Summary
This book presents a radical economic diagnostic and policy proposal.
The claim is that a combination of basic income and sovereign money creation will uniquely counteract economic crisis, reverse austerity policy, reduce debt in the economy, and offer environmental gains.
Historic economic data is analysed to demonstrate that disposable consumer income declines in relationship to both consumer expenditure and economic output. The role of unearned income therefore increases over time. Unearned income comprises welfare benefits, pensions, dividends, and household debt. Household debt quickly grows and becomes unrepayable from the same diminished real earnings, leading to economic crisis as in 2007. Meanwhile, financial orthodoxy insists that deficit government expenditure and money issue must be balanced by new government debt. This debt accumulates to a level above annual GDP, and so also becomes unrepayable. Governments respond with austerity policy to reduce deficit and debt accumulation.
Basic income supplements declining real incomes, and displaces household debt. Debt-free sovereign money funds basic income, removes the deficit constraint on public expenditure, and reverses austerity policy. By cutting the link between economic well-being, employment and output, ecological outcomes are improved.
The hypothesis behind the diagnostic and proposal is that high productivity technology causes the divergence between output and earnings which requires basic income, but at the same time makes basic income affordable against the real criterion of available economic output. Similarly, as technology causes real earnings to fall compared to output, then debt-free sovereign money is required and justified to supplement consumer income, and sustain public expenditure. This hypothesis is the subject of a 3-year research project at the Institute for Policy Research at the University of Bath, UK.
The bookās analysis focusses on data from the UK economy for ease of consistent presentation, and as a specific test case of a more general economic hypothesis.
The Main Issue
The post-war model of economic management is in crisis and needs urgent adjustment. The free market mixture of private investment, production and consumption, combined with government expenditure and fiscal and monetary policy, has worked reasonably well. It has delivered a general increased standard of living, and relatively stable economies.
This relative success owes much to technology. In earlier agrarian economies, and in initial industrial economies, productivity was low, and output insufficient to provide an adequate standard of living. Need exceeded supply, poverty was widespread, people were ill-clothed and ill-fed, partly because as Keynes showed, need was not translated into effective demand via adequate wages, but also because output was limited by low productivity technology. Major advances in technology throughout the twentieth century mean that productivity rose astronomically, such that potential output in the āmachine ageā is adequate, and it is now effective demand which is not fully funded. This in turn feeds back to impose a limit on productive output. This then threatens employment, and since employment is the main means of income, standards of living are compromised.
But we now face partial system failure, generating seriously dysfunctional outcomes of
- economic crisis, actual or likely to repeat
- pervasive debt, both household and government
- continuous austerity policy
- extensive poverty
- low pay jobs
- increased inequality
- ecological damage.
This needs a radical re-think and economic system re-engineering. There are many calls for new thinking in economics. Many think tanks address this aim, for example, the Institute for New Economic Thinking, the New Economics Foundation, the Institute for Public Policy Research, the Resolution Foundation, and the Progressive Economy Forum. The Association of Heterodox Economists meets annually, and Reteaching Economics seeks to redefine economic philosophy and education. This book brings together two such new ideas, for basic income and sovereign money, which offer a radical alternative paradigm to contemporary economic thinking. The combined proposal counteracts crisis and austerity, and offers ecological advantage, but lies within the established thinking of Keynesian economics that aggregate demand is the key policy target and tool in modern economic analysis and policy formulation.
The Main Claim
This book makes a big claim, that a combination of basic income and sovereign money can avoid economic crisis and austerity policy.
There are already many proposals for basic income, and separately for sovereign money. Basic income is the proposal that all citizens receive an unconditional income. Its advocates see it as a means to correct the social injustice of inequality, to give economic security to a āprecariatā group in society, to enable economic initiative, and to replace the expensive, intrusive nature of current welfare benefit systems. Critics claim that this would represent a disincentive to work, but advocates respond that on the contrary, it is current welfare benefit systems which are a disincentive to work, since any earned income will be deducted from benefit payments, whereas basic income is still received when someone takes work.
