to become a partner of the fiscal authority in stimulating economic growth directly as a borrower and spender of last resort for as long as necessary in order to reduce economic slack and thereby root out deflationary dynamics – a target reaffirmed by strategy. In the inflation targeting framework the central bank first generates expectations of negative real interest rates (via commitments to low rates for long, purchases of long-term bonds, or prioritizing employment over inflation) in hopes of the private sector then becoming a willing partner to borrow and dis-save in response to this stimulus – a target that’s in and of itself the strategy… In this paper we argue that simple inflation targets without being reinforced via fiscal-monetary cooperation will fail.”
https://www.interdependence.org/wp-content/uploads/2013/01/Helicopter_Money_Final1.pdf

MP Caroline Lucas, Green Party of England and Wales Politician
“It is understandably difficult for people to get their head around the idea that the Bank of England could magic up £50 billion of Green Quantitative Easing. Yet it has already e-printed £275 billion (around £4,000 for every man woman and child in the UK) in an effort to get increased borrowing to British business via giving the money to the banks. But this money has completely failed to reach small businesses in the real economy which urgently need support. The bankers have had their £275 billion chance. Now it’s time for the Bank of England to help create jobs, stabilize the economy, and support the environment through a package of Green Quantitative Easing.”
http://www.carolinelucas.com/latest/caroline-welcomes-report-calling-for-green-quantiative-easing

Sushil Wadhwani, Former Member of Bank England Monetary Policy Committee
“We need to ensure the extra money leads to higher demand. One good place to start is with the textbook example of printing money to finance consumption – sending every adult in the country a voucher that can be spent in the next three months. Allocating £300 to each of Britain’s 50m adults to spend on goods and services would cost £15bn, or 20 per cent of the £75bn created by the new round of QE. (In 1999, the Japanese government distributed $175 vouchers to the public – 99.6 per cent of them were spent within the six-month limit.) Perhaps you can persuade the MPC that this is preferable to buying gilts?”
http://www.newstatesman.com/blogs/the-staggers/2011/10/chancellor-bank-osborne,

Professor Randal Wray, University of Missouri-Kansas City
“…if you don’t ramp up the fiscal stimulus, and keep it ramped up until a full blown recovery has occurred, you will remain trapped in recession.”
http://www.economonitor.com/lrwray/2012/11/12/demystifying-quantitative-easing/#sthash.us2dehIJ.dpuf

George Magnus, Senior Economic Adviser to UBS Investment Bank
“Ultimately, the Bank could get involved in direct lending to SMEs and to the government, so that the latter could fund infrastructure and other programmes to boost employment. Extra ordinary times call for comparable economic thinking. We are a long way from having to worry about inflation and, as things stand, the status quo on policy is leading us into a depression that will sink your medium-term fiscal and economic strategy, to say nothing of the disastrous social consequences.”
http://www.newstatesman.com/economy/2011/10/bank-economic-government

Professor Mark Blyth, Brown University
“Unless one subscribes to the view that recessions are either therapeutic or deserved, there is no reason governments should not try to end them if they can, and cash transfers are a uniquely effective way of doing so. For one thing, they would quickly increase spending, and central banks could implement them instantaneously, unlike infrastructure spending or changes to the tax code, which typically require legislation. And in contrast to interest-rate cuts, cash transfers would affect demand directly, without the side effects of distorting financial markets and asset prices. They would also would help address inequality — without skinning the rich.”
http://www.foreignaffairs.com/articles/141847/mark-blyth-and-eric-lonergan/print-less-but-transfer-more

Professor Lucrezia Reichlin, London Business School
“In a situation of persistently weak economic conditions it makes sense to consider all options including tools that have stayed long in the closet.”
http://www.voxeu.org/article/helicopter-money-policy-option

Simon Jenkins, Journalist at The Guardian
“Abandon helicopters. Use bombers. Bomb Germany, France, Italy, Greece, the entire Eurozone. Bomb them with banknotes, cash, anything to boost demand. The money must go straight to households, not to banks. Banks have had their day and miserably failed to spend. From now on they get nothing.”
http://www.theguardian.com/commentisfree/2015/jan/22/qe-eurozone-confidence-trick-quantitative-easing-money-circulation

Larry Elliot, Journalist at The Guardian
“QE could have been better designed. There could have been a better dove-tailing of monetary (interest rates and QE) and fiscal (tax and spending) policies. There was a strong case for the targeting of QE at specific sectors of the economy, such as green infrastructure. In retrospect, far too much faith was put in the banks to channel QE to where it was needed. Handing a cheque directly to members of the public would have got money into the economy much more effectively.”
http://www.theguardian.com/business/economics-blog/2014/oct/29/quantitative-easing-policy-stimulus-janet-yellen-ecb

