For the Economics category

Living Standards, Poverty and Income Inequality in the UK

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This is an extract from the 2015 Annual Report produced by the Institute of fiscal Studies on Living Standards, Poverty and Income Inequality in the UK.

“Our first such report, in 2002, highlighted robust year-on-year growth in living standards and falling levels of poverty, while inequality was rising gradually. This latest report covers data up to and including 2013–14. The picture is strikingly different. Average incomes are edging up slowly again after falling sharply after the Great Recession. Income inequality has fallen back to levels last seen one or two decades ago, depending on the measure. Relative poverty is lower than before the recession, but that is because the poverty line fell in line with average incomes: in absolute terms, the poor did not tend to see falls in income of the magnitude experienced by those on middle and higher incomes, but their disposable incomes have at best been stable once their housing costs are properly accounted for. Important new themes have emerged, including increasing numbers in work alongside a deterioration of the financial position of working families, especially relative to pensioners.”




Picketty: Capitalism and Income Inequality

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More on Thomas Picketty’s historical research into capitalism and income inequality in Europe and the US since the 18th century:

Thomas Picketty

Thomas Picketty

As stated, the book’s central thesis is that when the rate of return on capital is greater than the rate of economic growth over the long term, the result is concentration of wealth. He defines capital as the stock of all assets held by private individuals, corporations and governments that can be traded in the market no matter whether these assets are being used or not. The rate of return includes profits,  dividends,  interestrents and other income from capital,      and growth is measured in income  or output.

He shows us that the return on capital has exceeded growth over the last 1000 years apart from the last century. He sees the 20th century to be an exception.

For the after tax rate of return on capital mapped against growth for the world see the graph:

Despite the periods when the wealth of the elite is diminished by world war, depression or debt-fuelled recession, Picketty argues that his data show that over long periods of time average return on investment outpaces productivity-based income by a wide margin. He dismisses the idea that bursts of productivity resulting from technological advances can be relied on to return sustained economic growth. Also a return on investment can increase when technology can be substituted for people. Piketty believes the growth rate will always return to being below the rate of return.

Income inequality as measured by the income of the top 1% in several countries tended to drop in the middle of the last century but has increased in the past several decades. Here is the graph:

He sees the trend being towards higher inequality. This was reversed between 1930 and 1975 due to unique circumstances: two world wars, the Great Depression and a debt-fuelled recession destroyed much wealth, particularly that owned by the elite. These events prompted governments to undertake steps towards redistributing income, especially in the post-World War II period. The fast, worldwide economic growth of that time began to reduce the importance of inherited wealth in the global economy.

The book argues that the world today is returning towards “patrimonial capitalism“, in which much of the economy is dominated by inherited wealth: the power of this economic class is increasing, threatening to create an oligarchy.

Some of the Criticism of Thomas Picketty’s historical research into capitalism and income inequality in Europe and the US since the 18th century

On the causes of income inequality:                                                                                      Most other economists explain the rise of top 1% incomes by globalization and technological change. The top 1% incomes are now mostly salaries, not capital incomes.  Daron Acemoğlu  and James A. Robinson point out that he seems to ignore the central role of political and economic institutions in shaping the evolution of technology and the distribution of resources in a society”.                                                                                                                                                                                                   Others point out that a large part of the increase in wealth has been through the value of land not capital goods.

Others have problems with definition of capital Piketty uses:                                                David Harvey sees him having a “mistaken definition of capital“, which describes as: […] a process, not a thing […] a process of circulation in which money is used to make more money often, but not exclusively through the exploitation of labor power. Picketty defines capital as the stock of all assets held by private individuals, corporations and governments that can be traded in the market no matter whether these assets are being used or not.

And where the rate of return comes from:                                                                                 James K. Galbraith criticizes Piketty for using “an empirical measure that is unrelated to productive physical capital and whose dollar value depends, in part, on the return on capital. Where does the rate of return come from? Piketty never says”.

For more see:





Limits to Growth: Extract from Synopsis of 2004 Update

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Limits to Growth: Extract from the Synopsis of The 30-Year Update

By Donella Meadows, Jorgen Randers, and Dennis Meadows  Donella Meadows

The following piece is taken from a short synopsis of Limits to Growth: The 30-Year Update. The full length book is available at the website of Chelsea Green Publishing

A Synopsis: Limits to Growth: The 30-Year Update

The signs are everywhere around us:

  • Sea level has risen 10–20 cm since 1900. Most non-polar glaciers are retreating, and the extent and thickness of Arctic sea ice is decreasing in summer.
  • In 1998 more than 45 percent of the globe’s people had to live on incomes averaging $2 a day or less. Meanwhile, the richest one- fifth of the world’s population has 85 percent of the global GNP. And the gap between rich and poor is widening.
  • In 2002, the Food and Agriculture Organization of the UN estimated that 75 percent of the world’s oceanic fisheries were fished at or beyond capacity. The North Atlantic cod fishery, fished sustainably for hundreds of years, has collapsed, and the species may have been pushed to biological extinction.
  • The first global assessment of soil loss, based on studies of hundreds of experts, found that 38 percent, or nearly 1.4 billion acres, of currently used agricultural land has been degraded.
  • Fifty-four nations experienced declines in per capita GDP for more than a decade during the period 1990–2001.

These are symptoms of a world in overshoot, where we are drawing on the world’s resources faster than they can be restored, and we are releasing wastes and pollutants faster than the Earth can absorb them or render them harmless. They are leading us toward global environ- mental and economic collapse—but there may still be time to address these problems and soften their impact.

We’ve been warned before. More than 30 years ago, a book called The Limits to Growth created an international sensation. Commissioned by the Club of Rome, an international  group of businessmen, states- men, and scientists, The Limits to Growth was compiled by a team of experts from the U.S. and several foreign countries. Using system dynamics theory and a computer model called “World3,” the book presented and analysed 12 scenarios that showed different possible patterns—and environmental outcomes—of world development over two centuries from 1900 to 2100.

The World3 scenarios showed how population growth and natural resource use interacted to impose limits to industrial growth, a novel and even controversial idea at the time. In 1972, however, the world’s population and economy were still comfortably within the planet’s carrying capacity. The team found that there was still room to grow safely while we could examine longer-term options.

In 1992, this was no longer true. On the 20th anniversary of the publication of Limits to Growth, the team updated Limits in a book called Beyond the Limits. Already in the 1990s there was compelling evidence that humanity was moving deeper into unsustainable terri- tory. Beyond the Limits argued that in many areas we had “overshot” our limits, or expanded our demands on the planet’s resources and sinks beyond what could be sustained over time.1 The main challenge identified in Beyond the Limits was how to move the world back into sustainable territory.

To overshoot means to go too far, to grow so large so quickly that limits are exceeded. When an overshoot occurs, it induces stresses that begin to slow and stop growth. The three causes of overshoot are always the same, at any scale from personal to planetary. First, there is growth, acceleration, rapid change. Second, there is some form of limit or barrier, beyond which the moving system may not safely go. Third, there is a delay or mistake in the perceptions and the responses that try to keep the system within its limits. The delays can arise from inattention, faulty data, a false theory about how the system responds, deliberate efforts to mislead, or from momentum  that prevents the system from being stopped quickly.

The 30-Year Update

Now in a new study, Limits to Growth: The 30-Year Update, the authors have produced a comprehensive update to the original Limits, in which they conclude that humanity is dangerously in a state of overshoot.

While the past 30 years has shown some progress, including new technologies, new institutions, and a new awareness of environmental problems, the authors are far more pessimistic than they were in 1972. Humanity has squandered the opportunity to correct our current course over the last 30 years, they conclude, and much must change if the world is to avoid the serious consequences of overshoot in the 21st century. See the graph

When The Limits to Growth was first published in 1972, most economists, along with many industrialists, politicians, and Third World advocates raised their voices in outrage at the suggestion that population growth and material consumption need to be reduced by deliberate means. Over the years, Limits was attacked by many who didn’t understand or misrepresented its assertions, dismissing it as Malthusian hyperbole. But nothing that has happened in the last 30 years has invalidated the book’s warnings.

On the contrary, as noted energy economist Matthew Simmons recently wrote, “The most amazing aspect of the book is how accurate many of the basic trend extrapolations … still are some 30 years later.” For example, the gap between rich and poor has only grown wider in the past three decades. Thirty years ago, it seemed unimaginable that humanity could expand its numbers and economy enough to alter the Earth’s natural systems. But experience with the global climate system and the stratospheric ozone layer have proved them wrong.

All the environmental and economic problems discussed in Limits to Growth have been treated at length before. There are hundreds of books on deforestation, global climate change, dwindling oil supplies, and species extinction. Since The Limits to Growth was first published 30 years ago, these problems have been the focus of conferences, scientific research, and media scrutiny.

