Author Archives: Brian

By Colin McGrath (with comments from Brian McGrath)


Imagine the next time you buy something, pulling out a piece of plastic and purchasing your item in the exactly the same way you would now use a credit or debit card.  But in this case, there is an important difference. Now you are purchasing with a transfer of shares of a broad capital index fund instead of traditional dollars.  For simplicity, suppose you and the seller are using the most familiar and widely held stock market capital index fund—SPYDRS (based upon the value of the 500 largest publicly held U.S. companies).  Hence, you would be trading a small piece of these companies to the seller in order to accomplish your purchase instead of using dollars.  There would be a small, agreed upon transfer out of your SPYDR account into the SPYDR account of the seller for whatever good or service you bought.  If this kind of transaction became widespread it would redefine what we think of as “money” and would change the nature of trading, prices, and wealth holding.  It would be simple but it would be revolutionary.  It would result in a privatized, non-bank transparent monetary and exchange system free of government manipulation, control and exploitation and free of the intrinsic instabilities of a currently broken fractional-reserve banking system.  How could it happen?













Imagine further a forward-looking discount brokerage firm that allows you to open a SPYDR equity account with trading privileges and then gives a trading SPYDR debit card to facilitate transactions.  Obviously, your purchases could not exceed the balance of your SPYDR account, unless the brokerage firm was willing to extend a short-term SPYDR loan to you.  Why would a brokerage firm be willing to facilitate such purchase transactions with essentially a SPYDR debit card?  Simply because it could get a small fee from every such transaction.  Moreover, if the practice grows, who knows where it might end.  Hopefully, SPYDRs could grow to become the effective money supply of the whole U.S. economy and why not?  Instead of using fictitious value of a government fiat money, or a speculative commodity money of little actual value in production, or an artificially scarce but intrinsically worthless cyber-money such as bitcoins, we would be using the most fundamental and valuable good of a market economy—ownership of a portion of the economy’s capital stock, the means of producing all goods and services.  The business opportunity for any brokerage firm accommodating changes in ownership and custody of even a small fraction of such exchanges could be staggering.

Who would win from such a trading system?  Clearly buyers and sellers or users.  Instead of risking the erosion of value in fiat money (inflation) they would be using, as money, an asset that currently gains in value 6 to 7 percent a year in terms of purchasing power over consumption goods.  Think about it.  At worst, even if you just lazily accumulated balances of such a monetary good as SPYDRs, instead of using them just for exchange, you would just be steadily growing the value of your wealth over time.  That is, exactly what you would be well-advised to hold in your IRA in any case.  Brokerage firms would also be winners.  By facilitating such exchange and providing custody for capital “money,” they would hugely expand the demand and holding of such assets and get a fee for every transaction they facilitated.  Of course, the competition would be severe and the fees for such SPYDR exchanges would be expected to be driven to a very small fraction of what trading fees currently are, in fact logically driven by competition toward zero per exchange.  They might only be applied by the purchaser’s brokerage firm because the seller’s firm would simply be gathering new assets.  Just for attracting the scale of new assets and trading activity, a competitive brokerage firm could easily see its way to making exchanges from such SPYDR trading accounts costless to customers as a part of its larger profit-maximizing strategy.  As the volume of capital-based exchange increased and became dominant, fiat money (dollars) would be an asset few people would chose to hold or accept in trade—thus the Federal Reserve Bank and the Government that covertly finances its purchases by printing worthless currency could be a loser.  However, if being a government of (and taxing) a more prosperous, larger and more stable economy is worth something, then even the government could be a long-term winner from moving to capital as money.

This last point is worth expanding on just a bit.  One of the most peculiar taxes imposed upon us is the so-called “capital gains” tax.  It is a tax imposed on property and assets, including capital, that gain in value measured in a fiat currency such as dollars between the time they are purchased and sold.  Of all taxes it is a particularly malicious, destructive, and dishonest tax.  Observers have noted that, in a society in which the government imposes a capital gains tax, all affected private property will gradually and inexorably be owned by the government, or at least given out as rewards to those who vote for it.  It is an amazing scam that the government imposes this tax in a way that gets us coming and going.  First the government imposes a tax based upon a supposed “gain” in value of a good or asset that we own measured in terms of a unit of fiat money and then, of course, it controls the supply of fiat currency.  Thus, if it feels it is not collecting enough capital gains taxes, it can simply inflate the currency generating a huge crop of fictitious and arbitrary capital gains.  Clearly it makes no logical sense to have a capital gain in money itself.  Thus, if capital becomes money, the fallacy of using the value of capital to measure capital gains or losses in other goods will immediately be made to appear a fallacious a concept as it actually is.

