Public Service Credits: A Free Market Solution to Taxation and a National Currency
Credits arise naturally from free market principles and offer a way to provide public goods without taxation.
I have previously discussed that there are two categories of goods and services based on the people who are purchasing that good or service. There are private goods, and there are public goods, depending on who the beneficiaries are. Private goods are purchased by individuals or organisations, while public goods are purchased by an arbitrary group of people. We can think of private goods as a special case of public goods where the number of people in the group is just one, or the number of people is greater than one but they are in an organisation. One of the major goals of a true free market is to efficiently provide both private and public goods, and find the right balance between the two. The balance is needed because individuals will usually acquire private goods for themselves but there is also a need for public goods such as roads. For public goods to be provided, individuals have to give up some of the private goods they want and redirect those resources towards the public goods they need. Figuring out what percentage of resources should be allocated for public goods has up till now been done in an arbitrary way by the government. They set the tax rate, take money from the general public, and use that money to redirect resources from private to public uses. As mentioned before, taxation is just a very roundabout way of allocating resources for public goods and services, and tax itself, in the view of the bartering paradigm, is the amount of resources allocated for public goods and services. The question therefore arises about whether the free market is able to optimally allocate resources for public goods, instead of the arbitrary way it is done now. The answer is yes, and the solution lies in the currency that arises from the exchange of goods and services between the government and the general public.
Public Service Credits give a natural solution to creating a national currency. It rewards people for contributing to the provision of public goods and services instead of penalising them as taxation does.
Current National Currencies
We take for granted the fact that every country has a national currency. But there is a reason why a national currency arises. The answer is that under the purchasing paradigm, you need to fund the government in order for them to be able to provide public goods and services. The government needs to tax the people to acquire this money, and they need some uniformity in doing this. It is not efficient to collect taxes in a myriad of currencies, so they choose one which they issue themselves or in partnership with the banks. Combined with legal tender laws, this creates a currency monopoly which results in this currency becoming the national currency. A national currency makes the process of reallocating private goods towards public goods more efficient, and this is true even under the bartering paradigm. However under the bartering paradigm, the national currency does not arise from legal tender laws, and there is no taxation, allowing additional private currencies to be able to compete in the market.
Today’s national currencies evolved from the use of commodity currency, typically gold or silver, in the earlier days of civilisation. It is however impractical to carry a lot of gold or silver around, and having a lot of it also makes you likely to get robbed. As a result, banking developed to handle this problem. Banks provided a safe place to store one’s gold or silver, and they issued certificates that could be redeemed for the gold or silver in the bank’s vault. But banks soon realised that people would typically not trade in their certificates for real gold or silver. Thus the banks could afford to create more certificates than the value of actual gold or silver they had stored. This idea led to the fractional reserve banking system that we have today. Eventually, the link to real gold and silver was severed, and currency today, which is still produced by banks, is not backed by anything despite evolving from commodity currency. Instead, we have central banks creating the monetary base out of thin air, and commercial banks multiplying that money through fractional reserve banking. The money is injected into the general economy through bank loans. There is no real reason for the general economy to accept this money as currency, so legal tender laws are required to force people to accept it.
National Currency in the Bartering Paradigm
The view in the purchasing paradigm, which we currently live in, is that money is a medium of exchange or a means of payment. How it arises is not precisely specified, and banks have taken on the responsibility of creating it for historical reasons. Commodity money of old had to be mined. But today money is just created out of thin air by banks because somebody has to create it. In the bartering paradigm, we view the transactions taking place in the economy as complex exchanges of goods and services for other goods and services. Exchange-based currencies, i.e., IOUs and UOIs are created as a side effect of these exchanges. In other words, exchange-based currencies require someone to provide a good or service to another party in order for them to be created. Since exchange-based currencies are contracts, the actors in the economy are automatically bound by those contracts. One particular exchange lends itself towards the creation of a national currency, i.e., a currency that will be accepted by all people in a nation without the need for legal tender laws. This exchange is the exchange of goods and services between the government and the public. Note the difference between the bartering paradigm and the purchasing paradigm. In the bartering paradigm, the government provides the public with public goods and services such as roads and bridges, and in return, the public provides members of the government, i.e., workers and contractors, with private goods and services. The public is bound by the contract it makes with the government, and as a result of that contract, we get a national currency. Notice that the government must provide the public goods or services first before the contract (currency) with the public can be created. In the purchasing paradigm, through taxation, the public provides the government with money, created arbitrarily by the banks, and loaned to the public, and in return, the government provides them with public goods and services.