What makes Limits to Growth: The 30-Year Update unique, however, is that it presents the underlying economic structure that leads to these problems. Moreover, Limits is a valuable reference and compilation of data. The authors include 80 tables and graphs that give a comprehensive, coherent view of many problems. The book will undoubtedly be used as a text in many courses at the college level, as its two earlier versions have been.


The World3 computer model is complex, but its basic structure is not difficult to understand. It is based in system dynamics —a method for studying the world that deals with understanding how complex systems change over time. Internal feedback loops within the structure of the system influence the entire system behaviour.

World3 keeps track of stocks such as population, industrial capital, persistent pollution, and cultivated land. In the model, those stocks change through flows such as births and deaths; investment and depreciation; pollution generation and pollution assimilation; land erosion, land development, and land removed for urban and industrial uses.

The model accounts for positive and negative feedback loops that can radically affect the outcome of various scenarios. It also develops nonlinear relationships. For example, as more land is made arable, what’s left is drier, or steeper, or has thinner soils. The cost of coping with these problems dramatically raises the cost of developing the land—a nonlinear relationship.

Feedback loops and nonlinear relationships make World3 dynamically complex, but the model is still a simplification of reality. World3 does not distinguish among different geographic parts of the world, nor does it represent separately the rich and the poor. It keeps track of only two aggregate pollutants, which move through and affect the environment in ways that are typical of the hundreds of pollutants the economy actually emits. It omits the causes and consequences of violence. And there is no military capital or corruption explicitly represented in World3. Incorporating those many distinctions, how- ever, would not necessarily make the model better. And it would make it very much harder to comprehend.

This probably makes World3 highly optimistic. It has no military sector to drain capital and resources from the productive economy. It has no wars to kill people, destroy capital, waste lands, or generate pollution. It has no ethnic strife, no corruption, no floods, earthquakes, nuclear accidents, or AIDS epidemics. The model represents the uppermost possibilities for the “real” world.

The authors developed World3 to understand the broad sweep of the future—the possible behavior patterns, through which the human economy will interact with the carrying capacity of the planet over the coming century.

World3’s core question is, How may the expanding global population and materials economy interact with and adapt to the earth’s limited carrying capacity over the coming decade? The model does not make predictions, but rather is a tool to understand the broad sweeps and the behavioral tendencies of the system.

Technology Markets

The most common criticisms of the original World3 model were that it underestimated the power of technology and that it did not represent adequately the adaptive resilience of the free market. Impressive—and even sufficient—technological advance is conceivable, but only as a consequence of determined societal decisions and willingness to follow up such decisions with action and money.

Technological advance and the market are reflected in the model in many ways. The authors assume in World3 that markets function to allocate limited investment capital among competing needs, essentially without delay. Some technical improvements are built into the model, such as birth control, resource substitution, and the green revolution in agriculture. But even with the most effective technologies and the greatest economic resilience that seems possible, if those are the only changes, the model tends to generate scenarios of collapse.

One reason technology and markets are unlikely to prevent overshoot and collapse is that technology and markets are merely tools to serve goals of society as a whole. If society’s implicit goals are to exploit nature, enrich the elites, and ignore the long term, then society will develop technologies and markets that destroy the environment, widen the gap between rich and poor, and optimize for short-term gain. In short, society develops technologies and markets that hasten a collapse instead of preventing it.

The second reason for the vulnerability of technology is that adjustment mechanisms have costs. The costs of technology and the market are reckoned in resources, energy, money, labor, and capital.


For more than a century, the world has been experiencing exponential growth in a number of areas, including population and industrial production. Positive feedback loops can reinforce and sustain exponential growth. In 1650, the world’s population had a doubling time of 240 years. By 1900, the doubling time was 100 years. When The Limits to Growth was published in 1972, there were under 4 billion people in the world. Today, there are more than 6 billion, and in 2000 we added the equivalent of nine New York cities.

See the table on doubling times:

Another area of exponential growth has been the world economy. From 1930 to 2000, the money value of world industrial output grew by a factor of 14—an average doubling time of 19 years. If population had been constant over that period, the material standard of living would have grown by a factor of 14 as well. Because of population growth, however, the average per capita output increased by only a factor of five.

Moreover, in the current system, economic growth generally occurs in the already rich countries and flows disproportionately to the richest people within those countries. Thus, according to the United Nations Development Program, the 20 percent of the world’s people who lived in the wealthiest nations had 30 times the per capita income of the 20 percent who lived in the poorest nations. By 1995 the average income ratio between the richest and poorest 20 percent had increased from 30:1 to 82:1.

Only eight percent of the world’s people own a car. Hundreds of millions of people live in inadequate houses or have no shelter at all—much less refrigerators or television sets. Social arrangements common in many cultures systematically reward the privileged, and it is easier for rich populations to save, invest, and multiply their capital.


Limits to growth include both the material and energy that are extracted from the Earth, and the capacity of the planet to absorb the pollutants that are generated as those materials and energy are used. Streams of material and energy flow from the planetary sources through the economic system to the planetary sinks where wastes and pollutants end up. There are limits, however, to the rates at which sources can produce these materials and energy without harm to people, the economy, or the earth’s processes of regeneration and regulation.

Resources can be renewable, like agricultural soils, or nonrenewable, like the world’s oil resources. Both have their limits. The most obvious limit on food production is land. Millions of acres of cultivated land are being degraded by processes such as soil erosion and salinization, while the cultivated area remains roughly constant. Higher yields have compensated somewhat for this loss, but yields cannot be expected to increase indefinitely. Per capita grain production peaked in 1985 and has been trending down slowly ever since. Exponential growth has moved the world from land abundance to land scarcity. Within the last 35 years, the limits, especially of areas with the best soils, have been approached.

Another limit to food production is water. In many countries, both developing and developed, current water use is often not sustain- able. In an increasing number of the world’s watersheds, limits have already been reached. In the U.S. the Midwestern Ogalallah aquifer in Kansas is overdrawn by 12 cubic kilometres each year. Its depletion has so far caused 2.46 million acres of farmland to be taken out of cultivation. In an increasing number of the world’s watersheds, limits have already, indisputably, been exceeded. In some of the poorest and richest economies, per capita water withdrawals are going down because of environmental problems, rising costs, or scarcity.

Another renewable resource is forests, which moderate climate, control floods, and harbor species, from rattan vines to dyes and sources of medicine. But today, only one-fifth of the planet’s original forest cover remains in large tracts of undisturbed natural forests. Although forest cover in temperate areas is stable, tropical forest area is plummeting.

From 1990 to 2000, the FAO reports that more than 370 million acres of forest cover—an area the size of Mexico—was converted to other uses. At the same time that forests decline, demand for forest products is growing. If the loss of 49 million acres per year, typical in the 1990s, continues to increase at 2 percent per year, the unprotected forest will be gone before the end of the century.

Nonrenewable Resources

A prime example of a nonrenewable resource is fossil fuels, whose limits should be obvious, although many people, including distinguished economists, are in denial over this elementary fact. More than 80 percent of year 2000 commercial energy use comes from non- renewable fossil fuels—oil, natural gas, and coal. The underground stocks of fossil fuels are going continuously and inexorably down. Between 1970 and 2000, even though billions of barrels of oil and trillions of cubic feet of natural gas were burned, the ratio of known reserves to production actually rose, due to the discovery of new reserves and reappraisal of old ones.


Sustainability with Prosperity

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How are we to achieve sustainability with prosperity and a good quality of life for all?                                                                    

For example: the need to attend to:

  • How the way we use materials and generate energy in our economy affects all life systems on our planet, on which we depend,
  • How we can use limited resources more effectively
  • How we can meet everyone’s basic needs and ensure equal opportunity for there to be stable and healthy societies.

Our technology is now very powerful in its effects on nature and each other, our population continues to grow, and what happens in any one country can affect others across the globe much more than before. Is there a need for greater collaboration and synergy                    

Between us and nature – the living systems of which we are a part,

Between us, richer and poorer, within and between societies?

Does this mean a new kind of economy? A fundamental change in the way we see and do things, and in how we identify our needs and get them met?

Is this to co-exist with a changing capitalism?

Has social evolution towards another kind of economic system started?

How far is there a shared felt need for a change and what are the signs of it?

How much do we need to change, how can we make this attractive and possible, and how can technology help?

Does economics need to be a multidisciplinary subject covering all natural and social sciences?

I am preparing a collection of website entries or posts to address these questions.

Understanding more about our Financial System and its Instabilities

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Towards a Sustainable Financial System: a conference at the LSE in March 2014  

Opening address by Lord Adair Turner, currently a senior fellow, Institute of New Economic Thinking, in the Centre for Financial Studies in Frankfurt, and a member of the Financial Stability Board  working on reform architecture for the global financial system for the G20; and recently Chair of FSA in UK.

