biophysical monetary economics - umkc 11-10-2013

7/27/2019 Biophysical Monetary Economics - UMKC 11-10-2013

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Money and stuff

A biophysical framework for monetary economicsUMKC

October 11th, 2013

Karl Seeley

Hartwick College


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From Charles A.S. Hall, Biophysical economics: definitions and applications


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From Charles A.S. Hall, Biophysical economics: definitions and applications

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MMT & Biophysical

Biophysical / Ecological: How does the economy actually function physically?

MMT: How does money actually work?

A natural marriage


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Existing work

Odum

Soddy No negative pigs!

No fractional reserve banking e.g., Daly, Farley, Sejk

Money backed by resource basket,or exergy e.g., Mobus

Debt harder to repay wheneconomy cant expand e.g., Tverberg


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Odum, Environment, power,and society, p. 194, Fig. 6-9


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Game plan

What is a monetary economy?

Value, money, and credit

Biophysical monetary economy

Future macroeconomic needs; Problems Future monetary needs

Solutions?


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What is a monetary economy?

Doesnt just use moneymoney is integral

New Consensus doesnt really use models of a monetary

economy Barter models in drag


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A biophysical monetary economy?

Draw on some Post-Keynesian elements Extension of credit creates money and can cause new output

Its a society-wide way of making a promise

Bank-created money (inside money) is claims on outside money

Outside money is backed by tax collection

Start with physical reality, set money in that context


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Components

EnergyMatter

Plants

Primaryconsumers;Symbionts

Secondaryconsumers

Decomposers

Waste heat

Natural origins of use value


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Plants

Primaryconsumers;Symbionts

Secondaryconsumers

Decomposers


Animal use value based on contribution to genetic survival


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Use value is created at every stage



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Economy as an ecosystem

Final useConsumptionInvestment

Manufac-turing

And serviceprovision

ProcessingExtraction

Ecosystem

Components Energy Matter Waste

Non-renewables


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Use value for humans


Manufac-turing



Ecosystem

Non-renewables

Something I want in itself, for myselfPoint-in-time utility function

For primitive humans, grounded in genetic survivalWith distance from subsistence, increasingly arbitrary


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Use value for humans

Final useConsumption

Investment

Manufac-turing



Ecosystem

Non-renewables

At each productive step, things are moved closer to usefulnessBut no ultimate use value until Consumption


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Distributing use value

Like social insects

But diversity of roles likean ecosystem

Extent of change likebiological evolution But much faster in terms of change per generation

Eusociality confers huge benefits

Coordination (who does what, who gets what) can be

solved through Social norms

Hierarchical systems

Free exchange, markets, money


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Final use

ConsumptionInvestment

Manufac-

turingServices

Proces-sing

Extrac-tion

Ecosystem

Non-renewables

Purchasing power

FinancialMarkets

Govern-

ment

Unsavedwages anddividends

Aggregate

expenditure

Purchase of

inputs

(intermediate

goods)

Value added

(labor income,

capital income)

Income

(including taxes

owed)



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Exchange value

Value

added

The value thats being

added is exchange value

When youre willing to

give something up for it

Exchange value increases at each step of production,

because the object is closer to being finally usableIts how the people upstream get their hands on things

that have use value


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Conditions of exchange value

Basis for willingness to exchange Requires excludability plus (relative) scarcity

Hopefully, an eventual purchaser who puts use value on it

At least somewhere down the chain

Money: a claim on exchange value


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The value continuum

Use value

Exchange value

Non-excludabilityDetachment from use value

Exchange value

Use value

Sphere of

public goodsBubbles

Where

money

works


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The value continuum

Use value

Exchange valueExchange value

Use value

Sphere of

public goodsBubbles

Where

money

worksWorks =

organizes /coordinates thephysical process of

production toeffectively produce

and distribute usevalue

Government?Credit?