Ann Pettifor, Director of Policy Research in Macroeconomics, Honorary Research Fellow at the Political Economy Research Centre at City University and a fellow of the New Economics Foundation, London
“Instead, with the help of the monetary authorities, government could increase spending on sound infrastructure projects. Low-cost financing by the Bank of England would enable George Osborne to implement Vince Cable’s public infrastructure investment plans.” or a Green QE “The idea of ‘Green QE’ is that the Bank of England would – with the agreement of the government – buy bonds from e.g. the Green Investment Bank, which could then use the financing to subsidise low carbon projects.”
http://www.huffingtonpost.co.uk/ann-pettifor/its-official-there-is-a-m_b_2945721.html

Lord Skidelsky, Professor of Political Economy at the University of Warwick
“If we want to print money, I would direct it not to the banks but into the pockets of the British people. This is akin to Friedman’s helicopter money. Here are two ideas: first, we could have a temporary wage subsidy paid to employers to encourage them to take on more workers; secondly, the Government might give every household a Christmas present in the form of a voucher to be spent on British goods within three months. There are many other methods, but the object would be to get the biggest bang of spending per buck of money.”
http://www.skidelskyr.com/site/article/house-of-lords-debate-queens-speech-5th-day/.

Collin Hines, Convenor of the Green New Deal Group
“It is time for a debate about what kind of QE can actually turn round the continent’s flagging economy. The Green New Deal group’s paper “Europe’s Choice — How Green QE and Fairer Taxes Can Replace Austerity” suggests the introduction of “green infrastructure QE”.
http://www.ft.com/cms/s/0/d33b5118-a2fe-11e4-9c06-00144feab7de.html#axzz3QI36XrP8

Robert Peston, Financial Commentator at the BBC
“Because what has been really striking about QE is that it was popularly dubbed as money creation, but it hasn’t really been that. If it had been proper money creation, with cash going into the pockets of people or the coffers of businesses, it might have sparked serious and substantial increases in economic activity, which would have led to much bigger investment in real productive capital. And in those circumstances, the underlying growth rate of the UK and US economies might have increased meaningfully. But in today’s economy, especially in the UK and Europe, money creation is much more about how much commercial banks lend than how many bonds are bought from investors by central banks.”
http://www.bbc.co.uk/news/business-29817100

Richard Wood, Former Policy Advisor to Australian Treasury and Author of How to Solve the European Crisis: Challenging orthodoxy and creating new policy paradigms
“In respect of monetary policy, overt money financing (creating new money and channelling it through net government spending to low income people, infrastructure and the unemployed) could replace the ineffective and wasteful quantitative easing policy as a means to stimulate economic activity. Quantitative easing finances banks and speculators; creates asset price bubbles; distorts risk pricing and resource allocation; causes competitive devaluations and currency wars; and results in reversals and financial distress on exiting the policy. Quantitative easing has no direct positive impact on consumer prices as predicated by the central banks of Japan and the United States.”
http://www.voxeu.org/article/failed-policy-response-global-crisis

Eric Lonergan, Fund Manager and Author of Money: The Art of Living
“Rather than trying to spur private-sector spending through asset purchases or interest-rate changes, central banks, such as the Fed, should hand consumers cash directly. In practice, this policy could take the form of giving central banks the ability to hand their countries’ tax-paying households a certain amount of money. The government could distribute cash equally to all households or, even better, aim for the bottom 80 percent of households in terms of income. Targeting those who earn the least would have two primary benefits. For one thing, lower-income households are more prone to consume, so they would provide a greater boost to spending. For another, the policy would offset rising income inequality.”
http://www.foreignaffairs.com/articles/141847/mark-blyth-and-eric-lonergan/print-less-but-transfer-more,

Edward Harrison, Financial Commentator BBC, CNBC, and Fox News
“What we want to see for economic growth to occur is that financial institutions are making loans to productive parts of the economy that have the greatest impact on sustainable long-term economic growth. Further, we want to see this economic growth underpinned by household and business income that supports further growth down the line. The key here is that the growth comes not from the financial sector or financial assets but from productive assets that throw off income which can be used by businesses and households to repay the debt and take on even more as productive ventures become available.”
https://www.creditwritedowns.com/2015/01/why-quantitative-easing-and-negative-interest-rates-will-fail.html,

Richard Murphy, Tax Research LLP
“This, of course, is Green Quantitative Easing where money is created, in exactly the same way that it was to bail out the banks to the tune of £375 billion, but this money is instead used to finance investment in the UK economy. This might be investment in infrastructure such as transport, hospitals, schools and new energy systems, or investment through a Green Investment Bank in partnering British business in creating new opportunities in this country for the benefit of our economy. This is not money that will, in that case, leave the UK economy: the whole purpose of this activity is to invest as much as possible of the money in this country, and for the long-term to make a return for us all.”
http://www.taxresearch.org.uk/Blog/2015/02/26/there-is-an-elephant-in-the-room-at-this-election/#sthash.Pyz8UtCu.dpuf.