This can be seen on video (45 mins) on the LSE website

He raised 3 inter-related questions and discussed them in the address, summarising some of the errors in basic assumptions used to manage the finance system up to the 2008 crisis:

1. Given that 97% of our money is created by the private sector in the form of credit from private commercial banks, how much is needed and for what purpose is this created?

2. How does this affect the stability of the financial and economic systems?

3. What might be the role of regulation by the state and of control by the central bank?

Money is created in three ways:

(1) Fiat money: The state prints the optimal amount of money needed to stimulate nominal demand, creating a small unfunded fiscal deficit. This puts new money into the system and increases net private financial assets. Can a government create a fiscal deficit responsibly, to an optimal extent, in line with GDP? Can we trust politicians not to buy support and create inflation? Currently this is taboo.

(2) Banks in the private sector create money by loans in the form of numbers or  a figure in a deposit account of the borrower. This is then available immediately as money to purchase with, and then repaid later. This difference in time as the loan matures means that money and purchasing power is created in the economy by credit. Private net assets are not increased as for every bit of money there is a bit of debt. So it increases private debt. 97% of money is created this way now, in the market. Deposit money and actual money are confused in people’s mind.

(3) Funded fiscal deficit. This creates new private assets in the financial sector but not new money, as it has to be offset by a public liability to pay off the debt.

In the late 19th century there was a stable supply of money (nominal GDP) as it was based on gold or metallic money. This was accompanied by a slow decline (downward flexibility) in prices (e.g. through technology increasing productivity) and nominal wages, which in turn could create growth.

In a modern economy where money takes a deposit form, how can we know if just enough credit is created for the increase in nominal demand needed? How are we to achieve stability in the money supply and financial system today?

A sufficient growth in nominal demand (which in itself can be debated as it affects sustainability in all its senses, and reflects assumptions about the mix of economic systems we need for today) may be a 5% money increase: 2½% actual growth and 2½% reflecting increase in prices/inflation.

Will the amount of money created by private credit be optimal for the desired growth in GDP and nominal demand, say 5%?

Will a sufficient proportion of credit be allocated and used for productive or socially useful purposes?

Are the consequences of debt contracts taken fully into consideration?

Borrowers use two different ways of raising money or mobilizing capital in the form of a bond or debt (e.g. from a bank), or in an equity or share form (not through banks). Equity is not certain enough to mobilise sufficient capital. Debt is not contingent on the economy as a whole or the profitability of the borrower’s business. Debt contracts are needed.

Up till recently it was believed that private sector credit creation would be controlled by market disciplines.  Borrowers will borrow at a price or rate of interest that accords with their expected return from their investment, the so-called “natural rate of interest”, derived from assumptions about key economic factors such the natural rate of productivity growth and how much people want to spend and save. The pre-crisis theoretical orthodoxy on the monetary and macroeconomic side was: low and stable inflation was not just desirable but also sufficient as an objective, as then the financial system would be in balance because the money rate of interest would be in line with the natural rate of interest, and so the financial system would be creating the right amount of credit. So money creation by credit from private commercial banks had “no meaningful role” in influencing the amount of money in the economy (Mervin King 2012). On the financial theory side there was more concern that there would not be enough credit rather than too much, as debt contracts were seen to be essential and there was a belief that free markets by themselves would maintain an optimal balance.

But the crisis of 2008 showed that we created too much of the wrong kind of debt. Empirical arguments have since been developed that show the system can be too much credit as well as too little  (on a graph the relation of credit to GDP is an inverse or upside down U curve). We can lend money without a reasonable expectation of return, leading to overinvestment cycles. The securitization of subprime mortgages were a result of neglected risk.

In an upswing of the cycle, risks can be downplayed and banks can lend without due attention to risk leading to an over-creation of credit and debt contracts.

Debt contracts are not contingent on the state of a business or potential of an asset: so it is more possible to lend without a reasonable expectation of return.

In the downswing of the cycle, there can be bankruptcy and default, as debt contracts do not respond to the state of economy in a smooth fashion.

While past equity investment carries on, if something wrong with the lending machine, the debt cannot be rolled over and there is a problem.

With debt overhang as people realize they are at risk or lose confidence, businesses become aware they are highly leveraged they de-leverage and reduce their investment. Households reduce consumption and spending.  Debt overhang leads to a slow recovery.

There are two problems with debt and so two forward indicators of such a crisis: (1) the pace of the growth of debt is high, and once there is a crisis (2) the higher the level of private debt relative to GDP (the right end of the inverse U curve) the bigger the problem.

The facts show that the system created too much debt before the crisis. Twenty years before the 2008 crisis pace of private credit growth was on average 10% – 15% per year higher than nominal GDP, growing at 5% (credit/GDP). In western developed economies the level of  private domestic credit as % of GDP rose from 50% in 1950s to 180% of GDP.

In the pre-crisis way of thinking, there was a policy conundrum: if central banks raised the interest rate when rate of increase in credit was higher than the rate of increase in GDP, there would be a risk that growth would be slowed and inflation drop below the desired target. But if they did not then they feared there would be instability. So there seemed no way of creating conditions for an  equilibrium in a monetary economy needed for economic stability and the desired rate of growth. The monetary system in its current form seemed to be inherently unstable.

To address this there is a need to attend to different categories of credit.

The original assumption about retail banking was that savings by the household sector would be lent to the business sector to finance investment. But the reality is that this has been only 15% of the credit. Instead credit has been used to finance the purchase of existing assets.

Financing consumption can be useful for smoothing across the life cycle when there is budgetary constraint. But lending money against existing assets (such as mortgages for purchasing real estate in the form of an existing building) has been a major cause of financial instability. It drives up the price of the asset – real estate – which validates in the minds of those lending and borrowing that there will be an increase in its net worth and so motivates them to continue to borrow and lend. This can feed through to new investment or to consumption through wealth, but this is not fully proportional to an increase in nominal demand. Every 15 yrs one banking system lends money for real estate without prudence.

In commercial or private real estate, changes in the money lending interest rate for the whole economy do not on their own have a sufficient effect on the credit to asset price boom while credit is easily available the asset prices (e.g. price of real estate) increase. Natural rate of interest is the interest rate in the mind of borrower, how far they expect an asset to increase in value or price, determines how much they borrow. But there is no one single natural rate for the whole of the economy.

The result is that there is more monetary wealth but no increase in nominal demand, which is the indicator that the central bank uses to raise interest rates. So it does not show up immediately. There is a problem then of debt overhang.

Three causes of rising intensity of credit in relation to growth:

1. Lending money against existing assets, especially real estate, creating a rise in real estate prices and an asset boom.

2. Pace of increase in inequality increases and there is more credit for consumption. Richer people have a larger propensity or desire to save but this money is not used for investment as it is lent to poorer people in the form of subprime mortgages to make up for deficiencies in income.

3. Global current account imbalances between surplus and deficit nations.

Countries where surpluses are not matched by equity or real property claims against the rest of the world, then they will be balanced by credit claims against the rest of the world.

We shift leverage between private and public sectors, or between countries, as this is the only way we know to address the excess leverage.

As too much private credit is created and it is not misallocated and not used effectively, Lord Turner suggests we need to go beyond bank regulation and look at the structure of the system and behaviour within it to get stability and equilibrium and address imbalances. Monetary and fiscal policies are needed to prevent too much debt and credit intensity that leads to unstable growth, and control is needed by the central bank.

Current account imbalances between surplus and deficit nations as it drives credit intensity and unstable growth

The central banks need to attend to and manage the level of debt as well as the rate of increase in it. The inverse U can be anticipated.  The limit could be 80% or 90%; it is not possible to be precise. But it is possible to see the shape of an inverse U curve.

The allocation of credit arising as a result of free market decisions can never be socially optimal. There is an externality of lending against real estate that goes up in price; this can never be captured by logical private assessment of risk rates. So higher risk ratings for real estate credit are needed.

There need to be constraints on lending both for the borrower as well as the lender.

There need to be more institutions that dedicate themselves to using savings for investment (as in Germany).





Transforming Finance

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                                       Transforming Finance  

              Fresh thinking on democracy, finance and debt                                                                             

Transforming Finance is a coalition project led by Friends of the Earth,  which draws on the expertise and support of a broad alliance of think tanks, academics, finance professionals and NGOs with an interest in making finance work for people and planet. The coalition includes the New Economics Foundation,, Share Action (formerly Fair Pensions), Civitas,, Respublica,, the World Development Movement,,   Positive Money,,  and Finance Lab, .

