This is the third post in my series of answers to questions about #FixingCapitalism. The first covered healthcare. The second covered basic income. This post is to address a very important question:

The answer is yes. We can employ every last person who is willing and able to work and pay them fair wages. And I will go a step farther than that and assert that we can also have near-perfect price stability over any time horizon.

This is actually a good time to discuss the value system of New Capitalism. The values are freedom, fairness and prosperity. This is in contrast to neoliberalism which explicitly values only freedom, and where freedom itself is not defined rigorously but is an more of an emotional concept used to bludgeon anyone who disagrees. For me, values are finite, measurable things. They are literally statistics which can be computed and used to determine whether one system configuration is more valuable than the other, and to quantify the value added by a particular series of operations. So let’s consider the proposed values in turn:

Freedom

Freedom is about having options. The most important option of this kind is the option to sell the result of your work for money. It is important because without first enjoying that option, you cannot ever acquire the option to buy things. Options are limited in supply. If I take an option to work at Google you cannot take the same option. Google might have another option for you or they might not. What if no institution will offer you the option to sell your work product? Then we are failing to value freedom properly in our capitalist system. There will be negative consequences. Value that could have been created will not be created. Products that could have been sold will not be. The people who create those products will see their options reduced in turn. Valuing freedom in New Capitalism is easy. The government simply offers to employ anyone who is able and willing to work. Then, at all times, everyone enjoys the freedom to sell their labor to the government for a fair wage paid in government currency, which is a claim of ownership (an equity) against the government balance sheet.

Fairness

If freedom is about having options, fairness is about pricing. It is about what you give up to exercise those options. My contention is that there are too many people who are partial participants in capitalism. That is, they are working full-time or more, but barely making enough to survive, let alone enjoy the benefits of the consumer side of capitalism. Even if they make enough to be consumers, they are still not likely making enough to invest and build the foundation of permanent savings that make a person into what I would call a full-participant in our capitalist system. I believe we aren’t doing capitalism fairly unless everyone has the ability to become a full-participant, meaning that they can earn enough income to spend, save and invest.

Prosperity

Implementing the freedom to work for money and the fairness of a fully-participating wage is the easy part. Government could put this policy into action at any time. The real question that everyone has is about prosperity. If we hire everyone who wants to work, and we pay them a fully-participating wage, and we don’t increase taxes at all (taxes are the antithesis of optionality and freedom), won’t there be a shortage of real wealth relative to the amount of money? Won’t there be inflation? Or worse, hyperinflation? I may not have enough space here to convince you that the answer is no. But the answer is no.

The argument from value.

Part of the reason the answer is no is that the currency is a financial asset, not a real asset. Financial assets get their value from real assets. Keeping the value of a real asset stable is generally difficult because:

  1. Controlling the value of any asset requires the ability to create that asset.
  2. Creating a real asset requires work.
  3. Work is difficult.

But keeping the value of a financial asset stable is a simple matter of having a disciplined process for issuing (creating) and redeeming (deleting) those financial assets. This is exactly how ETF prices are able to tightly track the stock portfolios and indices that they are built against. It is the success of ETFs which gives me hope that we can have a perfectly stable currency. Does anyone believe the ETF issuers are doing something which is beyond the capabilities of our government? This is also how ordinary corporations finance themselves. They issue equity in exchange for access to both real and financial capital. No corporation has the right to levy taxes in any form. So why do people believe collecting taxes is a necessity of government finance?

Of course, this entire discussion about the process of issuing financial assets is about protecting the value of currency, not its price, nor its effective purchasing power. Having reliable values is important, and there is a relationship between values and prices, but values and prices are not the same. Values belong to assets while prices belong to transactions. Assets are objects, while transactions are events. In real-life, prices may deviate significantly from values. So what does this mean for the price of the currency in trade?

The worry I anticipate is that if government were to hire everyone who was willing and able to work for a fully-participating wage, that prices in the real economy would rise in such a way, that after a time, they would no longer be able to spend, save and invest on that same wage. Either government would be compelled to raise the fully-participating wage, or we would fail to meet the fairness objective. So how dare I suggest that this would not be the case? I offer three arguments, in addition to the argument from fundamental value given above.

The argument from wealth.

The argument from wealth is that I believe everyone of working age wants to experience a net-worth increase in every period, on average. In other words, we all want to get rich together. But what does it mean to get rich? It means to increase the value of the assets that one owns on one’s individual balance sheet. If we are all going to grow wealthy at the same time, it also means that we are willing to hold an increasing quantity of financial assets on our balance sheets. This also means that we will only want to sell a portion of what we earn in each period in exchange for consumer assets. To make this vision of billions of expanding balance sheets into a reality, we need government to cooperate by issuing as much currency as individuals can earn by working in the public sector.

The argument from profit.

I know, you still aren’t convinced. You think that people are going to spend every last dollar they earn and drive prices to the moon. Some people will surely spend their entire incomes on consumer things and save and invest nothing. But they will not drive prices to the moon. The cash that is spent is quickly converted into financial capital on the books of some corporation. From then on, it will only become engaged in investment spending where the objective is to net an even bigger financial return. The money will be spent in a way that increases the availability of real assets. If those dollars cannot be invested for a profit, they will simply sit on the proverbial sidelines until a profitable opportunity appears. The investors who own the equity of these corporations will not complain about the increasing stockpiles of cash from which they can receive dividends or finance new investments, or both. Just as there are some people who will spend every dollar they receive in income, there are others who will invest every dollar and expect ongoing returns on each and every dollar. They will collect money without limit, but if government is unwilling to create money without limit, then their freedom to become wealthy is being constrained without reason.

Finally, the argument from demand.

I talk a lot about the fact that people who work for government add value to the government balance sheet. But what sort of value do they provide? First there is the raw, intrinsic value of the assets themselves which is related to the cost of the work that goes into creating them. Consider, for example, the pyramids as valuable public projects even though they are not particularly functional. They are valuable simply due to the sheer effort that went into their creation.

Artwork by Mike Winkelmann (http://beeple-crap.com)

But if we put our effort into creating things that are functional, and we compensate the creators fairly, the value creation potential is explosive. Government did not find itself in the business of implementing infrastructure, education and defense by accident. These services ended up in the public sector precisely because of the fact that investing in them drives demand for more wealth and capital in the private sector. People are more interested in saving the equity issues of a government which can defend itself. Likewise, roads and infrastructure make all sorts of new products and services possible. The corporations that provide these products and services all need capital on their balance sheet as an operational necessity. Education creates citizens that can perform more valuable work, and that additional value requires additional compensation to maintain fairness. That means more, fatter, balance sheets and more financial assets.

So to recap, implementing full-employment and fair wages (without raising taxes on anyone) is the easy part. The hard part is to understand why this will not result in a sustained increase in the price-level. I have offered four arguments. There is the argument that the new currency issues do not dilute the value of the currency because value is added to the public balance sheet at the same time. There is the argument that becoming wealthy entails that individuals and corporations hold more money in total. There is the argument that corporate profits require government deficits as a matter of accounting. And finally there is the argument that government services themselves drive increasing demand for financial assets in the private sector.

All of these forces work to support the value and the price of the currency, even as the supply of it goes up and up and up. That is why I believe we can have full-employment and fair wages along with stable prices.

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