The Grassroots Reinvention of Money

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Digital Cash Changes Everything

Our money itself is broken. Whether we’re talking about the UK, the US, or anywhere else in the world, our money is created by indebtedness to banks rather than adding value into our economy. This causes a lot of problems that have been well explained by an increasing chorus of voices.
Fixing our broken money system isn’t going to happen from the top down. It will come as a result of a grassroots movement in legislative reform, such as the one initiated by Positive Money, and as a result of a grassroots movement in reinventing money itself.
It is actually possible for groups of people to band together and form their own local economies. This is both legal and beneficial. It’s happening in the UK (click here, here, and here for examples), the US (examples here and here), as well as many other countries.

Opening the Floodgates with Digital Currencies

Creating custom economic systems is actually becoming significantly easier with the advent of digital cryptographic currencies, or cryptocurrencies for short.
A cryptocurrency is something quite different than the electronic money used for credit or debit cards. Debit and credit cards are digital representations of money held by banks and credit card companies. Cryptocurrencies, on the other hand, are digital forms of cash. Unlike credit and debit cards, cryptocurrencies provide the same level of privacy as physical cash.
As an analogy, you may recall the days when businesses created and moved around mountains of paper documents. We digitized the documents and the paper went away. We still have the documents. We can still do everything with them that we could before. But the paper is largely gone.
Digital cryptocurrencies digitize cash. When we digitize cash, the bills and coins go away. But we still have money with all the properties of cash–one of them being privacy.

Bitcoin Paves the Way

Bitcoin is currently the most well known cryptocurrency.  Bitcoin is a digital currency and a digital currency system. No one really knows who created the bitcoin system. Its creator appeared on the scene using a pseudonym and disappeared rather mysteriously. But the software he wrote is sheer genius.
The bitcoin software contains a digital wallet for storing and spending your bitcoins. When you digitize money, the coins and bills go away. Your money is now bits. So you need digital wallet software to store and use our money just like we need digital music players to store and use our digital music.
Therefore, the bitcoin software comes with a digital wallet. But in addition to being a wallet, the bitcoin software also does two other things. First, it contains a cryptographic puzzle that produces bitcoins. I won’t go into the details of how that works, but the cryptographic puzzle ensures that it gets harder to produce more bitcoins over time. It also limits the total number of bitcoins that will ever be created to 21 million.
The second thing that the bitcoin software does is to validate transactions. Everyone that installs the bitcoin software essentially contributes some of their computer’s processing power to the bitcoin network. When you install the bitcoin software, it uses the internet to automatically contact the rest of the network. This network collectively validates all bitcoin transactions.

The Watershed Event

A US court recently ruled that bitcoin is a currency and that the government can regulate it. In doing so, they’ve recognized it as a valid form of money. They’ve also established a precedent that can be used by any issuer of a non-national currency.
This decision means is that anyone can now legally issue a currency and it is acceptable as a valid form of money as long as its users agree to transact business with it. Like bitcoin, all currencies must accept government regulation. In other words, issuers must “come in through the front door” and not try to sneak past the laws that apply to currencies. As long as you play by the rules, you can issue a usable currency–but not legal tender–in the US. The same is likely to be true over most of the world.

Where Do We Go from Here?

The advent of digital cash has profound implications for our money and banking systems. In the next two blog entries, we’ll see how new currencies can be used in grassroots movements to provide ourselves with sound money, to create more humane financial systems, and to solve otherwise intractable social problems.

Money and Unmoney

This is the 2nd part of the series The Grassroots Reinvention of Money. You can read the 1st part here.

The advent of digital cash, which we discussed in Part 1, means that anyone can now issue a currency. This week, we’ll look at some of the new forms of money that digital cash allows.

Special-Purpose Currencies

Digital cash enables us to create currencies for addressing specific needs.

Currencies for Business

Large businesses offer cash back or other incentive programs, which are basically special-issue currencies. Cryptocurrencies let any seller issue a digital currency that is branded to their business. This digital cash incentivizes customer loyalty. Examples of this include airline miles, Amazon’s coin, and more.
As cryptocurrencies mature, we’ll see industries using specialized money through their entire supply chains. Business-specific currencies are rapidly becoming big business.

Currencies that Solve Social Problems

Most economic theories say that money is value neutral. The theory goes that, all things being equal, the features of money itself do not affect spending habits. This is false.
Money can influence people’s purchasing decisions. So it is possible to use new forms of money to solve otherwise intractable social problems. These complementary currencies, as they are called, enable anyone to match excess supply with unmet demand in a way that has social benefits. By simply rethinking money, we can create more humane economies and communities without increasing taxes, redistributing wealth, or going into debt.