The March 2013 conference was generously supported by The Institute of Chartered Accountants,, The Ecology Building Society , Ethex,  and Triodos Bank,

Aims of the Conference  The conference organisers aimed to improve understanding and debate around a range of positive proposals covering banking, investment institutions and alternative financing that were designed to:

  • Avoid another financial crisis; preventing asset price bubbles, debt crises and state bailouts of financial institutions
  • Have Banking work for the real economy
  • Get finance into projects with long-term social and environmental value and financing the transition to a greener economy
  • Explore what democratic financing might look like

Summary  The May 2013 conference, has been summarised and recorded on their website   Click on the Summary tab to download a PDF summary and on the Videos tab to see the speakers’ presentations  and The Guardian’s summary videos. Scroll down to the Themes section below for a quick overview of the 38 short presentations from leading thinkers and innovators from these sectors of the UK and some from other countries.

The Charter that came out of this conference sets out a vision for a financial system that meets the needs of the 21st century rather than trying to fix the old system or protest vested interests – a finance system riddled with short-termism, secrecy, conflicts of interest, intermediaries and unproductive speculation. It reflects the key issues and proposals set out set out by the 38 speakers and represents a voice of growing consensus from inside and outside the financial system on the need for profound systemic change.

These people want to see the system transformed into one that takes a long-term outlook, allows greater competition, thrives on transparency and diversity, and channels more finance into productive investment that delivers for society, the environment and the whole economy.

They believe that the conditions for transforming finance are now in place at European and national level, and that, with sufficient political will, it could start to happen. There are three developments that could together do this:

(1) The combination of banking reform proposals and papers on the need for long term investment in UK and the EU, will provide a great number of political opportunities for change that may not come around again for some years;

(2) A new wave of financial providers, be they ethical banks, new entrants, state sponsored entities, social finance or peer to peer platforms, are being proved in the marketplace; and

(3) A collection of policy ideas that could transform finance is being rapidly developed, in different places, and are ready for mainstream debate.

The Charter is a statement of why, where and how the financial system must be transformed. It sets out a vision of what transformation would look like in three areas: (1) banking, (2) investment in the future and (3) innovation to deliver a truly sustainable finance system.

It has already been signed by the advocacy organisations, academics, finance professionals and public interest groups represented at the conference. Visit the coalition’s website to read and sign their charter as an individual or organization:

The main themes of the conference

The content of the presentations are grouped below to match the three parts of the Charter:

 1. Banking

1.1 Size of Banks:  Centralisation of power in commercial banks in the sector, that are too large to fail – worth over £1 billion, and are therefore implicitly subsidized by the state. There need to be new rules for megabanks. Monopolies in the interbank lending market need to be broken up.

 1.2. Broadening the objectives of commercial banks to make money work for people and planet, not just for private gain. Commercial private sector banks listed in the stock market focus on short term returns on investment.  The two functions of banks, supporting productive activity and financing assets, need to be separated to reduce the risk of bubbles in the economy; and retail and investment banking need to be two separate industries.  Extreme boom and bust cycles can lead to environmental damage in the good times and abandonment of social and environmental regulation in the bad. Society needs the finance sector to allocate a much larger proportion of their credit and their balance sheets to the real economy and productive uses, cost effectively. Policy needs to be used to reduce credit for speculation leading to asset bubbles. The finance sector has been actively creating risk by pursuing short-term profits, and money is not going to the right places, like the green economy and making money work for people and planet.   Parts of the finance sector do damage and are socially useless.

 1.3. Need for a proper role of the state and a well-regulated financial sector to tackle vested interests.  There is a deep misunderstanding of the way the financial system works: the powers that be think that the problems of EU or Japan can be solved by money creation, but that is only part of the issue. The real concern is how the money created by bank credit in the form of loans is spent. Commercial, private sector, banks create 97% of the money supply in the form of credit in deposit accounts. There is no regulation or guidance on who gets the money and for what purpose; the banks decide mainly on the basis of how best to maximize their own profits. Credit creation for GDP transactions into the real economy need to be distinguished from credit for financial transactions that lead to financial asset creation which is not part of GDP. This determines asset prices and so can lead to asset inflation and the cycle of asset boom and then bust when there is not enough credit for GDP transactions. Capital creation through credit for financial transactions is always unsustainable as there is no real generation of income gains to repay the loans. Asset boom and bust cycles are shown in historical data over the last century (e.g. US in 1920’s and Japan in 1980’s), and in the first decade of this one when total credit (and so financial credit) was ahead of GDP.

In addition to this Banks all too often prefer to offer credit for the real economy and GDP transactions when it is to be used for consumption rather than productive activity. This can create more demand while not directly creating the goods and services to meet that demand, and therefore can fuel inflation. Money creation through credit is good if it is lent for the right kind of production. Credit guidance by the central bank can promote lending for productive activity in the real economy and it can reduce speculative lending for financial transactions. While regulation is important, credit guidance is key in preventing instability and crises in banking. Currently the Basel agreements appear to punish banks for lending to SMEs and to reward them for investing in property.  The banks will listen to their central bank’s credit guidance as they are dependent on it for inter-bank market operations. There needs to be a permanent and legitimate role for the state in banking, at a local or national level, either to reduce the cost of risk capital for socially desirable activities and innovation, or to influence the overall allocation of credit to the economy. Fix the financial system and we will become more democratic overnight: all of our institutions have been corrupted by finance, but in particular our democracies and our parliaments.

1.4. Banking systems with greater diversity of institutions, in forms of ownership and constitution, is another way of governing how money as credit is used:  as in Germany where regional savings banks and co-operatives, which make up 70% of the banking sector, are mandated to provide credit for productive use, the common good and for financial inclusion, and local savings are used for local loans and small businesses, with profits staying within the region. It is in the interest of local banks, constituted in this way, to invest in or lend to local businesses with good prospects. While such banks confine operations within a region they also collaborate across regions by sharing IT centres and funds to cover liabilities. The Government should provide central infrastructure for local banks to overcome cost barriers. Locally head-quartered and mutually-owned banks have a better track record of supporting small business & local economies. There should be increased competition and diversity within retail banking allowing for frequent new entrants, and exits: multiple ownership models including mutuals, co-operatives, credit unions, local savings banks and sector banks. Diversity and more prudential balance sheets and local knowledge leading to a more healthy loan book, create greater resilience in times of crisis. Governments and policy makers can structure the economy to have these different forms of banking institutions, and civil society and progressive finance can be aligned to this to secure big systemic change.  Government can encourage more financial education both for citizens and for professionals in different roles in the finance system so they can participate to mutual advantage.

1.5 Fresh Thinking on Debt and Recoveryfor now and the future.  Since the credit crunch debate has been around austerity versus public and private borrowing. How do we manage debt-cancellation now that there are complicated chains of debt between different players? Could some debts, those seen, through information available to the public, as legitimate, be written off or paid back later after recovery, as part of a transition to a new monetary system? Since the crisis banks have been cautious with loans and people are paying off their debts where they can, so that there is less money in the economy for productive activity. The central bank put money into the bond market through quantitative easing to address this but this has fuelled financial markets and led to loans for speculative, rather than productive, activity.  Should the central bank create money through putting it into the government’s bank account to be spent in the real economy, to tackle climate change and the transition from a carbon economy, creating jobs and enabling people to pay off their debts? This in turn could reduce private bank credit and the bank’s assets (as loans are assets and deposits liabilities), and so the size of the banks.  Or should there be an independent commission to oversee long term investment by the government in the low carbon infrastructure needed for sustainable living in the 21st century? This  would be a loan and the commission would also advise/decide how it is to be paid back:  through general tax, specific taxes, and the expected returns on investment for the economy as a whole that would in turn generate more state income from taxes and reduce state costs in the form of benefits or subsidies. The specific taxes might be on cars & vehicles with carbon emissions or a small carbon tax for the economy as a whole which increases as our international competitiveness moves over to carbon free technology  and energy?

2. Savings and Investment

2.1  Where do our savings go? How to ensure that our pensions and insurance savings serve people and planet rather than fuelling speculative bubbles and climate disaster? Pensions fund destructive activity but there is very little in the system to check this. Moving our money is relatively easy with banks, but much harder when it comes to pensions and insurance savings – though more people want to with their savings.   Does government need to fundamentally change the rules by which pension providers compete? Or should we cut out the mainstream middle men altogether and seek radically new ways of investing our money? Increases in transparency would give savers the information they need to know (and act) if their savings are being invested in environmentally or socially damaging projects.  Financial literacy and bringing economic activity into marginalised communities is vital too.