Any broad capital index could be used as the economy’s benchmark of value and medium of exchange.  Why do we suggest SPYDRs?  Simply because the S&P 500, while it doesn’t include all publicly traded companies, does account for about 95% of the total value of publicly owned stocks in the U.S.  That’s enough to be a pretty good representation of the broad capital market.  Moreover, at a time when the general public’s direct and indirect ownership of stock is widely considered to be too narrow (in the range of about 40%) limiting the wealth-enhancing return benefits of equity ownership to too few, what better way to broaden stock ownership than using capital as money—especially in an economy in which capital is increasingly replacing labor in production of goods and services.  As the ownership of capital is enlarged and broadened, aggregate investment in the U.S. economy will increase.  In the process the marginal return to capital will gradually fall toward the sustained growth rate of the economy, but as it does wealth will hugely increase due to capital price appreciation.  To see why, revisit Chapter Five in our book, Capital as Money.

To those who are fearful of using capital as money when the capital market is so volatile, we offer the following argument.  Remember that currently the market value of capital is measured in a fictitious and volatile fiat currency (dollars) which always carries inflation risk.  Beyond this, the dollar valued marginal product stream expected to be earned by capital is reduced to a present value (stock price) by using a fictitious government/Fed-determined government bond interest rate that is manipulated by central bank policy.  If the resulting value of capital were not volatile under this hare-brained scheme, it would be amazing.  Now imagine that instead of dollars and fed determined interest rates, the broad real marginal product of average capital itself was the fundamental or benchmark rate of return, against which all others were measured.  In such a world, the value of capital would probably not be volatile at all.

In fact, the real market-determined values of capital and consumption, at the margin, would determine the level of new capital good creation (investment) and the relative value of consumption goods versus capital goods as investors rationally pursue the consumption/investment trade-off that maximizes their expected long-term consumption path.  Then the benchmark basic real rate of return that markets keep their eye on would not be some fictitious so-called “risk-free” rate of return on government bonds stated in fiat currency, but rather the real rate of return to investment or capital on average which would converge to the long-term rate of growth of the economy.  The continuous comparison of whether to consume or invest at the margin (or consume now versus consume later) is exactly the genius of a free market at work.  In such a transparent world, the price of output used for consumption versus the price of output used for investment or new capital would logically discipline each price, driving them toward equality.  Serious or sustained overvaluation of either capital or consumption goods would be unlikely.  As a result, the volatility of the value of consumption or capital expressed in terms of the other would be low.

If our economy transitions to using the exchange of broad capital shares as money, then it can be imagined that at first everything will still be valued in the fiat currency—dollars.  This is, of course, what traders are familiar with.  Trades and values of goods and shares will doubtless be stated in dollars.  However, as the economy becomes more familiar with trading units of index shares for goods and services, this intermediate, unnecessary step will tend to disappear and prices and will tend to be more economically stated directly in terms of units of capital.

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Recall the simple job characteristic paradigm I suggested last time. Unfortunately, the real world seems to be bearing this out. You have likely read that, during the current anemic economic recovery, middle wage to higher wage jobs have apparently been lost (interpret that as jobs that have a moderate to high price, but involve little creativity while they may be complex or routine—thus they are vulnerable to replacement by a machine or software). The fastest growing sector in new jobs by far is the fast food industry.





The Fast Food Industry

Here again is a sector of the economy that is currently fairly labor-intensive, but in which jobs are simple, lacking in creativity, and low price. Thus, it might seem a fairly low risk alternative for technological substitution of capital for labor. The fact that this is where the greatest number of jobs are being currently created is not lost on politicians. To them, it appears a good place to cultivate and capture voters by over-riding the market and offering rewards. That is the essence of “public choice theory.” The idea that politicians will tend to steal or expropriate from those who voted against them in order to reward those who voted for them. The problem is that when the market is subverted by politics, the consequences are often not what the political architects intended.