Local Currencies

Another new form of money that digital cash makes viable is local currencies. For instance, if a local government wants to revive its area’s ailing economy, it can issue a bond as the backing for a local currency. The currency contains digital certificates of bond ownership. So a £20 bill in the digital currency would actually give the holder ownership of a £20 bond certificate. At maturity, the bond could be redeemed for physical cash. In the meantime, it can be spent at local businesses and used as payment for local taxes. This keeps money and value in local communities.
By the way, this same method can be used to issue money backed by gold, silver, or other commodities. The digital cash for a commodity-backed currency would simply contain certificates of ownership for that particular commodity.
While none of these new forms of money are legal tender, they are all legal currencies in most countries. There are a few things that people need to know in order to put local currencies on par with legal tender. But it’s perfectly possible to do business with sound local money rather than inflating national money.

Transcending Money

It’s actually possible to buy, sell, and do business with no money at all. Instead, you use certified digital IOUs that are designed to give the “look and feel” of cash.

Credit Clearing Cooperatives

Credit clearing cooperatives let you issue digital IUOs, called credits, to buy products from the economy instead of using money. You redeem them by selling goods and services in exchange for other people’s credits. You form cooperatives and networks of affiliated cooperatives to build the system into an entire economy. Your credits are a cryptocurrency issued through your co-op, which you can then spend anywhere in your co-op’s network.
In the co-op system, banks don’t create money. Because you’re using credits (IOUs), your “money” is created when you spend it and redeemed when you put value into the system. No debt is needed to create money. The supply of “money” always matches the demand. There’s never a shortage.
Credit clearing co-ops networks are a free market of competing businesses that profit from providing you with economic infrastructure and new investment opportunities. Competition pushes the networks to create the most stable, usable, and valuable system possible.
An excellent introduction to credit clearing is Thomas Greco’s book, The End of Money and the Future of Civilization.

Commercial Credit Circuits

Credit clearing can be specialized for business needs into a commercial credit circuit (C3). C3s enable business to issue insured IOUs (credits) as payment for goods and services instead of obtaining bridge loans.
For example, a housing contractor gets paid when she completes a house. But she must buy materials and pay for labor during construction. A C3 lets her issue insured credits that are guaranteed to be redeemable for actual cash when her customer pays her. If the customer doesn’t pay, the insurance does.
The contractor’s suppliers and workers have the option of cashing in the credits right away (and paying an early withdrawal penalty), spending the credits, or hanging onto them until they mature. If they spend their credits, then those recipients have the same choices.
In the end, everyone in a C3 is guaranteed to be paid in cash. But there are no loans needed and the capital costs are much lower because the insurance is cheaper than an interest-bearing loan. With C3s, businesses can vastly reduce the amount of money they pay to banks as interest.

What’s Next?

We’ve seen that cryptocurrencies provide us with many paths to sound money and lower capital costs. Next week, we’ll look at an example of how we can build more humane, fair, and profitable financial systems.

 

Money and Ecology

Wed, 9th Jan 2013 Positive Money

by David A. Jones (Guest Author)

“Debts are subject to the laws of mathematics rather than physics. Unlike wealth, which is subject to the laws of thermodynamics, debts do not rot with old age and are not consumed in the process of living. On the contrary, they grow at so much per cent per annum, by the well-known mathematical laws of simple and compound interest … It is this underlying confusion between wealth and debt which has made such a tragedy of the scientific era.”
–- Frederick Soddy, in Wealth, Virtual Wealth and Debt (1926).

What is debt and what is wealth? To a creditor, debts represent claims upon future wealth. While these claims can grow without limit, the payment of them is ultimately limited by what the biosphere provisions for the human economy – as John Ruskin once remarked “there is no wealth but life.” The economy is a sub-system of the biosphere, which ultimately derives its wealth from the abundant “organised” energy of the sun. This is indicated in my picture of “spaceship Earth” below (I explain what “entropy” is and its relevance to life on Earth here):

As supporters of groups like Positive Money well know, society currently issues its money as interest bearing debts to private banks. This has a very important implication for society as a whole: it means that, in order for us to enjoy permission to consume the goods and services of today (which is what money gives us after all – it is a claim upon social goods and services) we must produce more goods and services tomorrow (more future wealth) so as to repay today’s incurred debts. It seems to me that there can never be such thing as a sufficiency economy – no such thing as reaching “enough” and stopping – as long as money is created in this manner. Instead, our economy must produce tomorrow for permission to consume today.
Whilst debts, being mere accounting entries, can accumulate without limit, as Soddy pointed out wealth cannot: its generation is subject to the laws of thermodynamics. This implies a fundamental and broadening incompatibility between on the one hand a financial system founded upon unlimited creation of private debts and on the other hand a finite biosphere. Geologist M. King Hubbert (of the famous “Hubbert Peak” for oil extraction rates) made essentially this point back in 1981:

“The world’s present industrial civilization is handicapped by the coexistence of two universal, overlapping, and incompatible intellectual systems: the accumulated knowledge of the last four centuries of the properties and interrelationships of matter and energy; and the associated monetary culture which has evolved from folkways of prehistoric origin.
“The first of these two systems has been responsible for the spectacular rise, principally during the last two centuries, of the present industrial system and is essential for its continuance. The second, an inheritance from the pre-scientific past, operates by rules of its own having little in common with those of the matter-energy system. Nevertheless, the monetary system, by means of a loose coupling, exercises a general control over the matter-energy system upon which it is superimposed.
“Despite their inherent incompatibilities, these two systems during the last two centuries have had one fundamental characteristic in common, namely, exponential growth, which has made a reasonably stable coexistence possible. But, for various reasons, it is impossible for the matter-energy system to sustain exponential growth for more than a few tens of doublings, and this phase is by now almost over. The monetary system has no such constraints, and, according to one of its most fundamental rules, it must continue to grow by compound interest.”

But what is the relationship, if any, between economic growth and natural wealth extraction? I first note in passing that, under the current monetary system (and more broadly, I would argue, under capitalism itself, which is characterised by ongoing capital accumulation) economic growth is non-negotiable. As Barack Obama recently remarked:

“All of us are going to have to work together in an effective way to figure out how we balance the imperative of economic growth with very real concerns about the effect we’re having on our planet. And ultimately I think this can be solved with technology.”

Take note of the priority here: economic growth is an “imperative” – meaning absolutely necessary, unavoidable, non-negotiable – whilst threats to the ongoing survival of human civilization (exacerbated by ongoing economic growth) are merely “very real concerns”, which can be waved away with appeals to “technology”. Such prioritizing amongst world leaders, whilst it might look insane to an impartial alien observer of Earth, is perfectly understandable within an economic system which must grow tomorrow in order to subsist today.
But for how much longer can (or should) economic growth continue? As Prof. Tim Garrett shows empirically on his website, there is a simple linear relationship between global (monetary) wealth and global energy consumption, summarised in the plot below:

As I’ve argued elsewhere on more theoretical grounds, we cannot expect economic growth to become decoupled from increased energy demands and environmental impacts. In my opinion, this is why the Cop18 talks and similar conferences before them have failed. World leaders recognize that to meaningfully reduce carbon emissions implies a parting with economic growth which, under present monetary systems, would entail the swift collapse of their nation’s economy. I believe that so long as we continue to create permission to consume today – money – alongside the obligation to produce tomorrow – debt – they will remain correct in this surmise ( I should point out here that it is still perfectly possible to have a growth economy under full reserve banking – just no longer mandatory. So any growth enthusiasts reading this need not withdraw their support for monetary reform on that basis).
Arguably, it will furthermore be necessary to move beyond a capitalist system of production – thought that is a more debatable and less immediately pressing proposition, and also one beyond Positive Money’s remit to pass judgment upon. Once again, it is perfectly possible to have a capitalist economy under full reserve banking and so fans of capitalism can consistently support it – as plenty do. My own personal intuition, for what it’s worth, says that given mounting social and ecological constraints it will be necessary to increasingly phase out “capitalism” as a system, moving away from autocratic management of production for shareholder profits and towards democratic management of production for stakeholder needs.
Note the word “needs”, in contrast to the perpetually manufactured “wants” of the present economy. I would argue that capitalist production is both incentivised and coerced towards this behavior and also towards various hugely wasteful and inefficient forms of “planned obsolescence”; both entailing social and ecological costs a planet home to 7 billion people can no longer afford to pay for. We ought instead, I think, to have a system that is at least structurally capable of deciding that “enough is enough” and simply enjoying the material fruits of its past labours, while continuing to develop morally and intellectually. This is the economic future that John Stuart Mill looked forward to in his book Principles of Political Economy and later John Maynard Keynes in his essay Economic Possibilities for our Grandchildren.
We currently bump up against or exceed the limits of planetary wealth extraction and waste absorption in several sectors, as the picture below summarises:

Plot of planetary boundaries according to table 1 of the paper “A safe operating space for humanity”. Nature 461, 472-475 | doi:10.1038/461472a

Martin Wolf, chief editor of the financial times, recently noted that the financial system has become a parasite upon the wider economy, commenting that:

“An out-of-control financial sector is eating out the modern market economy from inside, just as a the larva of the spider wasp eats out the host in which it has been laid.”