2.2 Fiduciary duties are the strict legal obligations that apply when one person is entrusted to act on behalf of another. In an investment context, fiduciaries include the trustees of pension funds and charitable trusts. Other examples of fiduciaries are lawyers and the legal guardians of children. Fiduciary duties are interpreted very narrowly as a straightforward duty to maximise profits in the short term, and the law needs clarification  to ensure that ‘beneficiary interest’ is interpreted more broadly to address the issues of today – such as climate change, resource and energy limits, poverty and income equality across the world, security in the face of extreme ideologies linked to terrorism, and the need for strong and resilient economies. The behaviour of institutional investors will have an enormous impact on addressing these, and it is vital that our money contributes to good corporate governance rather than fuelling bubbles and irresponsible practices. Analysis by Carbon Tracker ( shows that the valuation on the stock market of major fossil fuel companies is largely based on reserves which cannot be burned if we are to keep the rise in global temperature below 2 or 3 degrees. This “carbon bubble” threatens investors and pension funds. Pension funds should be engaged owners of the shares they hold with an active role challenging companies, and ensuring much more engagement with issues such as funding the green economy. But it is hard for an individual fund to take a lead; we need to “re-humanise” investment collectively and regulation is needed together with radical new investment mechanisms that shift the mainstream. Fiduciary standards should be applied consistently to those managing other people’s money: this means addressing the conflicts of interest between financial intermediaries and the millions of ordinary savers whose money they invest. Without tackling the role of financial intermediaries and the principle (who has the money)/agent (to whom the investment is delegated) problem through a code of practice, asset mispricing and rent extraction result; the G30 proposals may be a step in the right direction.  Perverse incentives must be taken out of the system. New rules are needed for megabanks, and a change of culture so that they see themselves as fiduciaries. For example: highly damaging food speculation through the increase in trading of derivatives based on the price of food, that leads to massive price spikes with particular impact on the global south. Deregulation is the cause.  The war is cultural, not economic: we need to reclaim money and power from the banks. This can empower governments to bring in the regulation needed. Savers must make the case that social and environmental considerations are the bedrock of financial success, and demonstrate that we value something other than the highest short term financial return.

2.3 Investing as if the future matters Long term savings capital should be deployed in the market primarily as investments in economic activity for the long and medium term, rather than a pool of money to fund short term, speculative trading in equities which has little bearing on the true value of the assets being bought and sold. Investment institutions should understand and take into account the social, environmental and other systemic consequences of their investments. The legal framework must support and encourage this. Investors will be more responsive when the government shows by their policies that climate change will be tackled. The structure of the investment sector must maximise transparency and accountability to savers, and minimise opportunities for rent-seeking. The policy framework and tax system should unambiguously reward equity investments held for long periods over ones sold more frequently.

3. Innovation in raising Finance: 

Alternative and bottom-up solutions aimed at democratising finance and getting it into the right place have increased independently across the globe since the recent banking crisis using the same technology that allowed social networks to grow.  Much of the regulatory and policy recommendations have focused on reforming the financial institutions that caused the crisis, but elected governments need to ensure that the markets for new systems such as these are adequately protected from fraud or poor judgement derived from mass appeal. On the other hand experimentation on a small scale means less damage from failure or the breakdown of user trust. The resurgence of co-operative models of economic and financial collaboration, and peer-to-peer models, which connect people to each other rather than via financial intermediaries who think of their job in terms of transactions rather than as a commitment to the welfare of clients and the society of which they are a part. Finance based around localities is coming back, and finance that aligns with specific values. Timebanks and community exchanges allow people to trade freely and unleash underused resources, to engage differently with society locally and to question the relationship between money and value. Community shares and bonds, crowd-funding and social investment platforms provide new ways of raising finance for popular projects. Crowdfunding creates engaged supporters and democratises finance, and there are many ways to do it – from quasi-equity to loans and even donations. People support crowdfunding not just because of returns but also because of relationships. Could these innovative models ‘disrupt’ the system so that there is a tipping point where consumers demand greater transparency, autonomy and demonstrable social return?
 Allstreet (  ), for example,  has created a map of the alternative finance system, illustrating where new entrants and startups can disrupt or partly take over from mainstream financial services in all the main areas: lending (e.g. through ‘peer-to-peer’ networks),  nvesting, current accounts and savings, payments (e.g. mobile money),  alternative currencies, alternative stock and foreign currency exchanges, advice and guidance, open data etc. Through ‘disintermediation’ everyone could effectively become their own bank. There is a challenge for small  players offering alternative finance to get to a useful scale.

The intellectual power of the finance sector needs to be wholly focused on creating innovations that are socially useful. Regulation and the tax system should reward simplicity, transparency and diversity for the customer, and penalise complexity, secrecy and rent-seeking by the finance sector. Proportionate regulation should be introduced speedily for new finance products and innovative business models aimed at making financial services more inclusive and accessible, or accelerating funding to the real economy, for example peer-to-peer lending or equity crowd-funding. Policymakers and regulators should have to ensure they have the skills and resources to support innovation and competition with the existing system, as well as within it.

Those at the conference signing the Charter:

Organisations in support
 The Finance Innovation Lab,
New Economics Foundation,
Share Action,
Positive Money,
Move Your Money,
Friends of the Earth,
Ecology Building Society,
PRIME Economics,
All Street,
Blue & Green Tomorrow,
Centre for Banking Finance and Sustainable Development – University of Southampton,
Beacon Strategic Communications,
Trillion Fund
Manchester, Energy Generation Association,
Triodos Bank,
Community Forge,
Institute of Social Banking,

Individuals in support
 Paul Woolley, Founder of the Paul Woolley Centre for the Study of Capital Market Dysfunctionality LSE,
Professor Mariana Mazzucato Economist and Professor of Science and Technology Policy, University of Sussex,
Professor Gary Dymski Chair in Applied Economics Leeds University Business School,
Professor Costas Lapavitsas Professor of Economics at SOAS,
Professor Richard Werner Director Centre for Banking, Finance and Sustainable Development University of Southampton.

Climate Change & Global Temperature: Update

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CO2 Emissions & the Speed of Increase in Global Temperature    
Four new clips.   Scroll past headings for brief descriptions, youtube links & audio podcasts.

1. New Data on Earth’s ClimateSystem Amplifying the Effects of CO2 Increases –using a different method based on Historical Data
2. Risks of a Runaway episode in the Global Climate System: its Implications – Introduction
3. Risks of a Runaway episode in the Global Climate System: its Implications – Scientific Data
4. Risk of not using the best possible data & observations to estimate Global Temperature Increases

By David Wasdell,
Director of  Apollo-Gaia Project
June 2012

See also the 8 short June 2011 video clips explaining the greenhouse effect due to increases in CO2 in the atmosphere, the amplification of this by the earth’s climate system, the faster increases in global temperature that result, and the potentially disastrous effects of this on human and all life on the planet.
In these 4 more recent  clips made in June 2012 David describes in more detail the results of a recent study by the Apollo Gaia project that set out to address two questions:
(1)   By how much does the earth’s climate system itself multiply or amplify the effects of what we have done by changing the composition of greenhouse gases in the atmosphere so as to increase the average global temperature?
(2)   Is there a tipping point or critical threshold beyond which the climate system takes off on its own momentum into a runaway episode in which case we have no further ability to control it?

This new study is based on a different methodology developed over the last four years. It promises to produce more reliable results than the system modelling done so far that informs the Intergovernmental Panel on Climate Change (IPCC). Papers are now being presented and about to be published based on this new method. Climate scientists recognise its importance, including the head of the IPCC. Normally new studies lead to debate. As a leading scientist said recently, debates on the validity of findings on climate change need to be between climate scientists, not scientists and non-scientists. The media might thrive on debate but it needs to be between those with the relevant knowledge and information. 95% of climate scientists agree on the seriousness of the situation. Science thrives on debate – let us hear the debate on this between scientists, and hope that this new study leads to a revised consensus on estimates and risks if necessary, the implications of which can then be debated and discussed more widely.