Matt King, Credit Strategist at Citi Group
“Germans make the point that QE just puts off necessary reforms. I’m very sympathetic to that view,” says Mr King at Citigroup. “We’re in a period when investment should be high. People should be saying: ‘I can do something useful with all the cheap money and put it into the real economy.’ But the investment we’re seeing is very disappointing. In the energy sector it is actually being cut.”
http://www.ft.com/cms/s/0/86bd4a36-a60e-11e4-9bd3-00144feab7de.html#axzz3UUA1Upob

Felix Nugee and Johnathan Hazel, Wilberforce Society at University of Cambridge
“An ideal solution, then, would marry the efficacy of fiscal policy at the ZLB with the efficient design of monetary policy. Our argument – and the next part of this paper – is that the proposal of helicopter money can unite these two objectives.”
https://wilberforcesocietyblog.files.wordpress.com/2014/01/helicopter-money.pdf

Paul Serfaty, Director of Asian Capital Partners, Hong Kong
“There is nothing ‘Keynesian’ about using central bank money to buy financial assets as a putative substitute for shortfalls in aggregate demand. Indeed, the failure of this policy to bring about significant multiplier effects, and the pooling of cash in banking and corporate coffers, shows how poor a substitute it is for what Keynes himself recommended: that government should spend directly on capital works, putting cash in the pockets of the employee-consumer, thus driving demand.”
https://thomasattwood.wordpress.com/2015/01/10/qe-a-massive-wealth-transfer-to-bailed-out-banks-failed-to-bring-about-significant-multiplier-effects/

Thomas Fazi, Member of European Progressive Economists Network and author of The Battle for Europe: How an Elite Hijacked a Continent – and How We Can Take It Back
“Overt money financing is the policy with the highest impact in raising demand and output without increasing public debt and interest rates.”
http://www.voxeu.org/article/helicopter-money-today-s-best-policy-option

Now the Bank of England needs to deliver QE to the People (Guardian)

Positive Money ref May 2015

Blogger Ref http://www.p2pfoundation.net/Transfinancial_Economics

In Transfinancial Economics what is referred to as QE for the People is Primary Stage TFE.
It is only the BEGINNING in which new money could be gradually phased in, and virtually every transaction is subjected into instant electronic inflation checks by super-flexible controls to insure inflation cannot get out of control.

“We propose that the government legislates to empower the Bank with the ability to make payments directly to the household sector”, reads the Guardian article, on 21st May 2015
The authors, Mark Blyth, Eastman Professor of Political Economy at Brown University, Eric Lonergan, Fund manager, M&G Investments and Simon Wren-Lewis, Professor of Economic Policy at the Blavaynik School of Government, Oxford University warn, that more of the same – negative interest rates or further bouts of quantitative easing (QE) – may cause more problems than they solve. They argue that the Bank of England should be given a new tool.

The empirical evidence from analogous policies – such as tax rebates in the US – suggests that transfers to the household sector would have a far greater impact on demand at a fraction of the size of QE. Consumers appear to quickly spend between a third and a half of any cash windfalls. So to increase consumption by 1% of GDP, you would need a transfer of 3% of GDP. UK QE currently stands at about 20% of annual GDP. The Bank of England estimates this raised GDP by 3%. Further QE would likely have less effect. So cash transfers to consumers are a far more effective stimulus than that provided by more QE for a lower spend.
Consistent with operational independence of the Bank of England, the size of payments and their timing should be solely under its control, and subject to the inflation target. Parliament needs to equip the Bank with the infrastructure to administer payments, and determine in advance the recipients. An equal payment to all households is likely to be the least controversial rule. It would have an immediate impact on spending and it is transparent and fair – favouring neither borrowers nor savers, rich nor poor, nor one demographic over another.

They further explain why the common objection that “this is fiscal policy, and should not be the remit of the monetary policy” is misleading and also why the concerns about the inflation are not legitimate.

It is difficult to see why printing money on a far smaller scale than under QE should have a pernicious effect on inflation if the much larger costs associated with QE have failed to do so.

You can read the full article here.
The authors are not alone in proposing “Quantitative Easing for the People”. In March this year 19 prominent economists have signed a letter letter published in Financial Times calling for the European Central Bank and eurozone central banks to bypass the financial system and work with governments to inject newly created money directly into the real economy.
And there are many more prominent economists today who propose a style of Quantitative Easing aimed at the real economy, one that would be relayed away from the banking sector and speculators and towards consumers, non-financial businesses and low income earners – and one that could directly back investment projects, rather than create risky asset price bubbles.