But more broadly, I would argue that the economic system itself has become a parasite upon the ecological systems that support it, and looks increasingly in danger of killing the host. As senior NASA climate scientist James Hansen has written in Storms of my Grandchildren:

“If we burn all the fossil fuels, the ice sheets almost surely will melt entirely, with the final sea level rise about 75 meters (250 feet), with most of that possibly occurring within a time scale of centuries. Methane hydrates are likely to be more extensive and vulnerable now than they were in the early Cenozoic. It is difficult to imagine how the methane clathrates could survive, once the ocean has had time to warm. In that event a PETM-like warming could be added on top of the fossil fuel warming.
After the ice is gone, would Earth proceed to the Venus syndrome, a runaway greenhouse effect that would destroy all life on the planet, perhaps permanently? While that is difficult to say based on present information, I’ve come to conclude that if we burn all reserves of oil, gas, and coal, there is a substantial chance we will initiate the runaway greenhouse. If we also burn the tar sands and tar shale, I believe the Venus syndrome is a dead certainty.”

A new symbiosis of economy and ecology is thus required, if our grandchildren are to enjoy any sort of humane future. The alternative of ongoing parasitism could imply a grim downward spiral into police states, resource wars, potential nuclear conflicts – an increasingly desperate, violent, authoritarian struggle for survival in which many of the liberal political gains of the past several centuries would likely be lost and any hopes of advancing beyond these gains forgotten entirely.
To avoid this grim sketch of a possible future, we must cease eating the flesh of our children to cross the desert today – as one Buddhist sutra puts it. We must move beyond a monetary system which demands tomorrow’s production to enjoy today’s goods and services. And this entails, I believe and have argued here, the sorts of reforms that Positive Money is proposing. Whilst many changes above and beyond reformed global monetary systems are likely needed, I struggle to imagine a livable ecology emerging in the absence of such reforms. I see them as the first step and foundation towards building a sane, humanitarian and ecologically sound alternative to the present madness.

About the Author

At some point during a PhD in theoretical physics, David happened across information about "our" monetary system and decided that economics was too important to leave up to economists! Now he is doing his best to tell other people about this bizarre and harmful system as it stands today and to encourage discussions about what we might want to replace it with. David maintains a blog with more thoughts and discussions about this topic and others: http://freedomthistime.wordpress.com

Economic Methodology

Economic methodology is the study of methods, especially the scientific method, in relation to economics, including principles underlying economic reasoning.^[1] In contemporary English, 'methodology' may reference theoretical or systematic aspects of a method (or several methods). Philosophy and economics also takes up methodology at the intersection of the two subjects.

Contents  [hide]  1 Scope 2 Quotes 3 See also 4 Notes 5 References 6 External links

[edit] Scope

This section is in a list format that may be better presented using prose. You can help by converting this section to prose, if appropriate. Editing help is available. (July 2012)

General methodological issues include similarities and contrasts to the natural sciences and to other social sciences and, in particular, to:

• the definition of economics^[2]
• the scope of economics as defined by its methods^[3]
• fundamental principles and operational significance of economic theory^[4]
• methodological individualism versus holism in economics^[5]
• the role of simplifying assumptions such as rational choice and profit maximizing in explaining or predicting phenomena^[6]
• descriptive/positive, prescriptive/normative, and applied^[7] uses of theory^[8]
• the scientific status^[9] and expanding domain of economics^[10]
• issues critical to the practice and progress of econometrics^[11]
• the balance of empirical and philosophical approaches^[12]
• the role of experiments in economics^[13]
• the role of mathematics and mathematical economics in economics^[14]
• the writing^[15] and rhetoric of economics^[16]
• the relation between theory, observation, application, and methodology in contemporary economics.^[17]

Economic methodology has gone from periodic reflections of economists on method to a distinct research field in economics since the 1970s. In one direction, it has expanded to the boundaries of philosophy, including the relation of economics to the philosophy of science, the theory of knowledge^[18] In another direction of philosophy and economics, additional subjects are treated include decision theory and ethics.^[19]

[edit] Quotes

This section is a candidate to be copied to Wikiquote using the Transwiki process.

A historical sample of general methodological statements, not all of them subsequently accepted, include the following:

Happily there is nothing in the laws of value which remains for the present or any future writer to clear up; the theory of the subject is complete.

—John Stuart Mill,  1848 [1965], The Principles of Political Economy Book 3. University of Toronto Press, p. 594

So far no chemist has discovered exchange value either in a pearl or a diamond.

—Karl Marx, 1867 [1967]. Capital, Volume I, New York, International Publishers, p. 87

Economic doctrine is ... not a body of concrete truth but an engine for the discovery of concrete truth, similar say to the theory of mechanics.

—Alfred Marshall, 1885. "The Present Position of Economics", reprinted in A.C. Pigou, ed., 1925, Memorials of Alfred Marshall, Macmillan, p. 159.