1. New Data on the Amplification by the Earth’s system of the effects of increases in CO2 in the atmosphere
In this first clip David first describes the change in method two years ago (2010) from attempting to model mathematically the feedback processes in climate change to conducting an empirical historical study of the earth system in the past, combining 5 disciplines, to track how the earth’s system is sensitive to, and so amplifies, the effects of increased CO concentration in the atmosphere. He uses a metaphor to illustrate the change in method. The  answer to the first question on amplification and sensitivity has serious implications as it is 2 ½ times greater than the estimates of current models used by the Intergovernmental Panel on Climate Change.
Audio: Amplification of CO2 effects

2. The Boundary Conditions and Risks of a potential Runaway episode in the Global Climate System and its Implications – Introduction
All the work on the response of the earth’s system to CO2 increases has been based on historical change. This has in the past been very slow and only just a little out of equilibrium. Today this change is about 300 times faster, bringing with it new feedback processes that increase the amplification of the effects of CO2 increase. David uses a metaphor to illustrate amplifying and damping feedback, and the imbalances between them. He ends by pointing out that we are at a point where there is a very real possibility of a runaway episode in which amplifying feedback is stronger than damping feedback. This allows global temperature to increase exponentially, to accelerate without limit, rather than tend towards a new equilibrium.
Audio   Runaway – 1

3. The Boundary Conditions and Risks of a potential Runaway episode in the Global Climate System – The Scientific Data
Graph 1 compares different computer models of how the earth’s climate system responds to changes in CO2 concentrations in the atmosphere. Current change being 300 times faster than historical records the sensitivity or speed of response of the earth’s system is much higher. This means that there is a serious possibility of a tipping point or critical threshold being approached beyond which a runaway episode begins. Temperature goes on increasing: the faster it goes up the faster it goes up (non-linear change).
Graph 2 illustrates this. This shows how the amplifying effect of the strength of the feedback factor (feedback processes within the climate and earth systems in response to increases in CO2) in turn increases the global equilibrium temperature as it approaches the damping critical threshold of 3.3 Watts per square metre in radiated energy from the earth for every degree rise in the earth’s surface temperature. If this feedback factor is bigger than this measure of energy radiated from the earth the rise in temperature accelerates and the gap between energy in and out gets bigger and bigger.  But there are factors that will push the strength of the feedback beyond the critical threshold into an episode of increasingly faster runaway behaviour and temperature increases. This implies more intensive and faster interventions by us now before this happens.  For a full explanation of this see the 2012 Istanbul presentation link on the front page of
Audio  Runaway – 2

4. Risk of not basing estimates of Global Temperature increases and their effects on the best possible data and observations
Future changes in the earth’s climate system and the natural environment on which human life and all life depends will be greater than those we see today. Powerful analogy of misdiagnosing a temperature increase in a child. Very dangerous to dismiss climate change as a hoax.
Audio Risks

Transforming our Money System – 1

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Transformation of our Money System: the need and some tested solutions A review and summary of The End of Money and the Future of Civilisation by Thomas H.Greco 2010 Floris Books, UK,             ISBN 978-086315-733-2     2009 Chelsea Green Publishing, US.

You can download this by clicking on the PDF icon at the end of the document.   Also as noted in the comment at the end there are links to each of the other 5 parts at the end of this document and a summary of the topics in each part which are highlighted in that part.

Summary and Discussion of the book by John Bristow:  I have recently read this book by Thomas Greco and summarised it in order to get to grips with the ideas as I am unfamiliar with what money really is and how it has developed, and am interested in this as a key element of possible changes in our way of thinking about and organising our economy, particularly in more developed countries (though the solutions here are very relevant to the less developed and some of them are trying out new ways of doing business with money and with investments and savings). Other relevant and fairly recent books are Niall Ferguson’s Ascent of Money (more of an historical account) and Rachel Botsman and her colleague’s What is mine is yours (“collaborative consumption”) whose recent book has won acclaim for her as a “thought leader” alongside her work as a social innovator.

This book provides the information needed to understand the money system better and the effects of the current system on our lives, as well as practical ideas for possible local initiatives supported by national and international NGOs and research and knowledge centres.

Greco has worked in the area of alternative forms of exchange for 30 or more years as a teacher, advisor and author. This recent book is of practical interest as it describes the real need for a transformative change for the future of civilisation and gives examples of some tried and tested (knowledge based) ways forward in addressing the need. He shows  how a transformation of the kind he points to is in line with both felt needs. The ways forward make economic and financial sense and fit the need for economies that do not grow in ways that destroy our natural habitat and human and other lives on the planet (seeing all life as one life) and that create more social co-operation and cohesion rather than division between the have’s and have nots and the fragmentation of local communities. His suggestions for change also fit the kind of values and guiding ideas that appeal to younger people seeking alternatives and older seeing opportunities for change that they sought but had not seen or formulated in this way before. They seem to reflect aspects of the next step in humanity’s history, though this century is full of drama and uncertainty around how much suffering or cost will be incurred before some transition to a different way of living, thinking and doing things is arrived at. The solutions he puts forward would be supported by and need to be integrated with the emerging transformational change towards a more web-based trading platform world-wide, the technological infrastructure. He sees the main drivers for change being these felt needs and local “bottom up” initiatives, that do not use coercion or become unduly threatening to the current regime, that use the technology for information and communications and fit these values, and are globally networked and informed. National governments and the vested interests of some of the large financial organisations may well resist it and be fearful of not having the option available for borrowing off the central bank to cover spending above revenue from tax and so using the legal tender basis of national currency to pay off their debts or to use deficit spending to counteract deflation. They will need to see viable alternatives. Greco sees this political-financial elite and their world view as having inordinate power over our money system and therefore our economies, a form of what he calls “materialistic feudalism”, a politicised global debt-money regime. But local businesses may well see the advantages as well as financial service enterprises based on more co-operative models, and community groups seeking an economy based on a different mix of values and priorities and more resilient and empowered local communities. With similar successful initiatives in a few local regions, each requiring sufficient “critical mass” to be become stabilised, Greco sees similar changes be adopted elsewhere. So there are many factors coming together to make a key societal change, already under way in terms of 30 years (and more) of learning and in web-based developments. A more thorough analysis of the drivers and context for this change are set out in the last section.

The summary can be used for reference as it is organised with links to  these 4 sections (4 with 2 parts) and the topics within them are  listed here and can be found by scrolling down to the highlighted topic:

1. The Money System: historical development and current problems: the money sytem defined  –  5  Stages in the Transformation of Money –  Barter – Commodity – Symbolic – Credit, Fractional Reserve Banking, Monetisation, Deposits -Cheques – Credit Clearing – Mutual Credit Clearing – Governments, Central and Investment Banks – legal tender status –  Stages in development of Central Banks and Issuing of Money

2. Implications of Problems with the money system    Monopolised credit supply – Debt Imperative –   Concentration of wealth –  Inflation and Government Finance – Lending and high powered money – Issuing money and Inflation –  Interest and Usury defined and distinguished.

3. Principles to guide reform of the money system and the design of alternatives 

4, Transforming the money system (1) Alternatives:  Mutual Credit Clearing -Alternative Exchange Systems – analysing failure in these –  Commercial Trade Exchanges –  Investment through Partnership Finance –   Equity and Debt Financing compared –   Peer-to-peer lending – Standard Measure of Value –  Basis of Issuing Local Currencies –  Web-based trading platform – Forms of Organisation and Governance – Regional Cooperative Economy: Basque Example –  Organising Credit Clearing Exchanges – Limited Liability Partnerships –  Mutual Companies –   Mutual Credit Clearing the Swiss WIR example –  Social Money and Social Banking –  Role of Central Government in Transformation of the Money System – Local Government – Regional Socio-Economic networks in a country

4. Transforming the Money System (2) Implementing Change:  Disruptive Technology (Christensen) – Force Field Analysis –  Niche Markets – Web-based Trading Platform –  Four key components of Web-based platform –  Bottom up Change and Awareness Raising – Tipping Point, Networks, Design Characteristics and Context

World Future Council: Future Finance

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World Future Council Study Project – Future Finance                                                                        

Introduction on WFC website: (Italics mine) Financial markets and the monetary system are at the heart of the world economy. A new financial system is therefore the core of a new economy that is able to cope with the global challenges of poverty, climate change, and the destruction of natural resources. The current crisis widens the political space for change. Given that the financial crisis is linked to the food crisis and the ecosystem crisis, a fundamental rethink is urgently needed. Starting with a reassessment of the rules of finance, the World Future Council Finance Commission will identify the systemic drivers of our current crises and develop  concrete policy proposals guiding the transition towards sustainable and equitable growth. A coalition of social banks has provided the core funding for policy work on Future Finance over the next three years (till 2013).”         Activities:  Report on best policy practice and mini-brochures on concrete policy recommendations will raise awareness, engage decision makers and support policy implementation Speeches and media work at international conferences will build high-level awareness Strategy workshops with opinion leaders at important international events will encourage debate and provide practical policy advice.   Online policy platform will widen debate and build communities for change,  connecting decision makers with civil society          Future Finance Expert Commission: The Expert Commission on Future Finance includes Councillors Prof. Prabhu Guptara (UBS Bank), Prof. Stephen Marglin (Harvard University), Prof. Manfred Max-Neef (Pioneer of “Barefoot Economics”), Francisco Whitaker (Co-Founder of the World Social Forum), Anders Wijkman (Member of European Parliament), Advisors Prof. Margrit Kennedy (Founder of the Money Network Alliance), Marcello Palazzi (Taellberg Forum), Anthony Simon (World Business Council on Sustainable Development) and Hans Zulliger (Foundation Third Millennium), and external experts like Falk Zientz (GLS Bank).
Background information: For more detailed information on the WFC’s Future Finance proposals, you can download Jakob von Uexkull’s position paper and a presentation by Commission Coordinator Stefan Biskamp.