Government-Public Exchange
Let’s examine the exchange between the government and the public. We have previously seen the different kinds of exchanges, with the most general being the exchange between an organisation and an arbitrary group of people. This is the case that we have here. The government is an organisation made up of individual workers and contractors, while the public is an arbitrary group made up of a number of individuals. Of course, members of government are also members of the public, but this does not change the argument, as the two sets do not have to be disjoint. Government typically partners with people and organisations in the private sector and these are the ones who really provide the public goods and services. To capture this, I will now use the term public service providers instead of government, to make it clear that I am talking about any person or organisation providing public services under the umbrella of government. Public service providers will be denoted by P = (P1, P2,…, PN) where the Pi are the workers and contractors who actually provide the public goods and services. P provides public goods and services to the general public, denoted by Q = (Q1, Q2,…, QM), where P is a subset of Q, and the Qi are the individual members of the public. It is important to remember that it is the members of P and Q who are involved in the transactions. Suppose P provides a public good or service to Q. The individual members of Q are bound by contract to provide reciprocal goods or services to the individual members of P. The idea that the members of Q should provide goods to the individual members of P may seem strange if you’re used to the current paradigm where the members of Q pay taxes to an agent of P. But remember, in the current paradigm, taxes are used to pay government workers and contractors, who then use that money to purchase goods from the rest of the public, so this achieves the same result in fewer steps. Now the contract between P and Q will lead to the creation of an exchange-based currency. Obviously, it is impractical to figure out how much each member of Q benefits from the good or service provided by P, and even if you could, having each member of Q issue an IOU will create a mess of currencies. Fortunately, we can take the inverse solution which is UOIs issued by an agent of P. Because P is an organisation, the agent can know exactly how much each member of P contributed to the good or service provided to Q.
The agent of P can create UOIs which will be distributed among the members of P according to how they each contributed towards the good or service provided to Q. Practically, this means creating new UOIs and using them to pay government workers for their work and also pay government contractors for their public works. The members of P now have UOIs which are claims to goods and services to be provided by the members of Q. I call these particular UOIs, Public Service Credits, or just Credits for short, because they are literally a tangible credit you get for performing a public service. They are created when members of P provide a public service to Q as a whole. Members of P can now use these credits to claim goods and services from Q. Of course Q is not a physical entity in and of itself. The members of P must use their credits to claim goods and services from individual members of Q, and the members of Q are required to accept these credits because they received the public good or service for which those credits were issued, and are bound by that contract. Thus, the exchange contract between P and Q makes members of Q accept the credits without a need for legal tender laws. Now suppose the members of P use their credits to purchase goods and services from some members of Q, i.e., a subset of Q, which we will call QS1. Then the people in QS1 will have provided the members of P with goods and services being the reciprocal of the public goods and services from P, thereby completing the exchange between P and Q. In general, there will be some people in Q who did not provide goods or services directly to P, i.e., outside of QS1, but that’s okay. When groups exchange, not everyone has to be involved in the exchange. This is different from the current paradigm where everyone must contribute, i.e. pay taxes, directly to P. The novelty in this new paradigm is that not everybody has to contribute directly to P, but those who do are fully rewarded with credits. This is much more efficient than taxation since it uses the everyday transactions of the actors in the economy, so there is no overhead as in taxation. Now, after providing goods and services to the members of P, the people in the subset QS1 will hold the credits for that public good or service. Since every member of Q must accept those credits, the people in QS1 now have a claim to goods and services from other members of Q. Another subset, QS2, of Q, will provide goods and services to the members of QS1, thereby earning the credits from QS1. Furthermore, a third subset, QS3, of Q, will provide goods and services to QS2 and obtain the credits through those transactions. Similarly QS4 will provide goods and services to QS3 taking possession of the credits as a result, and this goes on ad infinitum. In this way the credits circulate through the general economy as they provide goods and services to each other. In practice this is a continuous process rather than discrete subsets providing goods and services to each other in turn. The real process is just members of the public engaging in their everyday exchanges as they do in any economy, but using credits as their currency.
Credits Versus Taxation
Note that when QS1 provided goods and services to the members of P, this was the way that Q was compensating P for the public services provided. Instead of taxing the members of Q and giving that money to an agent of P to distribute among P’s members, the members of P are given credits for their public service and they use the credits to get their real compensation, which is goods and services from the members of Q. The members of Q giving goods and services to the members of P in exchange for credits replaces taxation. Notice how the flow of money reversed. In taxation, money flows from the public to the government. With Public Service Credits, money flows from the government to the public. Taxation and Public Service Credits are duals. They achieve the same purpose using different approaches. I think the kind of behaviour we want from the public is for people to want to contribute to the provision of public goods and services. In that sense it is obvious that the punitive approach of taxation is inferior to the rewarding approach of Public Service Credits.