This infographic shows how QE was ineffective, and how the creation of sovereign money by the state would have been up to 37 times more effective in creating jobs and boosting the economy. View now…

Thursday, 20 August 2015

Companies Without Managers

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http://www.bbc.co.uk/programmes/p02yxbsb (actual link to the above)

Blogger Ref http://www.p2pfoundation.net/Transfinancial_Economics

Global Business

Who's your boss? Peter Day explores how three different companies, in three different countries, do business without managers. Who hires and fires? And how do you get a pay rise? He asks how these radical organisations emerged, and whether other companies may follow their lead.

Producer: Rosamund Jones

(Photo: Management diagram. Credit: Shutterstock)

The End of Capitalism has begun

Welcome to an age of sharing. Illustration by Joe Magee

Paul Mason

@paulmasonnews

The red flags and marching songs of Syriza during the Greek crisis, plus the expectation that the banks would be nationalised, revived briefly a 20th-century dream: the forced destruction of the market from above. For much of the 20th century this was how the left conceived the first stage of an economy beyond capitalism. The force would be applied by the working class, either at the ballot box or on the barricades. The lever would be the state. The opportunity would come through frequent episodes of economic collapse.
Instead over the past 25 years it has been the left’s project that has collapsed. The market destroyed the plan; individualism replaced collectivism and solidarity; the hugely expanded workforce of the world looks like a “proletariat”, but no longer thinks or behaves as it once did.
If you lived through all this, and disliked capitalism, it was traumatic. But in the process technology has created a new route out, which the remnants of the old left – and all other forces influenced by it – have either to embrace or die. Capitalism, it turns out, will not be abolished by forced-march techniques. It will be abolished by creating something more dynamic that exists, at first, almost unseen within the old system, but which will break through, reshaping the economy around new values and behaviours. I call this postcapitalism.

As with the end of feudalism 500 years ago, capitalism’s replacement by postcapitalism will be accelerated by external shocks and shaped by the emergence of a new kind of human being. And it has started.
Postcapitalism is possible because of three major changes information technology has brought about in the past 25 years. First, it has reduced the need for work, blurred the edges between work and free time and loosened the relationship between work and wages. The coming wave of automation, currently stalled because our social infrastructure cannot bear the consequences, will hugely diminish the amount of work needed – not just to subsist but to provide a decent life for all.
Second, information is corroding the market’s ability to form prices correctly. That is because markets are based on scarcity while information is abundant. The system’s defence mechanism is to form monopolies – the giant tech companies – on a scale not seen in the past 200 years, yet they cannot last. By building business models and share valuations based on the capture and privatisation of all socially produced information, such firms are constructing a fragile corporate edifice at odds with the most basic need of humanity, which is to use ideas fr

Third, we’re seeing the spontaneous rise of collaborative production: goods, services and organisations are appearing that no longer respond to the dictates of the market and the managerial hierarchy. The biggest information product in the world – Wikipedia – is made by volunteers for free, abolishing the encyclopedia business and depriving the advertising industry of an estimated $3bn a year in revenue.
Almost unnoticed, in the niches and hollows of the market system, whole swaths of economic life are beginning to move to a different rhythm. Parallel currencies, time banks, cooperatives and self-managed spaces have proliferated, barely noticed by the economics profession, and often as a direct result of the shattering of the old structures in the post-2008 crisis.
You only find this new economy if you look hard for it. In Greece, when a grassroots NGO mapped the country’s food co-ops, alternative producers, parallel currencies and local exchange systems they found more than 70 substantive projects and hundreds of smaller initiatives ranging from squats to carpools to free kindergartens. To mainstream economics such things seem barely to qualify as economic activity – but that’s the point. They exist because they trade, however haltingly and inefficiently, in the currency of postcapitalism: free time, networked activity and free stuff. It seems a meagre and unofficial and even dangerous thing from which to craft an entire alternative to a global system, but so did money and credit in the age of Edward III.

Post-capitalism apple trees. Illustration by Joe Magee — Sharing the fruits of our labour. Illustration by Joe Magee