Sovereign money proposals come in several forms, but essentially expect governments to issue money directly to maximise economic activity and engagement. Some advocates specify that such government issued money should be matched by debt, for example in the sale of government bonds, whilst others advocate that it should be debt free. The current leading rationales for sovereign money are (i) to limit the excess issue of money by commercial banks into finance-only markets, which is thought to have caused the 2007 economic crisis and (ii) to fund job guarantee programs to ensure full employment and therefore well-being.
However, both basic income and sovereign money proposals have a further crucial impact, namely that each can be defined with the intention of reducing debt in the economy. As an initial over-simplification, basic income can avoid the need for households to increase their borrowing to fund their expenditure, and hence radically reduce consumer debt. Since the massive rise in consumer debt was a main factor in generating the 2007 economic crisis, then replacing consumer debt with basic income will avoid such crisis.
Equally, if governments issued direct sovereign money and defined this to be debt-free, i.e. issued without the matching sale of government bonds, then the government expenditure this sovereign money funded would no longer be defined as deficit spending, and public sector debt would not be incurred. Austerity policy would then not be necessary to reduce otherwise escalating government deficit, mounting up as debt almost equal to, or in some cases well above, the entire annual GDP of the economy. Both of these points will be developed more fully throughout the rest of this book.
A combination of basic income funded by sovereign money therefore reduces consumer and government debt respectively, and so avoids crisis and austerity. Itās crucially important to state at this point that such issue of sovereign money, and payment of basic income, must be constrained by the estimate of potential full employment output GDP. Otherwise the policies would be inflationary. But up to the level of potential full output GDP, basic income and sovereign money would enable austerity cuts to be reversed, real productive investment to be increased, and standards of living for lower income groups to be raised. Basic income is a proposal addressed to individuals, but sovereign money can also be issued to government spending departments, including to local government administrations whose recent severe budget cuts have inflicted social and economic pain on their local population.
Combining proposals for basic income and sovereign money is an example of synergy where the whole exceeds the sum of the parts. Whilst each of basic income and sovereign money have independent justifying rationale, their combined impact in averting crisis and austerity lends immense weight to their policy proposal.
The Core Argument
The core argument presented in this book is
- In high technology economies, productivity means that the wage component of output reduces.
- Earned income becomes insufficient to purchase the productive output of the economy, or to meet consumersā expenditure.
- This requires increased unearned income in the form of pensions, welfare benefits, dividends, and consumer credit.
- Increased welfare benefits push government spending into deficit, and increase national debt to levels which can never be repaid.
- Increased consumer credit leads to unsustainable household debt which cannot be repaid out of the same declining wage share.
- This leads to default, the meltdown of a financial sector built on this debt, and economic crisis.
- Governments follow this by austerity policy, mistakenly trying to reduce the deficit, but thereby increasing poverty and inequality.
Technology will inevitably increase productivity, measured in real unpriced units of output per hour worked. This remains true even after taking account of the resources used in developing and implementing the technology itself. Technology changes the combination of capital equipment and labour in the production of goods and services. It requires investment in capital equipment, and changes in working practices. Economic theory seeks to explain the relative use of capital and labour according to their factor prices. Higher wages are said to favour a shift to investment in labour saving capital equipment, thus reducing employment and increasing output per employee. However, usually the capital equipment not only reduces labour employment, but also substantially increases output, so that the productivity effect can be huge, dividing increased output by decreased labour. This means that capital/labour substitution is not simply generated by shifts in factor prices of capital and labour, but by those factor prices set against increased output. Technology investment can also be a āgame changerā, i.e. a proactive visionary phenomenon with systemic quantum leap effects, rather than a reactive fine-tuning response to changes in factor prices. The results can be dramatic, as some examples included later in this book demonstrate. The increase in productivity can be, and historically has been, so immense, that production exceeds what the labour force itself can consume. Wages cannot therefore increase as rapidly as output, meaning that the wage content of output must reduce.
There are other factors at work which also reduce the wage content of output, or the wage share of GDP. In a market economy, wages resu...