Given that the members of P use their credits to purchase goods from a subset QS1 of Q, you might wonder if that makes it seem like only the members of QS1, instead of the entirety of Q, contributed to the compensation, in real goods and services, of members of P, and if that would effectively be equivalent to only a subset of society paying taxes. While it is true that only QS1 contributed directly to compensating P, you don’t need everyone directly compensating P. Part of the efficiency that credits introduce is that they allow for indirect compensation. Not everyone has to compensate P directly. Instead of compensating P directly, other members of the public may compensate those who compensated P directly, and they in turn may be compensated by others. Whoever holds the credits at a particular time has either directly provided a public service, i.e., is a member of P, has directly compensated a public service provider, i.e., is a member of QS1, or has indirectly compensated a public service provider, i.e., is a member of QSN where N is greater than 1. For every credit in existence, there is a chain of exchanges that links it directly to the provision of some public goods or services by a public service provider. Here is one example of such a chain: P1 is a government worker who provides public services to members of Q. For her services, an agent of P creates new Public Service Credits which he uses to pay her. Recall that P1 is also some Qi since P is a subset of Q. P1 uses the credits to purchase goods from say Q1. Using familiar terminology, this means that Q1 has paid a tax, albeit in real goods, to compensate P1 for the public services she provided. For this “tax” paid, Q1 is rewarded with credits by P1. Q1 then uses those credits to purchase goods from say Q2. This means that Q2 compensates Q1 in real private goods for the services he provided to P1. These private goods are an indirect “tax” paid by Q2 to Q1, and Q1 rewards Q2 with the credits. Continuing on, Q3 may also compensate Q2 with real private goods for which Q2 would reward her with the credits, and the chain goes on. This is just like the way we currently use currency except that we have changed the way we inject the currency into the economy, and also now use a system of rewards instead of taxation to compensate people for providing public services.
Credits as Currency
Whenever someone provides a good or service in exchange for credits, they are directly or indirectly compensating the public service providers, and they themselves are performing a public service for which they earn credits, hence the name Public Service Credits. Public service providers provide public services to the entirety of society and for that, they earn newly created credits. Private exchanges such as you working for your employer or the grocer providing you with groceries, result in the transfer of existing credits from one party to another. Your employer gives you credits for the work you have done for her, and you give the grocer credits for providing you with groceries. These are all public services, even when provided to an individual. Thus the credits circulate as currency within Q, and anytime a person provides a good or service to another party in the society she gets credit for it, by receiving Public Service Credits. The members of Q are bound by the contract with P so they must all accept the credits regardless of who the bearer is. The only exception is if the credits were issued for a good or service that they did not request.
Public Service Credits are slightly different from the currency we have now. When banks create money in the current system they just enter a number on their balance sheet. Public Service Credits are not just numbers since they are UOIs. They are tuples, made up of a unique identifier, a description of goods or services provided, for which the credit was created, and the numerical value of the credit. Members of the public can use the unique identifier to verify that a particular credit is valid before accepting it as payment for goods or services they provide. Unlike in the current system which uses legal tender laws, with Public Service Credits the public has the right to refuse any credit which was created for goods or services which the public did not request directly or through their agents. Each credit having a verifiable signature also helps prevent counterfeiting and means that credits cannot be multiplied through fractional reserve banking. To be effectively implemented, Public Service Credits should be an electronic currency.
Public Service Credits also have a finite lifetime. Since credits are UOIs, the government must create new credits for each new public service, rather than recycle old credits. Apart from public goods, the government also provides some private services to individuals who will have to pay for those services, so there will be some Public Service Credits returning to the government. Since the government cannot reuse the credits, this marks the end of their lifetime and they must then be destroyed. Thus private services provided by the government provide an avenue for credits to be withdrawn from the economy.
We see now how the bartering paradigm is different from the purchasing paradigm. In the purchasing paradigm, you compensate public service providers with money, obtained by penalising people who provide goods and services to others, i.e., taxation. Money is created by some arbitrary process and may have no bearing on real economic activity, but the more a person provides to society the more he is penalised in taxes. In the bartering paradigm, you compensate public service providers with goods and services, and you get credits for providing goods or services to other members of society. The credits are created as a side effect of the government-public exchange, i.e, credits are created whenever a public service is provided to the entire society by some public service provider. For the same activity of providing goods and services to others in the society, the current system penalises, transferring money from the public to the government in an arbitrary way, while the bartering paradigm rewards, transferring credits from the government to the public in an organic way. The task at hand is to allocate resources for public uses. Since the advent of civilisation we have used the stick, i.e., taxation, and people make a lot of effort to minimise the taxes they pay. It’s time to use the carrot and reward people for contributing to public goods and services instead. Public Service Credits is the national currency that does just that.