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The monetary state

Essence of state action: production of public goods Useful, but doesnt create exchange value

State needs claims on exchange value to produce publicgoods

Acquire through: Taxes

Borrowing

Creation of money


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Value, money, credit

Economy evolves through innovation & investment

Final demand = Consumption + Investment

But investment produces no use value in the present Like production of intermediate goods

Credit: Give you something now for a promise of something later

Money-credit:

Providing claims on exchange value now, so you can control inputsneeded to create something that will generate claims on exchangevalue in the future

Money as a tool for society-wide promises Credit coordinates those across time


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Biophysical monetary economics

Final use

ConsumptionInvestment

Manufac-

turingServices

Proces-sing

Extrac-tion

Ecosystem

Non-renewables

Purchasing power

FinancialMarkets

Govern-

ment


Aggregate

expenditure

Purchase of

inputs

(intermediate

goods)

Value added

(labor income,

capital income)

Income

(including taxes

owed)

Monetary

economics


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Biophysical exchange value

Tradition of seeing value as work done, or embodiedenergy

That has a relation to use value

But here, exchange value comes from the interaction of:a. Evolving technological relationships among stages of production

b. Prices at different stages of production, both relative andabsolute

c. Willingness and ability to make promises


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A biophysical monetary economy?

Economy understood as a physical process

Money-credit structure is integral to it Ability to coordinate division of labor across steps of production and

across time

Why money-credit? Operates at a scale that social norms havent managed

With a dynamism that state planning hasnt exhibited


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The key interface

Biophysical / Ecological: How does the economy actually function physically?

MMT: How does money actually work?

Value is where these meet Value is created by physical actions

Money operates on value

To coordinate value-creating physical activity


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Ecological perspective:

Economy as a physical process

MMTMoney as a social

phenomenon


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Future macroeconomic needs

Maximize use value, minimize use-value poverty, subjectto significantly reduced throughput Increased role for public goods

Undertake least loser investments

Dont make you better off than you were Leave you better off than you would be without the investment

Less badly off

Enable saving in an economy that cant grow


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Problems

Increasing misalignment between exchange value anduse value Least-loser investments with best use value may not have best

exchange value

High exchange value attaches to ownership of increasingly scarceresources

Increasing difficulty of keeping promises in exchangevalue


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Solutions?

100%-reserve banking

Exergy backing; Commodity backing

BANGS (Bonds Against Nominal GDP Shares)

Extraction taxes / Payment for ecosystem services GPI vs. GDP

Relocalization


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The 100% solution

No inside or horizontal money Its all outside or vertical

Eliminate the drive to use resources created by the needto pay interest

Remove from private hands the gain from creating money

Give the state access to claims on exchange valuewithout needing to borrow

But: You cant actually do it

Banks play useful role in liquidity transformation

Doesnt address the least loser problem


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The physical-backing solution

Argument: Money is essentially a claim on exergy, so

Make money a claim on a quantity of rawresources, or on a quantity of exergy?

But: Money is inherently backed by the ability to create (exchange)

value

Most people have no direct use for resources

Only want them for their exchange value

Relationship between resources and exchange value isnt stable

Ratio of promises to GDP stayed stable for 40 years

Moneys role in the end of that not clear


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0

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Household & Nonprofit net worth scaled by potential GDP

Jun. 2013

Oct. 2013

FuelCPI


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Debts and pigs

Negative pig = Unreal physical thing

Debt = Promise = Real social thing Cant eat a promise, but can trade credible promise for food

Too many promises?

They start losing credibility

Losing value

Getting back in line with reality


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BANGS

Bonds Against Nominal GDP Shares e.g., 5-year bond with $1,000 face value

If nominal GDP grows 50% in 5 years, you receive $1,500

If it shrinks 20%, you receive $800

If you pay $1,000 for the bond, call that an interest rate of 0% Auction will result in a lower or higher price (positive or negative interest

rate)


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BANGS benefits and questions

Public sector: State can make promises that remain credible even in a shrinking

economy

Private sector:

BANGS-type borrowing rewards relative ability to repayLeast-loser investments become viable

Would they be issued in excess?