New forms of ownership, new forms of lending, new legal contracts: a whole business subculture has emerged over the past 10 years, which the media has dubbed the “sharing economy”. Buzzwords such as the “commons” and “peer-production” are thrown around, but few have bothered to ask what this development means for capitalism itself.
I believe it offers an escape route – but only if these micro-level projects are nurtured, promoted and protected by a fundamental change in what governments do. And this must be driven by a change in our thinking – about technology, ownership and work. So that, when we create the elements of the new system, we can say to ourselves, and to others: “This is no longer simply my survival mechanism, my bolt hole from the neoliberal world; this is a new way of living in the process of formation.”
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The 2008 crash wiped 13% off global production and 20% off global trade. Global growth became negative – on a scale where anything below +3% is counted as a recession. It produced, in the west, a depression phase longer than in 1929-33, and even now, amid a pallid recovery, has left mainstream economists terrified about the prospect of long-term stagnation. The aftershocks in Europe are tearing the continent apart.
The solutions have been austerity plus monetary excess. But they are not working. In the worst-hit countries, the pension system has been destroyed, the retirement age is being hiked to 70, and education is being privatised so that graduates now face a lifetime of high debt. Services are being dismantled and infrastructure projects put on hold.
Even now many people fail to grasp the true meaning of the word “austerity”. Austerity is not eight years of spending cuts, as in the UK, or even the social catastrophe inflicted on Greece. It means driving the wages, social wages and living standards in the west down for decades until they meet those of the middle class in China and India on the way up.
Meanwhile in the absence of any alternative model, the conditions for another crisis are being assembled. Real wages have fallen or remained stagnant in Japan, the southern Eurozone, the US and UK. The shadow banking system has been reassembled, and is now bigger than it was in 2008. New rules demanding banks hold more reserves have been watered down or delayed. Meanwhile, flushed with free money, the 1% has got richer.
Neoliberalism, then, has morphed into a system programmed to inflict recurrent catastrophic failures. Worse than that, it has broken the 200-year pattern of industrial capitalism wherein an economic crisis spurs new forms of technological innovation that benefit everybody.
That is because neoliberalism was the first economic model in 200 years the upswing of which was premised on the suppression of wages and smashing the social power and resilience of the working class. If we review the take-off periods studied by long-cycle theorists – the 1850s in Europe, the 1900s and 1950s across the globe – it was the strength of organised labour that forced entrepreneurs and corporations to stop trying to revive outdated business models through wage cuts, and to innovate their way to a new form of capitalism.
The result is that, in each upswing, we find a synthesis of automation, higher wages and higher-value consumption. Today there is no pressure from the workforce, and the technology at the centre of this innovation wave does not demand the creation of higher-consumer spending, or the re‑employment of the old workforce in new jobs. Information is a machine for grinding the price of things lower and slashing the work time needed to support life on the planet.

As a result, large parts of the business class have become neo-luddites. Faced with the possibility of creating gene-sequencing labs, they instead start coffee shops, nail bars and contract cleaning firms: the banking system, the planning system and late neoliberal culture reward above all the creator of low-value, long-hours jobs.
Innovation is happening but it has not, so far, triggered the fifth long upswing for capitalism that long-cycle theory would expect. The reasons lie in the specific nature of information technology.
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We’re surrounded not just by intelligent machines but by a new layer of reality centred on information. Consider an airliner: a computer flies it; it has been designed, stress-tested and “virtually manufactured” millions of times; it is firing back real-time information to its manufacturers. On board are people squinting at screens connected, in some lucky countries, to the internet.
Seen from the ground it is the same white metal bird as in the James Bond era. But it is now both an intelligent machine and a node on a network. It has an information content and is adding “information value” as well as physical value to the world. On a packed business flight, when everyone’s peering at Excel or Powerpoint, the passenger cabin is best understood as an information factory.

Postcapitalism evolution. Illustration by Joe Magee — Is it utopian to believe we’re on the verge of an evolution beyond capitalism? Illustration by Joe Magee