Currently, the Obama administration has attempted to attract attention by announcing its support for a minimum wage of $15/hour for fast food workers. At first glance, those of us with a weak foundation in the working of the marketplace, may applaud the idea of a guaranteed higher living-wage for fast food workers. Employers might look at it a little differently. With new health care mandates, higher cost unemployment insurance and, now, higher hourly wage costs for their employees as well, they may see the attraction of a new, alternative production technique. There are many ways to skin the cat of producing a burger and fries. Which one is preferred in a competitive marketplace? The one that minimizes total costs of production while making final consumers happy. Put bluntly, fast-food employers only chose a low-skilled, labor-intensive technique because the cost of labor was less than the cost of automating. Now, as a result of higher costs mandated by government or bureaucrats, that may have changed.


“We can substitute capital to achieve automated food preparation, increase touch screens for customers, and meet customers’ human interaction preferences with cheerful host/managers. These higher-skilled employees can then deal with any software and hardware problems that may arise. Moreover, they will be far friendlier and easier for customers to deal with than the mix of surly teenagers, early parolees, or inarticulate speakers we used to employ. Individually they will cost more,but we can get by with fewer of them. As a result, we can produce an improved product and experience for a customers with 1 or 2 employees per franchise, rather than the 8-12 lesser skilled employees we used to depend on.” Hence, an unintended consequence of $15/hour minimum wage in the fast food industry could be to sharply reduce jobs in that sector. Once again evidence that politicians don’t understand economics.

The more cynical amongst us may be forgiven for believing that politicians do understand the economic consequences of their policies, but they simply don’t care—the legislated minimum wage was just done for political effect – “window dressing” for the uninformed.

This outcome is kind of sad because many, if not most, fast-food workers were likely not planning on a long-term career in the industry. Rather, it was viewed as the available first rung of job experience. A chance to develop for low-skilled, entry level employees or teenagers, on their way to more lucrative careers. Consider the substitution of capital for labor in another low-skilled food sector.


Farm Workers

Over the past 200 years technology has slowly replaced small farmers and farm workers in the U.S. and has changed the optimal economic scale of a farm. Although some agricultural activities are still labor intensive, the substitution of capital for labor will likely accelerate. Why? After all, described in terms of our three job attributes, farm work is typically fairly simple, uncreative, and lowly paid (the recent wage average in the U.S. is about $9/hour). A low average wage would tend to insulate this sector somewhat from immediate or accelerated technological substitution. However, there are indirect costs to employers. First, there are regulatory costs and the risk of legal sanctions against those who hire illegal immigrants as farm workers. For employers avoiding this risk is desirable. Especially as the bureaucratic complexity and indirect cost of hiring any worker in the U.S. economy steadily increases. Secondly, militancy and unionization of farm workers in order to demand better work conditions and pay will likely have the ironic effect of actually accelerating their replacement by machines and technology.

Development of GPS and computer guided tractors and farm machinery has reached the point where planting, fertilization, thinning and weeding, picking, and primary processing of many crops can now be accomplished by equipment that substitutes for unskilled or low-skilled labor. This machinery may be expensive but it is available. Its productivity is rising and its cost per unit of output is falling. Not surprisingly, the adoption of it is increasing. Final consumers know of farm-workers but in most cases they do not know or interact with them personally. Most employers of farm workers probably look on farm-workers as a necessary evil, required only so long as they can’t be profitably replaced by a cheaper, capital-intensive production technique.


Health Care

The health sector in the U.S. is now morphing from an already heavily-regulated oligopolistic industry to one arguably now totally controlled and paid for (by us of course) through taxation by the government sector. Thus, health care is apparently on its way to becoming a sector where market forces will not be primary in determining supply, demand or production. That is, one with political criteria and mandates applied to its practitioners and beneficiaries. This change hasn’t been lost on the cottage industries of would-be new purveyors of health care to the patient. They were waiting in the wings ready to rise. For the most opportunistic of them, it is now raining soup. To the naïve patient, of course, it seems as though it’s all free—paid for by the government!