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Extraction taxes & Service payments

Economic activity requires resources and ecosystemservices

No payment made for their depletion / degradation Only to the land owner of some resources

So tax extraction of renewables or impairment ofecosystem services


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Manufac-

turingServicesProces-sing

Extrac-

tion

Ecosystem

Non-renewables

Purchasing power

FinancialMarkets

Govern-

ment


Aggregate

expenditure

Purchase of

inputs

(intermediate

goods)

Value added

(labor income,

capital income)

Income

(including taxes

owed)



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Manufac-


Extrac-

tion

Ecosystem

Non-renewables

Purchasing power

FinancialMarkets

Govern-

ment


Aggregate

expenditure

Purchase of

inputs

(intermediate

goods)

Labor income,

capital income After-tax

income

Separate out taxes

Tax revenue


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Manufac-


Extrac-

tion

Ecosystem

Non-renewables

Purchasing power

FinancialMarkets

Govern-

ment


Aggregate

expenditure

Purchase of

inputs

(intermediate

goods)

Labor income,


income

Increased scarcity

Tax revenue


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Manufac-

turingServices

Proces-sing

Extrac-

tion

Ecosystem

Non-renewables

Purchasing power

FinancialMarkets

Govern-

ment


Aggregate

expenditure

Purchase of

inputs

(intermediate

goods)

Labor income,


income

Extraction taxes

Tax revenue


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Problems with extraction taxes

You can only tax claims on exchangevalue

Resource owner gets his from downthe supply chain

Every tax is a value-added tax

http://blogs.mcall.com/.a/6a00d8341c4f

e353ef0133f2e2c82b970b-popup


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Problems with eco-service payments

(Still need work on this)

http://www.fcps.edu/islandcreekes/ecology/marsh.htm


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GPI vs. GDP

Tie money system to a measure of well-being? GPI better aligned with use value

But: Money = Claim on exchange value

GDP Measure of the creation of exchange value

Money = Claim on piece of GDP, not GPI You cant have claims on use value

Money is backed by the GDP Declaring it to be something else doesnt change that


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Relocalization

Ithaca Hours

Berkshares

If a local currency isnt backed by taxing power, what is itbacked by?


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Limitations of monetary policy

Money is inherently a claim on exchange value

Theres more we need done that isnt amenable to

treatment as exchange value

When resources are scarce, perverse windfalls to those atthe resource spigot


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Ecology and MMT

MMT: Money creation inflationary Output can increase in response to increased money emissions

Lesson from ecology: A new structural constraint on the ability to create exchange value

Money creation is more inflationary than in the past


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Future monetary needs

A mechanism for making promises we can keep

Some way of coordinating (who does what, who getswhat) Not social norms?

Not central planning?

Not money?

?


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New type of social organization?

A mechanism for making promises we can keep

Some way of coordinating (who does what, who getswhat) Not social norms?

Not central planning?

Not money?

?


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Looking at MZM over potential GDP (green line), theres no evident procyclicality


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MZM over base isnt noticeably pro-cyclical


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MZM over reserves isnt noticeably pro-cyclical


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The base itself is not pro-cyclical


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(Cutting off the post-Lehman spike to see better)The base is not procyclical.


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Problems

Negative real interest allows least loser to pay, but doesit bring other distortions?

Is the fundamental problem a greater disalignmentbetween use value and exchange value?

The totemic example of how to pay for home energy retrofits Social innovations may have a higher use/exchange ratio

than others, and so be disfavored

Similarly, socially valuable technologies may have a highuse/exchange ratio e.g., sustainable farming practiceshave a good ratio when energy

is expensive, but they dont have an automatic infrastructure forspending on them, the way that agrochemical solutions do in theform of the people who make money off of the inputs


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Problems

All of this would seem to point to greater state action,because were in the realm of public goods Or rather, were in the zone where something is excludable, but we

dont like the outcomes when we leave it to the market, as with

health insurance and higher education in Europe, or basiceducation in all the rich countries

How far can state action go without leaving us with acalcified economy?