But what is all this information worth? You won’t find an answer in the accounts: intellectual property is valued in modern accounting standards by guesswork. A study for the SAS Institute in 2013 found that, in order to put a value on data, neither the cost of gathering it, nor the market value or the future income from it could be adequately calculated. Only through a form of accounting that included non-economic benefits, and risks, could companies actually explain to their shareholders what their data was really worth. Something is broken in the logic we use to value the most important thing in the modern world.
The great technological advance of the early 21st century consists not only of new objects and processes, but of old ones made intelligent. The knowledge content of products is becoming more valuable than the physical things that are used to produce them. But it is a value measured as usefulness, not exchange or asset value. In the 1990s economists and technologists began to have the same thought at once: that this new role for information was creating a new, “third” kind of capitalism – as different from industrial capitalism as industrial capitalism was to the merchant and slave capitalism of the 17th and 18th centuries. But they have struggled to describe the dynamics of the new “cognitive” capitalism. And for a reason. Its dynamics are profoundly non-capitalist.
During and right after the second world war, economists viewed information simply as a “public good”. The US government even decreed that no profit should be made out of patents, only from the production process itself. Then we began to understand intellectual property. In 1962, Kenneth Arrow, the guru of mainstream economics, said that in a free market economy the purpose of inventing things is to create intellectual property rights. He noted: “precisely to the extent that it is successful there is an underutilisation of information.”
You can observe the truth of this in every e-business model ever constructed: monopolise and protect data, capture the free social data generated by user interaction, push commercial forces into areas of data production that were non-commercial before, mine the existing data for predictive value – always and everywhere ensuring nobody but the corporation can utilise the results.
If we restate Arrow’s principle in reverse, its revolutionary implications are obvious: if a free market economy plus intellectual property leads to the “underutilisation of information”, then an economy based on the full utilisation of information cannot tolerate the free market or absolute intellectual property rights. The business models of all our modern digital giants are designed to prevent the abundance of information.
Yet information is abundant. Information goods are freely replicable. Once a thing is made, it can be copied/pasted infinitely. A music track or the giant database you use to build an airliner has a production cost; but its cost of reproduction falls towards zero. Therefore, if the normal price mechanism of capitalism prevails over time, its price will fall towards zero, too.
For the past 25 years economics has been wrestling with this problem: all mainstream economics proceeds from a condition of scarcity, yet the most dynamic force in our modern world is abundant and, as hippy genius Stewart Brand once put it, “wants to be free”.
There is, alongside the world of monopolised information and surveillance created by corporations and governments, a different dynamic growing up around information: information as a social good, free at the point of use, incapable of being owned or exploited or priced. I’ve surveyed the attempts by economists and business gurus to build a framework to understand the dynamics of an economy based on abundant, socially-held information. But it was actually imagined by one 19th-century economist in the era of the telegraph and the steam engine. His name? Karl Marx.
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The scene is Kentish Town, London, February 1858, sometime around 4am. Marx is a wanted man in Germany and is hard at work scribbling thought-experiments and notes-to-self. When they finally get to see what Marx is writing on this night, the left intellectuals of the 1960s will admit that it “challenges every serious interpretation of Marx yet conceived”. It is called “The Fragment on Machines”.
In the “Fragment” Marx imagines an economy in which the main role of machines is to produce, and the main role of people is to supervise them. He was clear that, in such an economy, the main productive force would be information. The productive power of such machines as the automated cotton-spinning machine, the telegraph and the steam locomotive did not depend on the amount of labour it took to produce them but on the state of social knowledge. Organisation and knowledge, in other words, made a bigger contribution to productive power than the work of making and running the machines.
Given what Marxism was to become – a theory of exploitation based on the theft of labour time – this is a revolutionary statement. It suggests that, once knowledge becomes a productive force in its own right, outweighing the actual labour spent creating a machine, the big question becomes not one of “wages versus profits” but who controls what Marx called the “power of knowledge”.
In an economy where machines do most of the work, the nature of the knowledge locked inside the machines must, he writes, be “social”. In a final late-night thought experiment Marx imagined the end point of this trajectory: the creation of an “ideal machine”, which lasts forever and costs nothing. A machine that could be built for nothing would, he said, add no value at all to the production process and rapidly, over several accounting periods, reduce the price, profit and labour costs of everything else it touched.
Once you understand that information is physical, and that software is a machine, and that storage, bandwidth and processing power are collapsing in price at exponential rates, the value of Marx’s thinking becomes clear. We are surrounded by machines that cost nothing and could, if we wanted them to, last forever.
In these musings, not published until the mid-20th century, Marx imagined information coming to be stored and shared in something called a “general intellect” – which was the mind of everybody on Earth connected by social knowledge, in which every upgrade benefits everybody. In short, he had imagined something close to the information economy in which we live. And, he wrote, its existence would “blow capitalism sky high”.
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With the terrain changed, the old path beyond capitalism imagined by the left of the 20th century is lost.
But a different path has opened up. Collaborative production, using network technology to produce goods and services that only work when they are free, or shared, defines the route beyond the market system. It will need the state to create the framework – just as it created the framework for factory labour, sound currencies and free trade in the early 19th century. The postcapitalist sector is likely to coexist with the market sector for decades, but major change is happening.
Networks restore “granularity” to the postcapitalist project. That is, they can be the basis of a non-market system that replicates itself, which does not need to be created afresh every morning on the computer screen of a commissar.
The transition will involve the state, the market and collaborative production beyond the market. But to make it happen, the entire project of the left, from protest groups to the mainstream social democratic and liberal parties, will have to be reconfigured. In fact, once people understand the logic of the postcapitalist transition, such ideas will no longer be the property of the left – but of a much wider movement, for which we will need new labels.
Who can make this happen? In the old left project it was the industrial working class. More than 200 years ago, the radical journalist John Thelwall warned the men who built the English factories that they had created a new and dangerous form of democracy: “Every large workshop and manufactory is a sort of political society, which no act of parliament can silence, and no magistrate disperse.”
Today the whole of society is a factory. We all participate in the creation and recreation of the brands, norms and institutions that surround us. At the same time the communication grids vital for everyday work and profit are buzzing with shared knowledge and discontent. Today it is the network – like the workshop 200 years ago – that they “cannot silence or disperse”.