If you now incur an illness or injury, you are may be surprised and perhaps flattered by the size and scope of the “team” that is ready to deal with it. For example, let’s say you are suffering the after-effects of a concussion. You will likely encounter a psychologist, a social worker or sociologist, a physiatrist, a physical therapist, an occupational therapist, an activity therapist, a chiropractor, a neurologist, an ophthalmologist, a speech therapist and perhaps even a phrenologist, an acupuncturist or an herbalist. You might wonder why all these wonderful, well-meaning folks are necessary to work for you. Why is the “team” so large? They are here because they were able to elbow and winnow their way to a seat at the crowded table and because the government is not a particularly discriminating buyer with your money. Politicians, of course, realize they are buying votes and economic leverage, not services.

After dealing your team for a while, you may discover a sad fact. The actual communication level amongst the “team” may be surprisingly low as is the actual quality of the health care you receive. Missing, may be the sharply intuitive diagnostician or perceptive, bright physician we sometimes were lucky enough to have as our personal doctor. That person may still be there somewhere, or they may have gotten fed up and retired from the medical profession to develop real estate. Alas our national healthcare may appear to have boarded some non-market crazy train.

However, have some optimism and faith. This path toward national healthcare has been traveled by many other societies and the widespread discovery is that the market is not so easily suppressed. In fact, the term “non-market sector” may be one we should generally avoid. The “market” always tends to re-emerge in one way or another – especially in such a critical sector as health. If you have a minor injury or minor complaint, you likely deal with the irritating bureaucracy and the barrier of semi-competent practitioners. If you have a serious health problem, you seek out the “A-team” practitioners and specialists who are highly competent– insightful, creative, and expensive. The supply and demand for these folks will still be market-determined. Of course, the sad thing about a national healthcare system is that it will be more bureaucratic, clunky, and expensive than it needs to be. You will be paying for your healthcare at least twice.


Other Sectors

To those who respect the working and efficiency of free, private markets, the replacement of drudgery, work, or jobs by technology is an inevitable and desirable outcome. It is the only way in which a society may enjoy an increase in productivity and its standard of living. Development of productive capital and its employment has unimaginably increased the output of a single human. Ultimately, all of us would like to be put out of the part of our jobs that is tedious, repetitive or physically hard. Most of us enjoy or prefer work that is creative, productive and well-compensated. Some of us who have worked in the past and taken risk to own productive capital, prefer to vacation. In common with our ancestors, “work” is something to be minimized in order to produce well-being and leisure.

Where government has politically intervened in this process, we usually have been saddled with an inferior outcome—where the public sector has sought to create “a village.” The story is familiar and dismal. The post office? About it, little needs to be said. The regulated communication industry? A bright spot, perhaps. Smart-phones and the internet stand as a shining example that regulation can sometimes be reversed and when it is the results can be fantastic. If that industry was still regulated as it was, we all might still be talking to each other on “princess” phones and the post office might still appear relevant.

Finance and banking? That sector along with much of the legal industry may define exactly what we mean by “stuffed shirt” purveyors of arcane information, otherwise of little real substance. We are close to the heart of those who subsist by getting “between the wallpaper and the wall.” When you think you might need the insight of one of these people, it seems a good time to “Ask Google.” Do you really need some financial advisor to churn your stock account or show you a simple, canned pie chart about how to allocate your assets for retirement? Read our book, Capital as Money, to get our view on the hardship wrought on the economy by central bankers, bankers and a seriously flawed, unnecessary system of money and credit. Do we need a private monetary system? More than ever. (Answer that question again, after you experience the fiat money inflation coming in the next few years—we currently have a relic of a Chairperson of the Federal Reserve who actually thinks that inflation is caused by “wage-push!” What’s next? More Japanese soldiers emerging from the jungles of the Philippines, convinced that WWII is still on?) Is private money technologically feasible? You bet!