Transforming our Money System – 6

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You can download this by clicking on the PDF icon at the end of the document.

Transforming the Money System: (2) how to implement and embed alternatives       As stated already in part (1) of this section on transforming the system, Greco states clearly that design principles need to be applied both to the system itself and the strategies for changing it. These need to be based on an understanding of money and the money system and how it has developed historically, and also of social dynamics, markets and networks in relation to money. The elements of the solutions he is proposing are based on his understanding and on information about what has and has not worked in finding alternatives in the past, what look like promising ideas, and the market and social conditions or context that would enable them to work – or act as forces against them. All his solutions come from ideas, understandings and trial experiments that are already publicly available. He has put this all together in a new and compelling way. Here we are looking at some of the design principles he extracts from studies of societal change as well as his with others from attempts to establish alternatives to some or all functions of the money system. These principles are there to consider in designing strategies for implementing innovations, rather than the solution options themselves, and the contextual conditions that enable them to be integrated into society.

All societal change, based on an analysis of historical examples involves all key social actor groups, and both national and local initiatives, together with networking on different scales and in different ways for innovation and learning. Frank Geehls and his colleagues (to whom Greco does not refer) have attempted to see patterns in socio-technical innovation and change often over a 50 year period. (See for example  and which gives an overview of his work and  publications). They note that different transformations go through similar stages in different ways that may or may not modify or radically change the dominant current cultural and normative rules and formal institutions in a society (this mix of rules Geehls and his colleagues call “regimes”). There are often cycles on different timescales within these stages (like a wave form across time). How bottom up and top down change across social actor groups might work for the money system is an interesting question, given resistances and fears of different kinds.

Greco emphasises the importance of local bottom up change (community and business led) – stating that a political process by itself has not worked. He also sees the key to economic survival and environmental sustainability in the future to be local communities gaining more economic independence and having more control over how their material needs are met. At the same time the changes in the money system he suggests, especially use of mutual credit clearing, would fit well into the emerging global web-based trading platform, a major transformational change in itself. He focuses on creating the conditions for these changes both locally and globally and using the unexpected turn of events as an opportunity where this is possible.

 Greco alludes to what many people see as one of the key guiding ideas (zeitgeist) – though he does not use this concept as such – for the next step in human history and evolution: collaboration or synergy (at the start of chapter 18 on organisational forms). He describes how being different from each other in values, life styles and traditions can create both conflict (in protection or promotion of a group identity) or a rich diversity once differences are respected and transcended through connection with our common humanity. He also stresses how the current problems, opportunities and challenges we are facing can only be addressed through co-operation on much larger scales than in the past. In a complex, more inter-connected global economy, solutions to global problems or advances in human civilisation can only occur through greater collaboration and co-operation, more co-ordinated action. Our increasing connectivity can help here. In nature the forces and capabilities for co-operation are greater than those of competition. Even Dawkins, author of the selfish gene, says he would now rename the title of his book as the co-operative gene. Gregory Bateson said the Darwin’s book should have been called survival of species and habitat, as the one depends on the other. But Darwin too recognised the co-operation in nature. This co-operation Greco sees working at local levels especially, as well as globally at times. In discussing the Mondragon example of a co-operative economy (see below) he quotes Terry Mollner who described Mondragon as an example of the emerging “relationship age society”. See LovingSociety.html

 Major improvements in, and transformation of, the money system are more likely to come initially through the developing web-based trading platform and through private, voluntary and free market use of alternative exchange media – such as mutual credit clearing. These initiatives in innovation are more “bottom up”, applying new technology and forms of business and trade within the business sector or networks of local organisations  across all sectors – business, voluntary, NGO, public sector, research centres in or outside universities – rather than “top down” through new legislation and political initiatives – though these may follow, and Greco points out a role for central government. They also fit an age of synergy and relationship, with more democracy at local as well as national levels. Greco refers to two key authors on societal change – Christenson on disruptive technologies (relevant both to global and local change), and Gledhill on networking and other factors (as well as other authors on network theory).

 In discussing the evolution and development of a web-based trading platform around the world, Greco uses some of the ideas and analysis by Clayton Christensen in the Innovator’s Dilemma  (03 New Yk Collins) as well as quoting the management writer Peter Drucker. See for access to his key ideas and books, including the concept of  “disruptive technologies”.

 Christensen’s two types of technology – disruptive or sustaining are relevant to both local and globally networked change, and their interconnection. Techonology can be disruptive of the current ways of seeing, thinking and acting – the informal cognitive or normative rules and those embedded in formal institutions and rules. This is similar to Kuhn’s distinction between “ordinary science” and “revolutionary” science (new fundamental mindset). It is also similar to Gregory Bateson, and later Chris Argyris’s, distinction between two levels of learning – change within a frame of reference or way of seeing and thinking, and change of  that frame or organising structure (and to Einstein’s saying that a major problem cannot be solved within the mindset that helped create it). The first is cumulative change through improvement; the second is transformational change (change of form for organising thinking and action), which can also have a build up of disconfirmation of current mental models guiding cognition, decision and action. Bateson built on the ideas of Russell and Whitehead – a category (organising concept) cannot be a member of itself; so there are two levels at play here. These sets of rules can form together a “regime” (that has both political and cultural connotations as the regime is embodied in the dominant culture and the institutions and groups of people who enact or follow it).

 Looking at the forces for change and against change (Kurt Lewin’s “Force Field Analysis” see ) is familiar to consultants and managers involved in organisational change (and to others). Greco looks at the strengths and vulnerabilities of the current system of political money and conventional banking (c.f. a SWOT analysis of strengths, weakness, opportunities and threats).

 Against change:

What has made the current political money system so dominant?

Greco sets this out:

Inertia – people are used to it, it is accepted across countries, with ease of foreign exchange.

Above all it is supported and protected by national governments and political privilege. Dominant companies generally can become unresponsive to developments in technology or markets; their focus is on improving current products more than transformational innovation. They can ignore or suppress the competition of disruptive technologies, or be very late in adopting them (Christensen makes this point too). With the money system the power of government has been used to suppress alternative credit systems or currencies. The entrenched position of the money and banking establishment exceeds that of any dominant group of companies in other sectors.

Alongside this there is a lack of awareness of the ill effects of the current system and of viable alternatives.

 For change:

The current money system is unstable, unsustainable, inequitable and over-expensive. Instability in a globalised finance system is shown in the credit crunch. Other destabilizing forces are rising or volatile oil and food prices. Bank-created debt-money drives the need for unsustainable economic growth, the effects of which are well documented in the form of getting out of balance with what can be supported by our natural habitat and resources, and at the same time polluting ecosystems or putting the climate system out of balance as well, potentially destroying more habitats and species, as well as reducing the human population, through drought, famine, and extremes of climate. Inequity shows in the poverty trap and greater income inequality that leads to unhealthy societies (see Richard Wilkinson and Kate Pickett (09) Spirit Level or the 2010 paperback of this Why Equality is better for Everyone see )

 Debit and credit cards are more expensive to users (buyers and sellers) than they need to be. Christensen points out that dominant companies often overshoot their markets, making them vunerable to displacement. They give their customers more than they need or are willing to pay for. The consortia of banks within the two major credit card companies have co-operated to raise interest rates and fees and make conditions more stringent. Those caught in the debt trap feel exploited.

 The technology is now there for a democratically structured global payment system with membership open to all, alongside a complete web-based trading platform; the blocks are political (see above) and vested interests, but this trading platform is emerging and will continue to grow with a greater functionality and range of services. This has what Christensen calls “innovative potential”.

 In summary, while the forces for change may be strong – so also is the resistance in the form of protection of the current system by governments.

 So Greco suggests focusing on niche markets where exchange alternatives are appreciated. In the grass roots, community sector the attraction is often initially ideological – social justice and equity, local self-determination and protection/restoration of the natural environment on which we depend. In the business and commercial sector the attraction has been to be able to have another medium of exchange for trading without recourse to the national currency, especially when it is unstable or scarce, and to be able to sell goods and services to other members of the exchange association. As the performance and reliability of these alternatives improves and they are more trustworthy, others will be attracted. The usefulness of credit clearing for exchange increases as more people and businesses up and down the supply chain are members, and more products and services are included. A “critical mass” needs to be arrived at in terms of scale and scope.