The Theory of Economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions.

—John Maynard Keynes, 1922 "Introduction to the Cambridge Economic Handbooks Series", in D. H. Robertson, 1922, Money, p. v

[A]lmost every statement which we — or for that matter anyone else — runs afoul of some existing opinion, and, by the very nature of things, most opinions thus far could hardly have been proved or disproved within the field of social theory. It is therefore a great help that all our assertions can be borne out by specific examples from the theory of games and strategy.

—John von Neumann and Oskar Morgenstern,  1944. Theory of Games and Economic Behavior, Princeton University Press, p. 43.

The fact that economics is not physics does not mean that we should not aim to apply the same fundamental standards for what constitutes legitimate argument; we can insist that the ultimate criterion for judging economic ideas is the degree to which they help us order and summarize data, that it is not legitimate to try to protect attractive theories from the data.

—Christopher A. Sims, 1996. "Macroeconomics and Methodology", Journal of Economic Perspectives, 10(1), p. 111.

[edit] See also

• Methodology of econometrics
• Model (economics)

Please expand this article. Some suggested sources are given hereafter. More information might be found in a section of the talk page. (July 2012)

[edit] Notes

1. ^ :Press + button to enlarge small-text links below.
      • Roger E. Backhouse, 2008. "methodology of economics", The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
      • Lawrence A. Boland, 1987. "methodology", The New Palgrave: A Dictionary of Economics, v. 3, pp. 455-56.
      • Daniel M. Hausman, 1989. "Economic Methodology in a Nutshell", Journal of Economic Perspectives, 3(2), pp. 115-127.
      • Kevin D. Hoover, 1995. "Review Article: Why Does Methodology Matter for Economics?" Economic Journal, 105(430), pp. 715-734.
2. ^ • John Stuart Mill, 1844. "On the Definition of Political Economy; and on the Method of Investigation Proper to It", Essay V, in Essays on Some Unsettled Questions of Political Economy.
      • Roger E. Backhouse and Steven Medema, 2008. "economics, definition of", The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
      • _____. 2009. "Retrospectives: On the Definition of Economics", Journal of Economic Perspectives, 23(1), pp. 221–33 (close Bookmarks tab) Abstract.
3. ^ John Neville Keynes, 1891. The Scope and Method of Political Economy. Annotated chapter links. 4th ed., 1917 [1999]. Full Contents.
4. ^ • John R. Hicks, 1939. Value and Capital: An Inquiry into Some Fundamental Principles of Economic Theory.
      • Terence W. Hutchison, 1938. The Significance and Basic Postulates of Economic Theory.
     • Martin Hollis and Edward J. Nell, 1975. Rational Economic Man, ch. 3,4,5 and 7. Cambridge University Press.
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      • Lawrence A. Boland, 2008. "instrumentalism and operationalism", The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
      • _____, 2003. The Foundations of Economic Method, 2nd Edition. Description and chapter links.
5. ^ • Kaushik Basu, 2008. "methodological individualism", The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
     • Edward J. Nell, 1998. General Theory of Transformational Growth, Part I. Cambridge University Press.
      • Harold Kincaid, 2008. "individualism versus holism", The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
      • F.A. Hayek, 1948. Individualism and Economic Order. Chapter-preview links.
      • George J. Stigler and Paul A. Samuelson, 1963. "A Dialogue on the Proper Economic Role of the State." Selected Papers, No. 7. University of Chicago Graduate School of Business.
      • James M. Buchanan, 1990. "The Domain of Constitutional Economics", Constitutional Political Economy, 1(1), pp. 1-18, adapted as "Constitutional Political Economy" in C. K. Rowley and F. Schneider, ed., 2004, The Encyclopedia of Public Choice, v. 2, pp. 60-67.
      • Kenneth J. Arrow, 1994. "Methodological Individualism and Social Knowledge", American Economic Review, 84(2), pp. 1-9.
      • Richard H. Thaler and Cass R. Sunstein, 2008. Nudge: Improving Decisions about Health, Wealth, and Happiness. Yale. Description and preview.
      • Shiozawa, Y. 2004 Evolutinary Economics in the 21st Century: A Manifest, Evolutionary and Institutional Economics Review, 1(1): 5-47.
6. ^ • Lawrence A. Boland, 2008. "assumptions controversy", The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
      • Milton Friedman, 1953. "The Methodology of Positive Economics" in Essays in Positive Economics.
      • Paul A. Samuelson, 1963. "Problems of Methodology: Discussion", American Economic Review, 53(2) American Economic Review, pp. 231-236. Reprinted in J.C. Wood & R.N. Woods, ed., 1990, Milton Friedman: Critical Assessments, v. I, pp. 107-13. Preview. Routledge.
      • Stanley Wong, 1973. "The 'F-Twist' and the Methodology of Paul Samuelson", American Economic Review, 63(3) p p. 312-325. Reprinted in J.C. Wood & R.N. Woods, ed., Milton Friedman: Critical Assessments, v. II, pp. 224-43.
      • Shaun Hargreaves Heap, 2008. "economic man", The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
      • Kenneth J. Arrow, [1987] 1989. "Economic theory and the hypothesis of rationality", in The New Palgrave: Utility and Probability, pp. 25-39.
      • Duncan K. Foley, 2004. "Rationality and Ideology in Economics", Social Research, pp. 329-342. Pre-publication version.
      • Thomas J. Sargent, 1994. Bounded Rationality in Macroeconomics, Oxford. Description and chapter-preview 1st-page links.
      • Vernon L. Smith, 2008. Rationality in Economics: Constructivist and Ecological Forms, Cambridge. Description/contents links and preview.
7. ^ • David Colander (1992). "Retrospectives: The Lost Art of Economics", Journal of Economic Perspectives, 6(3), pp. 191-198.
      • John Neville Keynes, 1891. The Scope and Method of Political Economy. ch. I-II. Annotated chapter links. 4th ed., 1917 [1999]. Full Contents.
8. ^ • Richard G. Lipsey, 2008. "positive economics." The New Palgrave Dictionary of Economics. 2nd Edition. Abstract.
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      • Colin F. Camerer, 2003. Behavioral Game Theory: Experiments in Strategic Interaction, pp. 5-7 (scroll to at 1.1 What Is Game Theory Good For?).
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      • "Economics as a Moral Science" session, 2011. American Economic Review, 101(3), article-abstract links.
9. ^ • Lionel Robbins, 1932. An Essay on the Nature and Significance of Economic Science.
      • Richard G. Lipsey, 2009. "Some Legacies of Robbins’ An Essay on the Nature and Significance of Economic Science", Economica, 76(302), pp. 845-56 (press + button).
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      • Douglas W. Hands, 1984. "What Economics Is Not: An Economist's Response to Rosenberg", Philosophy of Science, 51(3), p p. 495-503.
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10. ^ • Edward P. Lazear, 2000. "Economic Imperialism", Quarterly Journal of Economics, 115(1), pp. 99-146.
       • George J. Stigler, 1984. "Economics—The Imperial Science?" Scandinavian Journal of Economics, 86(3), p p. 301-313.
       • Ben Fine, 2000. " Economics Imperialism and Intellectual Progress: The Present as History of Economic Thought?" History of Economics Review, 32, pp. 10-36.
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       • Gary S. Becker, 1976. The Economic Approach to Human Behavior. Description and preview.
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       • H. Wold 1954. "Causality and Econometrics", Econometrica, 22(2), p p. 162-177.
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       • _____ 2001a. "Achievements and Challenges in Econometric Methodology", Journal of Econometrics, 100(1), pp. 7-10. PDF, pp. 1-4.
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[edit] References