Transportation? Improvement in computer technology has allowed us to use far fewer air traffic controllers than we needed before. We are in sight of the capability to remotely pilot most planes and vehicles. This technological capability may sharply reduce the risk of terrorism from that direction, at least, and could lead to more fruitful employment of the 55,000 individuals currently working within the TSA bureaucracy. How much longer does every car, taxi, bus, truck, or train have to be monotonously driven by a bored, numbed individual?

Education? Does your child benefit from the Department of Education and its political agendas? Along with its duplicate in all 50 states coupled with a public teachers’ union. Compare that to a market- driven system of private education, perhaps combined with vouchers? Which works better? You already know the answer. That is why, where it can, private or non-conventional delivery of primary education is growing by leaps and bounds. Do colleges, professors and their lectures have to be duplicated across the landscape or has the internet already created the capability for a better delivery system for most students? Again, you already know the answer.

The more sinister view of course is that education and health-care, for example, are currently two of the largest service sectors of the U.S. economy. If you can nationalize them, then you may be able to secure their loyalty toward incumbent politicians and political parties. This is a wonderful outcome for politicians trying to consolidate political power and influence. Effectively, it is socialism built one brick at a time, not for ideological reasons, but for pragmatic political ones. The problem is, of course, that the provision of services by non-market sectors is so inept that it always attracts market competition and replacement.

In the “normal” market case, advancing technology causes productivity to rise over time – that is a given amount of work or labor results in more output. Unlike this in a “non-market” sector we are likely to observe declining productivity—a baffling growth in jobs, work, and administrators coupled with a dismaying shrinking level of output. In fact, this is the best way to tell that you are looking at an emerging non-market sector. Low productivity is always used as a political excuse for the commitment of yet more resources, more employment, more controls, and more expenditure. Public education is a very good illustration. Spend more and get less. That’s because the primary goal of a political sector is typically lifetime employment and enfranchisement, not productivity. Get ready to hear the same argument for public healthcare.

The list of how occupations and work will evolve naturally goes on and on. So what determines what the public, the final consumer, gets? Within a free market, of course, the public gets exactly what it wants. The occupations that can be replaced by a machine or algorithm will be, if and only if that reflects the changing desires of the market. Human provision of labor and services will remain or grow in those areas where that is what final consumers prefer. What is the endgame of an increasingly capital-intensive economy? Doing what economists do worst (forecast), I hazard some guesses in the final segment of this blog.

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Irrelevant labor—the concept seems impossible. After all, in the natural world, we observe two things about work. First, since it is necessary to survive, work must always be done (even the dullest coyotes must still catch rabbits). Secondly, work is something to be minimized subject to attaining a desired goal. Labor or work is a necessary evil. In fact, the entire progress of human civilization and science seems to be based upon making our efforts more efficient—that is, so more can be attained with less work.

Advances in our standard of living demand advances in productive laziness. That is, using our human ingenuity and intellect to produce more with less work. This probably began with the first caveman who started or captured a fire. Within the context of an economic “production function”, we think of capital, labor, and perhaps natural resources being combined in some production technique to produce a desired output. In such a setting what we think of as a useful technological advance is simply anything that allows a given input of human time and effort to result in more output—hence technology augments labor making the impact or effect of a given amount of labor greater. In this way technology increases the effective labor force—through more or better tools and/or more knowledge. Progress of humanity allows us to achieve a higher standard of living with less effort—even though we sometimes venture down useless cul-de-sacs of excessive bureaucracy or narcissistic technologies whose application seems to consume rather than to save time and effort.

In a free-market, all labor can find some place in the perfectly competitive market, no matter how modest its marginal product may be—so long as the wage it receives does not exceed its marginal product. This is all true and yet we also know that as technological advance occurs some occupations of labor are more vulnerable to obsolescence and technological substitution than others. Returning to our rabbit-hunting coyotes for example, suppose coyotes suddenly somehow developed guns. Then this technological advance would appear to make the labor of those coyotes who didn’t have them, or know how to use them, irrelevant. Yet even coyotes who didn’t have guns could still harvest rabbits less efficiently for their own subsistence using their old production technique of chasing and catching.

