Let’s do a mind experiment.
A thousand people under the leadership of some very bright people decide to buy an Island and set up a new society. They bring with them all the technology they need to support themselves.
It is founded on two principles: direct democracy for settling disputes (majority rules), and the market for allocating resources. For this purpose, they create their own money.
All the new citizens (who come from different countries) convert their different fiat currencies into a new common token to use as money on the island
In a generation or so, the island’s population has remained steady and the economy stablised. People’s natural abilities and drive operating in the market have seen the most talented rise to the top.
Now there are a number of competing companies in each of the key economic sectors, each owned and run by the most talented and driven people who best understand reality. One sector supplies the food and clothing, another power, water and sanitation, others the health and education services required, and another all the building and maintenance works for the island.
Everyone else works for these companies and is paid a wage that also varies based on their own talents and contribution judged in the market (as each person competes for the better paid jobs that suit their own talents).
The base wage provides enough to live a decent (though far from extravagant) life.
Very few people save any money, as they don’t need to. What they earn each week they spend buying the goods and services they need from the companies where they collectively work to produce the goods they collectively consume.
Everyone uses their own money to signal what they want produced to meet their own needs. Some want pork, others chicken. Some a round house by the ocean, others a square home in the hills. Because of the pay differentials, some have bigger houses than others in better locations, and so for other goods and services.
The market is completely efficient creating the goods and services that everyone wants — not more or less — all at least cost.
The money is doing what it is supposed to do: circulating through the economy to signal what people want produced to meet their needs.
It is paid in wages at the end of each week that are used to buy goods from the businesses that use the sales proceeds to pay the wages, and so on, week after week.
Over time, as the profits from the businesses accrue, the owners get more and more money in the bank, as there is no tax to re-circulate their share of the island’s gross income and they soon reach the limits of what they want to spend their own money on. (A person can live in only so many rooms and consume only so much food). So their ‘money wealth’ grows… though their real wealth (namely the businesses they own) remains relatively stable.
Everyone is basically happy with their station in life as they see that each person is getting what they deserve and no one is left out.
In time, the farming companies have become so efficient, that rather than laying off workers they are exporting the surplus food.
These companies foreign reserves just keep piling up, until one day the owners realise that they could spend the money importing new fully-automated equipment so they would only need to employ half the people just to maintain the equipment, and could sell the food much more cheaply and still make more profit.
The heads of these companies talk with the owners of the other businesses who see the same opportunity. The farmers agree to buy all the equipment that they and the other businesses need (using their foreign reserves) and to sell it to the others on terms. All based on market pricing.
Once the equipment is installed, the owners of all the businesses call their staff together and tell them that they have good news and bad news. They will be assessing all staff based on each person’s technical capabilities to maintain the equipment, and will be letting everyone else go at the end of the week.
That’s the bad news.
The good news is that everything will be cheaper!
At the end of the week, those being terminated are given a weeks wages for the work done.
At the end of the next week, what happens?
Half the population now have no money to express their needs in the market.
Suddenly, the sales of the businesses drop by almost half. This forces further layoffs, which send the businesses into a down spiral.
Meanwhile, people have been sharing their incomes so others are not starving. But now everyone’s standard of living has dropped.
Until someone says, this is madness. We have all the resources to produce what everyone needs just as before. We had better start paying the people who are not working. But how much?
The owners decide it ought to be sufficient for a minimum standard of living.
So the next week half the people go to work and are paid their fair wage, while the other half are paid a minimum standard (decided by the owners) and get to do what they want.
This causes a bit a a problem, because now there are people working (especially those on the lower pay scales) who feel that the extra they earn for working is hardly worth it, so some quit.
But now there is another moral dilemma — should they be paid the minimum? Who deserves it and who doesn’t? Why should some people be forced to work, and others get a free ride?
So, after some thought the owners decide that everyone should be paid the same amount as a ‘base’ entitlement as a citizen of the island: a Universal Basic Income (UBI). This would be paid, regardless of whether or not they are in work.
But what amount?
In the end, they decide it should be set in the market, like all prices.
They start off with a low rate, but people are still complaining, so they increase the amount paid to everyone. They do this until the first person in work decides the amount is enough to live on without working.