• John Bryan Davis, D. Wade Hands, Uskali Mäki (1998). Handbook of Economic Methodology, E. Elgar
• Hands, D. Wade, ed. (1993). The Philosophy And Methodology Of Economics, Duke University
• Hausman, Daniel M. (1984). The Philosophy of Economics: An Anthology. New York: Cambridge University Press, ISBN 052145929X
• Boland, L. (1982) The Foundations of Economic Method, London: Geo. Allen & Unwin.
• Boland, L. (1989) The Methodology of Economic Model Building: Methodology after Samuelson, London: Routledge.
• Boland, L. (1997) Critical Economic Methodology: A Personal Odyssey, London: Routledge
• Boland, L. (2003) The Foundations of Economic Method: A Popperian Perspective, London: Routledge
• D.N. McCloskey (1983). The Rhetoric of Economics, Univ of Wisconsin Press, 1998
• Daniel M. Hausman (1992). Essays on Philosophy and Economic Methodology, Cambridge University Press, 1992
• Nell, E.J. and Errouaki, K. (2011) Rational Econometric Man. Edward Elgar.

[edit] External links

• Journal of Economic Methodology - page @ EconPapers
• Daniel M. Hausman, Philosophy of Economics (with focus on methodology), Stanford Encyclopedia of Philosophy
• Milton Friedman, "The Methodology of Positive Economics"

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

Proof That Banks Create Money

The following is from Positive Money site. Like other monetary reforms such as this, it makes the claim that virtually all of the money of the world is created electronically by banks as repayable interest bearing loans to customers. Government creates a tiny fraction of the money as cash as something non-repayable into the economic system. RS.