Given the advance of knowledge and its application (technology) some types of human labor are similarly on the competitive target range and are more vulnerable to technological substitution and competition than others. This should not surprise us because competition, including technological competition, is inevitably going to be attracted to where the returns are greatest or to where the cost of the labor being replaced is the largest. Technological advance, itself, is an economic good. It usually doesn’t occur by chance or coincidence. It is induced and attracted toward those applications and markets in which the return to innovation is the greatest. This also is a natural function of free markets at work—and creatively trying to minimize “work.”


I. A Simple Framework

I am going to suggest three simple characteristics that I think capture the likelihood of technological substitution for a particular task or type of “work”—think of a particular type of occupation. These are not the only attributes that could be used, but I think they are useful in illuminating the risk of substitution of capital or technology for your job. Let us measure different occupations by the following characteristics: complexity, creativity and price. By “complexity” I mean the detail, routine, or the number of steps that must be mastered to accomplish a particular job. By “creativity” I mean the degree to which judgment, insight, unique problem-solving, decision-making, original intellect and/or imagination is required to practice a particular occupation. “Price” simply means the current cost to the market which employs the occupation—the total wage or total compensation.

In the tradition of graphical economics, we could draw three axes in these variables with each attribute increasing as we move away from the origin—but don’t worry, even people as infatuated with graphs as economists find it difficult to draw three dimensional graphs. Instead, just think of the ordered triple of values (creativity, complexity, price) associated with different occupations and then let us consider some specific jobs. Of course these attributes are not necessarily independent of each other and they are somewhat subjective as they relate to different occupations. In addition, they may vary for a given occupation in how different individuals perform their work. You will already have inferred that this is important in a competitive marketplace. It is for the market to sort this out, not for our subjective conclusions or opinions. The best and simplest way to illustrate this framework is with some examples.

If there is a theme in our world of increasing ease of access to information, it is that the jobs that have survived based upon simple mastery of complexity, alone, are probably the most vulnerable to technological substitution. Put simply, practitioners of them are likely to be at risk of replacement by a machine or an algorithm. A subsidiary theme is that when governments, bureaucracies, or even private institutions (unions) enter the fray in order to “protect” such jobs with either good or bad intentions (given the byzantine agendas of politics, we’re not sure which)—they ironically often end up eliminating or destroying them.

Start with the most famous example that most of us are already familiar with. Consider assembly-line manufacturing, such as workers in an auto plant, circa 1970. In most cases, such jobs involved tedious, repetitive tasks. These individuals are doing what humans do rather poorly and should not have to do, mimic robots. Their job is routine, sometimes complex depending upon how many separate tasks they must master, and boring. Assembly-line workers do not interact with the final consumer of the automobile and are personally unknown to them. In terms of our three attributes, complexity could be low to high, creativity is intentionally very low and, if it should happen, is not appreciated or rewarded, and due to efforts of politicians or the UAW, the price may be viewed by their employers as quite high.

The outcome is by now an old story in U.S. manufacturing and has led to the replacement of most repetitive assembly-line jobs being replaced by robots or capital-intensive production techniques. In the limiting case, the only employees needed on an assembly line are production engineers, and perhaps software engineers—in order to make sure the machines are working properly. This revolution in the U.S. economy is reflected in the steady decline in manufacturing employment in the U.S. economy. It fell by 50% from 1970 to 2012. This caused the U.S. to be viewed as an economy in which manufacturing is dead, and de-industrialization rampant—with manufacturing and jobs apparently fleeing overseas to other economies that can exploit cheap labor, notably China. Despite articles to the contrary, this perception is categorically not true, as growth in U.S. manufacturing output has kept pace with the growth rate of overall U.S. GDP. U.S. manufacturing is healthy, semi-skilled manufacturing employment is not. Machines really have replaced labor in assembly-line manufacturing and thank goodness. Who wants these repetitive, tedious, low-paying jobs anyway?

As a recent related example, we are all familiar with using computers to print files as physical documents. A new technology referred to as “3-D printing” allows computer design files to be printed not as documents but as actual final products or “stuff” with no intermediate steps. You want a pair of shoes customized to your feet and tastes? Print them! Where do you print stuff? That depends on minimizing raw material and shipping costs, but in many cases it will pay to print or make final products physically closer to the final consumer.