 Money as an exchange medium is nothing more than credit, and credit can be organised more effectively, efficiently and equitably (the 3 “E’s”); and in a way that does not drive unsustainable growth through over-extended debt obligations. Mutual credit clearing associations, supported by the appropriate constitutional rules and agreements and technology (such as mobile phones), is the way forward proposed by Greco, and these associations can also issue their own currency for use by non-members in their economic region, backed by their exchange of core goods and services that are in demand in so far as they cover basic needs. Local businesses, community groups, NGOs and Councils can work together to establish this in a region of a country. This would be a transformational change.

 But alongside these local developments, the progress of a global web-based trading platform since 2000 is the other line of development and potential transformation in the money system. More commerce is being transacted on the internet, and functionality and the range of services continue to improve. Greco lists some disruptive technologies – using Christensen’s definition of technology. Technology in Christensen’s terms is a general term to cover any new ways of using labour, capital, materials and information to transform them into products and services of greater value. So this can include innovative technologies in investment, distribution or marketing and managerial/organisational processes as well as the narrower sense of design and production.  For example: web-based market places on the internet (including consumer to consumer lending and borrowing ( and see Rachel Botsman and Boo Rogers’ book on collaborative consumption in general – What’s mine is yours ), transparency in web-based accounting and exchange systems, strong identity verification, secure encryption of information over the internet, updated reputation rating of suppliers and buyers (e.g. using to find tradesmen in the UK), re-emergence of mutual companies alongside co-responsibility and local web-based markets – and direct credit clearing between buyer’s and seller’s that bypasses the national currency and brings the definition or form of money as exchange up to date. Greco sees a combination of these being able to provide the structures that can mediate the establishment of more effective and equitable exchange processes that enhance more sustainable economic activity.

 Greco quotes the management writer Peter Drucker: profits migrate to the suppliers of the missing component that completes an (evolving) system. The four key components that Greco sees for a completed web based trading platform are: a market place, a social network, a means of exchange or payment, and a measure of value or pricing unit. Market places are where sellers and buyers can communicate what they offer and need and negotiate. These can be business to end-customer (B2C) or business to business (B2B). Social network enables people to become known to each other, personally or professionally; and establish identity, credentials and reputation, and, through supporting and tracking exchange or co-ordination, to build trust and valued co-operation between network members. Amazon and eBay are well known examples of marketplaces, and Facebook or Linkedin or MySpace of social networks.

 The gaps are in the last two, and ways of addressing these are described and discussed in this book, and elsewhere by Greco – mutual credit clearing using an information system (possibly accompanied by local currencies previously used when the national currency and economy is in distress), and a basket of regularly exchanged commodities as a unit of value. PayPal is a trusted intermediary for payments but it uses bank-created debt money. PayPal could set up a mutual credit clearing network amongst some its account holders if it extended lines of credit to them in expectation of return of income from other account holders. National currencies are unstable and “political money” in the sense that their value is determined by the policies of their governments and central bank issuers. Greco sees legal tender laws being abolished at some time in the future. These laws make these currencies the measure of value as well as a means of payment that must be accepted. This will require standard commodities (not just gold or silver as in the past) being used again to create a unit of value. In the meantime buyer’s and seller’s can adopt a non-political measure of value based on a basket of commodities (see Appendix B of this book). This can be deferred as a missing component until first a network of mutual credit clearing systems for exchange is set up.

These two missing components need to be integrated with the market places and social networks of the global web-based trading platform that is emerging. This can take over some of the functions of the physical market place and banks.

Commercial trade exchanges have developed over the last 30 years and provide proof of concept, a key step in the innovation journey. Optimising their internal processes and design and taking the networks to scale will be the next step. Will these be bold enough to develop new markets and extend their membership, up and down the supply chain, business to customer (e.g. employees of members initially) as well as business to business)? Will the small ones be taken over by the big ones, or by market place web-based businesses such as Amazon, for some markets? Or by web-enabled payment intermediaries like PayPal?

 A “bottom up”, locally developed, internationally networked, evolutionary change with a new Role for Governments, national and local is explored by Greco. Using the political process to change the dominant money system has failed in the past. But it might form part of the solution – in raising awareness of issues and needs (e.g. Ron Paul’s candidacy for the US presidency in 2008, and some groups of politicians in the UK, and in national and international policy forming networks such as those reflected in the World Future Council), and then supporting well managed and designed local or regional trials. Attention needs to be given to relations with governments, and often this is best done through some kind of national association (c.f. the IRTA for commercial trade exchanges). Locally initiated alternatives more often fail too – as described in the section on these above. So the learning from this needs to be used for designing both the system and implementation and learning processes.

Greco emphasises the importance of awareness raising as part of getting people to consider alternatives to their existing patterns of behaviour and to systems they have trusted till now, particularly in bottom up initiatives and creating the enabling context.

 Most countries have not experienced serious inflation for long or have reasons to question the current money system. Generally there is little knowledge of what money is for and how it is created and used, with perhaps financial journalists and economists making it sound more complicated than it is by using technical terms.

 These changes will require people to realise how they can empower themselves regarding the money system, and assert that power, reclaiming the “credit commons”. Educating and informing people about the current money system, and the risks and effects of it, in a way can create a felt need; and ideas of solutions to adapt to their conditions, give them the confidence to be part of a growing network of people wanting to do something about it  – without unduly threatening current vested interests (and those who support or only feel secure with a centralised money system rather than a more decentralised, egalitarian, empowering, equitable, resilient and sustainable one).

Greco agrees with Riegel who suggests a “freedom of association” approach to setting these changes going, based on information and education, with government support.

These changes could best come about through private voluntary initiative, in an environment of freedom of association and the right of contract are protected and preserved. Local communities can reduce their dependence on political currencies and on bank-created credit. They can take control of their own credit and organise ways of allocating it directly to people and businesses they can trust. As Riegel says there is no legal barrier to a private enterprise, non-debt, non-interest, mutual money system. As Ulrich von Beckerath stated in the 1930’s: “The extension of exchange transactions without state money is in reality the beginning of a new system of settling accounts and ..  a new economic order”. Any local credit unit or currency would be open to acceptance (and so also rejection or discounting) in a local market or network of markets. Only the issuer of the credit unit would be obliged to accept it. These changes would be developed locally with “local” meaning a viable socio-economic area in which the day to day trading of goods and services that meet common basic needs occurs.

Awareness raising and continuous learning from local initiatives can build local or sub-regional social and economic networks of suppliers of key goods and services and their customers, both citizens and other businesses, a network that sees and feels the need to innovate and try out new forms of exchange, investment and measures of value (the functions of money). Trust and credibility will need to be established within this network and a form of organisation, ownership and control set up that maintains and protects this.

Any learning from action and experience in developing and using a system that works can then be shared in national and international networks, facilitated by the internet.

Through numerous success stories, examples and role models, linked through learning networks and wider multi-local socio-economic exchange, building up trust in alternative money systems that can stand alongside the traditional, and if seen to be successful and secure, supplant it over time.  More and more people can be weaned off the current system, including the key groups in a society – citizens, business, government, science and education and the media.

 This would end a system that forces perpetual growth to one which is more steady and fulfils people’s material needs in a way that respects the human dignity and the need for a fulfilling life, and at the same time nurtures the systems of nature that support all life on this planet. The measures of success would be aspects of the quality of (all) life, rather than the quantity of output and consumption.

 Local trials of alternative ways of fulfilling the functions of money will need to be supported widely to counteract those with vested interests in the current system and threatened by competition from alternative associations. Central and local government can give some initial support while having their concerns addressed, and then when there is wider support from businesses and individual customers, ensure there are the regulatory frameworks and other support mechanisms needed for them to work and to be protected from sabotage.

 In discussing networks and enabling conditions Greco mentions 3 key factors described by M. Gladwell (in his book The Tipping Point 2000 – see also ). Gladwell draws analogies between nature, epidemics and social change processes.

The Law of the Few: a few salient people can make a big difference and help an idea, practice or product spread like a virus. They take on 3 types of role: those who know all about it and want to share what they know (“mavens” he calls them), The connectors who “know everyone” and can bridge the gaps in social networks, sharing the news, and the sales people who can persuade people to adopt, use or buy it.

The Stickiness Factor: characteristics of the alternative (i.e. the design of the money system or a part of it rather than the implementation process) that can make it attract and stick.

The Power of Context: the enabling conditions or factors that create a strong felt need. The Swiss WIR bank he gives as an example of this.

Greco also mentions other studies of social change, particularly of networks such as L. Barabasi’s Linked: the new science of networks (02). He gives an example of the spread of Hotmail which used ease of adoption and signing up (low cost) together with users advertising it by default; there was an offer to the recipient to set up their own free account at the end of each email sent by a user, in this way using their networks.

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