True, states can shut down Facebook, Twitter, even the entire internet and mobile network in times of crisis, paralysing the economy in the process. And they can store and monitor every kilobyte of information we produce. But they cannot reimpose the hierarchical, propaganda-driven and ignorant society of 50 years ago, except – as in China, North Korea or Iran – by opting out of key parts of modern life. It would be, as sociologist Manuel Castells put it, like trying to de-electrify a country.
By creating millions of networked people, financially exploited but with the whole of human intelligence one thumb-swipe away, info-capitalism has created a new agent of change in history: the educated and connected human being.
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This will be more than just an economic transition. There are, of course, the parallel and urgent tasks of decarbonising the world and dealing with demographic and fiscal timebombs. But I’m concentrating on the economic transition triggered by information because, up to now, it has been sidelined. Peer-to-peer has become pigeonholed as a niche obsession for visionaries, while the “big boys” of leftwing economics get on with critiquing austerity.

In fact, on the ground in places such as Greece, resistance to austerity and the creation of “networks you can’t default on” – as one activist put it to me – go hand in hand. Above all, postcapitalism as a concept isociety by, for example, the year 2075, can be outlined. But if such a society is structured around human liberations about new forms of human behaviour that conventional economics would hardly recognise as relevant.
So how do we visualise the transition ahead? The only coherent parallel we have is the replacement of feudalism by capitalism – and thanks to the work of epidemiologists, geneticists and data analysts, we know a lot more about that transition than we did 50 years ago when it was “owned” by social science. The first thing we have to recognise is: different modes of production are structured around different things. Feudalism was an economic system structured by customs and laws about “obligation”. Capitalism was structured by something purely economic: the market. We can predict, from this, that postcapitalism – whose precondition is abundance – will not simply be a modified form of a complex market society. But we can only begin to grasp at a positive vision of what it will be like.
I don’t mean this as a way to avoid the question: the general economic parameters of a postcapitalist , not economi s, unpredictable things will begin to shape it.
For example, the most obvious thing to Shakespeare, writing in 1600, was that the market had called forth new kinds of behaviour and morality. By analogy, the most obvious “economic” thing to the Shakespeare of 2075 will be the total upheaval in gender relationships, or sexuality, or health. Perhaps there will not even be any playwrights: perhaps the very nature of the media we use to tell stories will change – just as it changed in Elizabethan London when the first public theatres were built.
Think of the difference between, say, Horatio in Hamlet and a character such as Daniel Doyce in Dickens’s Little Dorrit. Both carry around with them a characteristic obsession of their age – Horatio is obsessed with humanist philosophy; Doyce is obsessed with patenting his invention. There can be no character like Doyce in Shakespeare; he would, at best, get a bit part as a working-class comic figure. Yet, by the time Dickens described Doyce, most of his readers knew somebody like him. Just as Shakespeare could not have imagined Doyce, so we too cannot imagine the kind of human beings society will produce once economics is no longer central to life. But we can see their prefigurative forms in the lives of young people all over the world breaking down 20th-century barriers around sexuality, work, creativity and the self.
The feudal model of agriculture collided, first, with environmental limits and then with a massive external shock – the Black Death. After that, there was a demographic shock: too few workers for the land, which raised their wages and made the old feudal obligation system impossible to enforce. The labour shortage also forced technological innovation. The new technologies that underpinned the rise of merchant capitalism were the ones that stimulated commerce (printing and accountancy), the creation of tradeable wealth (mining, the compass and fast ships) and productivity (mathematics and the scientific method).
Present throughout the whole process was something that looks incidental to the old system – money and credit – but which was actually destined to become the basis of the new system. In feudalism, many laws and customs were actually shaped around ignoring money; credit was, in high feudalism, seen as sinful. So when money and credit burst through the boundaries to create a market system, it felt like a revolution. Then, what gave the new system its energy was the discovery of a virtually unlimited source of free wealth in the Americas.
A combination of all these factors took a set of people who had been marginalised under feudalism – humanists, scientists, craftsmen, lawyers, radical preachers and bohemian playwrights such as Shakespeare – and put them at the head of a social transformation. At key moments, though tentatively at first, the state switched from hindering the change to promoting it.
Today, the thing that is corroding capitalism, barely rationalised by mainstream economics, is information. Most laws concerning information define the right of corporations to hoard it and the right of states to access it, irrespective of the human rights of citizens. The equivalent of the printing press and the scientific method is information technology and its spillover into all other technologies, from genetics to healthcare to agriculture to the movies, where it is quickly reducing costs.