Social units evolve to maximize use value, but so far, theones we have that do this without money tend to be on atiny scale relative to modern economies


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Solution

The core instrument of the central bank is that it controlsthe supply of base money, which is credits valid forsatisfying tax commitments

Is there some instrument the central bank can provide

that would represent the sort of promise that we want tobe able to make under the changed circumstances?

ESCO-like contracts?


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Future directions

100% reserve is appealing because it limits promises

But can you stop people from making promises?

Is the problem that were making the wrong sort of

promises?

Can we have money that is a claim on what we reallywant to reward?


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The value continuum

Use value

Exchange value

Non-excludabilityDetachment from use value

Exchange value

Use value

Sphere of

public goodsBubbles

Where

money

works


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How is biophysical different?

Needs of the real economy: Keep resource use within sustainable limits

Restructure the economy to allow that plus a decent life

Increased role for public goods

Impact on monetary system Exchange value becomes a more imperfect guide to useful

economic activity

Creation of exchange value added is harder

Basis of taxation is eroded

Need for investments that have negative returns Well be worse off than in the present

But if we invest, well be less worse off


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Limitations of monetary policy

Money is inherently claims on exchange value, but thatwill become an even less reliable guide to whats useful Many of the needed investments are inherently public goods,

generating significant use value but little or no exchange value

Depending how resource flows are reduced, the parties sitting atthe spigot may be able to claim a growing total amount ofexchange value, even as the economy shrinks


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Take-away

There are options for keeping a monetary system workingthat dont depend on growth

We should look closely at whether required 100% reserveratios are a good idea

Monetary policy should aim to do no harm (or at leastminimize the harm it does) Theres no monetary policy that can really address the problems

were facing


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Biophysical economics and money

Main focus on physical reality e.g., advocating ERO(E)I as more useful signal than financial ROI

Yet a long history of looking at money as well Soddy, Odum, Hall et al., Georgescu-Roegen, Daly, Farley

Shorter history of looking at implications of physical realityfor function of financial system Tverberg, Hagens


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Money, value, and taxes

GDP is sum ofexchangevalueadded

Non-commodity money is backed by tax authority

Taxes can only be levied on things that contribute to theGDP

Money is backed by the GDP


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Firms

Circular flow diagram

Labor,capital

Goods,services

Wages,capital rent

Consumptionexpenditure

($)

($)

Financialmarkets

Government

SI

T G

Importexpenditure

Exportexpenditure

Households(HH)


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Explaining variation in expenditure

Households(HH)

Firms

Labor,capital

Goods,services

Wages,capital rent

Consumptionexpenditure

($)

($)

Financialmarkets

Government

SI

T G

Importexpenditure

Exportexpenditure

Focus here

New consumerborrowing


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Financial markets

Flow of savings from

households(includes debt

repayment)

Stock of existingassets

(Stocks, bonds,houses, art, jewels)

Savings

withdrawals byhouseholds

Debt repaymentby firms

Payment ofold debt

(Reducesstock ofassets)

Creation ofnew debt

(Increasesstock ofassets)

New businessborrowing

borrowing


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Financial markets

Stock of existingassets

(Stocks, bonds,houses, art, jewels)

Payment ofold debt

(Reducesstock ofassets)

Creation ofnew debt

(Increasesstock ofassets)

These dont have to balance

There can be a net inflow or outflow herePaper value of stock of assets will rise or fall

Aggregate flows into financial markets dont have

to equal aggregate flows out of them


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Circular flow of money


Manufac-


Extrac-

tion

FinancialMarkets

Govern


Income

(including taxes

Firms

Households

biophysical monetary economics - umkc 11-10-2013

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