Do banks really create money? Yes! But we know it’s hard to believe. After all, the police spend time and energy hunting down any criminal gang that starts printing their own £10 notes. But when it comes to digital money – the numbers in your bank account – the same rules don’t apply.
Don’t take our word for it – this is Sir Mervyn King, governor of the Bank of England:

When banks extend loans to their customers, they create money by crediting their customers’ accounts.

Sir Mervyn King, Speech to the South Wales Chamber of Commerce at The Millenium Centre, Cardiff on 23 October 2012

And here is Martin Wolf, chief economics editor for the Financial Times:

The essence of the contemporary monetary system is creation of money, out of nothing, by private banks’ often foolish lending 

Martin Wolf, Financial Times, 9th November 2010

In other words, when banks make loans, they create brand new money (in the form of the numbers in our bank accounts).

Here’s further confirmation from a Bank of England paper:

By far the largest role in creating broad money is played by the banking sector… When banks make loans they create additional deposits for those that have borrowed the money

Bank of England, Interpreting movements in broad money, p.377

Even before the crisis banks enjoyed various kinds of state support, including the effective right to create money.

Independent Commission on Banking Interim Report, p65

So when you take out a loan from the bank, the ‘money’ is just typed into your account and created effectively out of nothing. Here’s further proof from Paul Tucker, Deputy Governor of the Bank of England and Member of the Monetary Policy Committee (the term ‘extend credit’ is a synonym for ‘make loans’):

Banks extend credit by simply increasing the borrowing customer’s current account … That is, banks extend credit [i.e. make loans] by creating money

Paul Tucker, Deputy Governor for Financial Stability, Bank of England. Speech: ‘Money and Credit: Banking and the Macroeconomy’

[Banks] can lend simply by expanding the two sides of their balance sheet simultaneously, creating (broad) money.

Paul Tucker, Deputy Governor for Financial Stability, Bank of England. Speech: ‘Shadow Banking: thoughts for a possible policy agenda’

That’s a very mundane way of saying that the creation of money in the UK has been privatised. In other words, banks are able to create all the money in the economy and lend it to us. This has a wide range of rarely-discussed consequences and effects upon the economy and society, and is surely something that we should be questioning in the wake of a huge financial crisis.
If you’ve always thought that banks took money in from savers and lent it to borrower (as we did, before we started researching this issue), this can be quite hard to believe. But here’s the chairman of the Financial Services Authority, Lord Adair Turner:

The banking system can thus create credit and create spending power – a reality not well captured by many apparently common sense descriptions of the functions which banks perform.  Banks it is often said take deposits from savers (for instance households) and lend it to borrowers (for instance businesses) with the quality of this credit allocation process a key driver of allocative efficiency within the economy.  But in fact they don’t just allocate pre-existing savings, collectively they create both credit and the deposit money which appears to finance that credit.

Adair Turner, Chairman of the FSA, Speech: ‘Credit Creation and Social Optimality’, Sept 2011

However, the UK is not a special case – the same system operates in every country in the world. 

But isn’t this just the Money Multiplier?

It is important to note that what is being described in these comments is not the money multiplier model of banking so beloved of economics textbooks (which implies the central bank has complete control over the amount of money that banks can create). Empirical research has proved that banks do not need reserves to make loans:

There is no evidence that either the monetary base or M1 leads the [credit] cycle, although some economists still believe this monetary myth. Both the monetary base and M1 series are generally procyclical and, if anything, the monetary base lags the [credit] cycle slightly.

Nobel prize winners Finn Kydland and Ed Prescott , Federal Reserve bank of Minneapolis (1990)

MPs Talk about Banks Creating Money

Conservative MP Jesse Norman sits on the Treasury Select Committee, a group of MPs that is responsible for scrutinising the Treasury, Bank of England and Financial Services Authority. In 2011 he wrote the following in a paper entitled The Case for Real Capitalism:

[C]ommercial banks have an even greater power than that: they have the power to create credit—that is, money—by expanding their balance sheets. It is not widely  understood how important this power is: of the money presently in circulation in  the UK economy today, three per cent takes the form of cash; 97 per cent is in credit and deposits.  This financial alchemy is an extraordinary privilege, which we as citizens and taxpayers underwrite. 

Jesse Norman MP, The Case for Real Capitalism

Even Major City firms talk about Banks Creating Money:

A recent paper from Legal and General Investment Management confirmed the fact that most money is created by banks. This is a firm with nearly 10,000 employees and revenue of over £18bn. Their paper opens with:

We all know that money makes the world go round. But where does it come from? Before the recent descent into central bank money printing, the answer was that banks created money whenever they made a new loan. 

Legal and General Investment Management

In America:

The actual process of money creation takes place primarily in banks.