Based on the market, the UBI rate will be just below the minimum wage that people demand for working.
At this point, everyone is being paid the same amount of basic income. Those who are capable and motivated are in work, earning more, and the rest are living a ‘decent’ life (based on the UBI) doing what they want.
The market is in balance.
No one working can complain that those not working are being paid the UBI ‘for doing nothing’, as they are also being paid the same amount. But they want more, and so they take the available jobs. They get the jobs because they are the most capable and motivated people.
No one not working can complain because the best people have the jobs and there is no more work available, while they are also being provided a decent living and now have time to do what they want.
There is no central authority deciding what should get made, or how much people should get paid, or what they should spend their money on.
The rate of the Universal Basic Income is the sum total of everyone’s individual decisions in the market.
Hopefully this mind experiment may bring our points of view closer together.
There is a problem of course. The money is no longer circulating. More has to be printed each week to give people without work the means to buy the next weeks provisions.
As it is pumped in who gets to keep it?
Not the people receiving it. They spend it on buying the goods and services they need.
Ultimately, more and more money flows up to the owners of the businesses (the 1%) who simply put it in the bank…making them appear ever wealthier, though in reality their wealth has not changed. The money is just numbers in their bank account. They still owne the same businesses selling the same goods and services to the same population year on year.
The owners have no incentive to invest more in their businesses, as the people have no more money to spend on more or better goods.
Nor do they have any incentive to pay more to their staff, as the rate paid is the ‘market rate’. If they paid more, they could not get any better people, as they already have the best people working for them.
And yet, as automation increases, the capacity to make everyone better off grows!
This is not a fault of the owners. It is a system problem.
At some point, the population decides that it is foolish for the owners just to keep amassing more and more money which they cannot spend either on more goods and services for themselves (because they already have all that they want), nor on increasing productive capacity for the rest of the population (because the rest of the population has no money to buy the extra output).
The result is that all the workers band together and form a union and refuse to work, or threaten a revolution.
The owners come to their senses, and use some of the extra money they are just stashing away to increase wages… and the UBI.
This extra money is used by the population to demand more and better goods, encouraging the owners to invest in more productive resources… increasing their real wealth and the wealth of the whole island.
Again, the increase in wages and UBI is driven by the market. They are increased in tandem until the whole ‘productive capacity’ of the island is maxed out.
The danger is if the capacity of the firms to extract resources is greater than the islands capacity to supply raw material, including the regeneration of its biodiversity that supports all life on the island.
As the island’s resources are a common good on which everyone relies (including all future generations), the population devises specific mechanisms to stop over extraction and pollution that could destroy the life support systems of the island. This prevents any one firm from, say, over exploiting the common water resources, which would encourage others to do the same. As no one firms owns the water, none individually have the incentive to conserve it. Their incentive is to exploit it before the others do. This is the ‘tragedy of the commons’. How we avoid it is the topic of another day.
The point is that any restriction on exploitation has very little impact on the owners of the businesses (except to ensure their livelihood into the future!). It may reduce their profits in the short term, but it will not alter their lifestyle one bit, for they collectively consume little of the island’s resources relative to the rest of the population. The greatest impact will be on the population in general who must restrict their own consumption in keeping with the island’s carrying capacity.
At this point the businesses are generating maximum profits, the workers are earning maximum wages and the UBI is at maximum. Everyone is enjoying the best the market can offer.
But that is only looking at the supply of goods and services. There is another much more precious resource: ‘time’.
Lastly, the people working also decide they would like a bit more time off! As a result, they are happy to have their jobs restructured so they can be done by two or more people sharing the work.
On the other hand, some of those out of work would be happy to train up for a part-time job that still gave them plenty of free time, but also a bit more money to spend on things in that free time.
While being paid the UBI, they can easily take on the needed training, so the businesses don’t incur any extra costs putting them on.
As the businesses incur no extra cost in employing two or more people to share the work vs one person (because there are no extra on-costs), the owners agree
Both the goods and services AND time are shared via the market.
And everyone lives happily ever after.
At least that is a very rough overview of how I would like to see the economy work.
The mechanics underlying this type of society has been developed in detail, including the banking and tax provisions required to make it work… but that is a whole other story :)
Are we any closer?