The modern equivalent of the long stagnation of late feudalism is the stalled take-off of the third industrial revolution, where instead of rapidly automating work out of existence, we are reduced to creating what David Graeber calls “bullshit jobs” on low pay. And many economies are stagnating.
The equivalent of the new source of free wealth? It’s not exactly wealth: it’s the “externalities” – the free stuff and wellbeing generated by networked interaction. It is the rise of non-market production, of unownable information, of peer networks and unmanaged enterprises. The internet, French economist Yann Moulier-Boutang says, is “both the ship and the ocean” when it comes to the modern equivalent of the discovery of the new world. In fact, it is the ship, the compass, the ocean and the gold.
The modern day external shocks are clear: energy depletion, climate change, ageing populations and migration. They are altering the dynamics of capitalism and making it unworkable in the long term. They have not yet had the same impact as the Black Death – but as we saw in New Orleans in 2005, it does not take the bubonic plague to destroy social order and functional infrastructure in a financially complex and impoverished society.
Once you understand the transition in this way, the need is not for a supercomputed Five Year Plan – but a project, the aim of which should be to expand those technologies, business models and behaviours that dissolve market forces, socialise knowledge, eradicate the need for work and push the economy towards abundance. I call it Project Zero – because its aims are a zero-carbon-energy system; the production of machines, products and services with zero marginal costs; and the reduction of necessary work time as close as possible to zero.
Most 20th-century leftists believed that they did not have the luxury of a managed transition: it was an article of faith for them that nothing of the coming system could exist within the old one – though the working class always attempted to create an alternative life within and “despite” capitalism. As a result, once the possibility of a Soviet-style transition disappeared, the modern left became preoccupied simply with opposing things: the privatisation of healthcare, anti-union laws, fracking – the list goes on.
If I am right, the logical focus for supporters of postcapitalism is to build alternatives within the system; to use governmental power in a radical and disruptive way; and to direct all actions towards the transition – not the defence of random elements of the old system. We have to learn what’s urgent, and what’s important, and that sometimes they do not coincide.
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The power of imagination will become critical. In an information society, no thought, debate or dream is wasted – whether conceived in a tent camp, prison cell or the table football space of a startup company.
As with virtual manufacturing, in the transition to postcapitalism the work done at the design stage can reduce mistakes in the implementation stage. And the design of the postcapitalist world, as with software, can be modular. Different people can work on it in different places, at different speeds, with relative autonomy from each other. If I could summon one thing into existence for free it would be a global institution that modelled capitalism correctly: an open source model of the whole economy; official, grey and black. Every experiment run through it would enrich it; it would be open source and with as many datapoints as the most complex climate models.
The main contradiction today is between the possibility of free, abundant goods and information; and a system of monopolies, banks and governments trying to keep things private, scarce and commercial. Everything comes down to the struggle between the network and the hierarchy: between old forms of society moulded around capitalism and new forms of society that prefigure what comes next.
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Is it utopian to believe we’re on the verge of an evolution beyond capitalism? We live in a world in which gay men and women can marry, and in which contraception has, within the space of 50 years, made the average working-class woman freer than the craziest libertine of the Bloomsbury era. Why do we, then, find it so hard to imagine economic freedom?
It is the elites – cut off in their dark-limo world – whose project looks as forlorn as that of the millennial sects of the 19th century. The democracy of riot squads, corrupt politicians, magnate-controlled newspapers and the surveillance state looks as phoney and fragile as East Germany did 30 years ago.
All readings of human history have to allow for the possibility of a negative outcome. It haunts us in the zombie movie, the disaster movie, in the post-apocalytic wasteland of films such as The Road or Elysium. But why should we not form a picture of the ideal life, built out of abundant information, non-hierarchical work and the dissociation of work from wages?
Millions of people are beginning to realise they have been sold a dream at odds with what reality can deliver. Their response is anger – and retreat towards national forms of capitalism that can only tear the world apart. Watching these emerge, from the pro-Grexit left factions in Syriza to the Front National and the isolationism of the American right has been like watching the nightmares we had during the Lehman Brothers crisis come true.
We need more than just a bunch of utopian dreams and small-scale horizontal projects. We need a project based on reason, evidence and testable designs, that cuts with the grain of history and is sustainable by the planet. And we need to get on with it.

Postcapitalism is published by Allen Lane on 30 July. Paul Mason will be asking whether capitalism has had its day at a sold-out Guardian Live event on 22 July. Let us know your thoughts beforehand at theguardian.com/membership.

Postcapitalism by Paul Mason (Allen Lane, £16.99). To order a copy for £12.99, go to bookshop.theguardian.com or call 0330 333 6846. Free UK p&p over £10, online orders only. Phone orders min. p&p of £1.99.