Federal Reserve Bank of Chicago (1992) Modern Money Mechanics

 In the real world, banks extend credit, creating deposits in the process , and look for the reserves later.

Alan Holmes, then Senior Vice President, Federal Reserve Bank of New York (1969)

And in Europe:

At the beginning of the 20th (century) almost the totality of retail payments were made in central bank money. Over time, this monopoly came to be shared with commercial banks, when deposits and their transfer via checks and giros became widely accepted. Banknotes and commercial bank money became fully interchangeable payment media that customers could use according to their needs.

Tommaso Padoa-Schioppa, then Member of the Executive Board, European Central Bank. Speech: ‘Domestic payments in Euroland: commercial and central bank money’

In the Eurosystem, money is primarily created through the extension of bank credit…. The commercial banks can create money themselves, the so-called giro money.

(Bundesbank (2009), Geld und Geldpolitik, as cited and translated by Richard A. Werner, (2009), Topics in Monetary Economics, Lecture Slides for Master in Money and Finance degree course, Goethe University, Frankfurt

This paper contends that the emphasis on policy-induced changes in deposits is misplaced. If anything, the process actually works in reverse, with loans driving deposits. In particular, it is argued that the concept of the money multiplier is flawed and uninformative in terms of analyzing the dynamics of bank lending. Under a fiat money standard and liberalized financial system, there is no exogenous constraint on the supply of credit except through regulatory capital requirements. An adequately capitalized banking system can always fulfill the demand for loans if it wishes to.

Piti Distayat and Claudio Bori, Bank for International Settlements (2009)

 It is argued by some that financial institutions would be free to instantly transform their loans from the central bank into credit to the non-financial sector. This fits into the old theoretical view about the credit multiplier according to which the sequence of money creation goes from the primary liquidity created by central banks to total money supply created by banks via their credit decisions. In reality the sequence works more in the opposite direction with banks taking first their credit decisions and then looking for the necessary funding and reserves of central bank money.

Vitor Constancio, vice president of the ECB (2011)

In Canada:

Each and every time a bank makes a loan, new bank credit is created – new deposits – brand new money

Graham Towers (1939), former Governor of the Central Bank of Canada, quoted in Rowbotham, M (1998) The Grip of Death, p.12

And a few more quotes from the UK:

Broadly speaking, at present, the money-creating sector covers UK banks and building societies, whereas the money-holding sector consists of UK households and private companies.

Bank of England, Proposals to modify the measurement of broad money in the United Kingdom p.402

In the United Kingdom, money is endogenous—the Bank supplies base money on demand at its prevailing interest rate, and broad money is created by the banking system

Bank of England, 1994, Q3 Quarterly Bulletin, p.264

The money-creating sector in the United Kingdom consists of resident banks (including the Bank of England) and building societies

Bank of England, Proposals to modify the measurement of broad money in the United Kingdom, p.405

changes in the money stock [i.e. the total amount of money in the economy] primarily reflect developments in bank lending as new deposits are created.

Bank of England, Interpreting movements in broad money, p.378

 The money stock is a dependent, endogenous variable. This is exactly what the heterodox, Post-Keynesians, from Kaldor, through Vicky Chick, and on through Basil Moore and Randy Wray, have been correctly claiming for decades, and I have been in their party on this.

Charles Goodhart, (2007), Whatever became of the Monetary Aggregates?

 Given the near identity of deposits and bank lending, Money and Credit are often used almost inseparably, even interchangeably…

Paul Tucker, Deputy Governor for Financial Stability, Bank of Engalnd. Speech: ‘Money and Credit: Banking and the Macroeconomy’

…the banking sector plays such an important role in the creation of money. Changes in the terms for deposits will affect the demand for money, while changes in the terms for loans will affect the amount of bank lending and hence money supply.

Bank of England, Interpreting movements in broad money, p.383

Money-creating organisations issue liabilities that are treated as media of exchange by others.  The rest of the economy can be referred to as money holders

Bank of England, Proposals to modify the measurement of broad money in the United Kingdom, p.402

And if you need further proof, here’s a letter written by a correspondent of ours to the Bank of England (see the original here). He asked them:

When a commercial bank makes a loan to a borrower, does the commercial bank in effect create new money? In other words, when a bank makes a loan to a borrower, is that ‘money’ just created out of thin air?

And the Bank of England response was:

When banks make loans, commercial banks do indeed create much of the money in the economy.

From the Mainstream Press

[M]uch as they might like to think they are in charge, it isn’t really the central bank in a country that creates the money – it is the commercial banks.
Every time they expand their lending they increase the supply of money in the economy. And every time they contract lending they reduce it.

Merryn Somerset Webb, editor-in-chief of Money Week, The Financial Times, August 24, 2012

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