There is potential bad news here for emerging underdeveloped countries and perhaps for the global shipping industry. In the past, underdeveloped economies have typically expected to earn their seat at the world economic table by offering a large pool of unskilled or low-skilled labor available for extremely low wages. As the cost of substituting capital for labor diminishes and capital-intensive production grows yet more efficient, the wage at which it is not worth replacing these folks with capital in manufacturing could be very low indeed—in fact lower than that required for their subsistence. Thus, finding a place in manufacturing or assembly for very low skilled workers is, for them, a dreary prospect. Moreover, as technology continues to advance, it is becoming drearier. All this, of course, is not a new problem. Read the 19th century legend of “John Henry,” for example. Who wants these machine jobs? Who wants to be a “steel-driving man” anyway! Aim the efforts of your low-skilled, but would be upwardly mobile work force in a new and different direction—one in which human interaction and human skills are desired and preferred by consumers. Aim them at becoming barristas or leaders of “hot yoga” classes. Have them become professional athletes or cage-fighters!

Speaking of that, let’s turn to the case of the cage-fighter. Now subjectivity creeps in, as it always does in the free marketplace. Some of us (including me), may say this occupation perplexes them by its very existence. In our (my) subjective view, creativity is low (individuals bash each other in the head until one of them succumbs), complexity is low (individuals bash each other in the head until…) but the market price is absurdly high because morons are always attracted to such blood sport spectacles (see, for example, the movie, Idiocracy). This kind of sneering at someone else’s preferred consumption choices is oddly common, even in societies that value freedom and free markets. To those who do value freedom, such diversity of tastes and preferences is the beauty of the free and continuously emerging marketplace. Many things are made and consumed that you would not.

The many who enjoy and are aficionados of cage fights hold a different view and would come out with very a different ranking: 1. Creativity— extremely high, perhaps off the scale, because cage-fighters must make rapid decisions using all of their mental and physical skills with partial information. Moreover, they accomplish this under uncertainty and faced with the direst of consequences. 2. Complexity-low you just need to be a good fast basher. 3. Price-high because people with the courage, ability, intuition, other mental attributes, and physical attributes required to prevail at this raw form of entertainment are very rare. You could, of course, replace cage-fighters with machines, but what would be the point? Their “humanness” is what their audiences identify with and are entertained by. Despite disparaging contrary opinions, cage-fighters, at least currently, win the argument with those, like me, who disparage them or their sport. Whether we like it or not, the free market rewards them handsomely. In fact, having rare physical or mental human skills and being fun to watch probably explains the employment and compensation of most athletes and celebrities.

This also raises an interesting and very optimistic point for the larger labor market. Humans typically like to personally interact with other humans in the provision of many services—unless those other humans have little in their personality or people skills to differentiate them from say a codfish or a wolverine. Hence, the familiar case of the Stanford graduate (we all know one) who has a degree in, say, communications, sociology, or political science, but who has become a barrista. For barristas, complexity is low, price is also typically low, but creativity is apparently quite high. Creativity in this case is reflected in the artistic flower patterns drawn on the top of our mochas, the lending of a sympathetic ear to customers, and the stimulating humor and conversation. This person may seem to be sadly underemployed. But don’t worry. With their imagination, general background, intelligence, and people skills, they will soon likely re-invent themselves as a major marketing force—perhaps becoming the CEO of the largest new “hot yoga” franchise in the region.

Another example that captures the desired humanness of services is the diet industry (physical fitness and beauty would be similar). If we were to “Ask Google” on our smartphones to provide us the simplest definition of a weight-reducing diet, we might well get something like:

1. Calories in = Calories out is the necessary condition to maintain one’s current weight. If calories in > calories out, then fat will accumulate. If calories in < calories out, then fat and weight will decline.

Therefore a successful weight-reducing diet starkly means reducing intake of calories (consume more water, eat more cardboard, eat less carbs, eat less fat, etc…) and/or increase calories spent (short of setting yourself on fire, burn more calories, live in a hypothermic environment, jog to Baltimore, etc…)

This advice may seem rather stark and heartless to most of us. Being social, many humans tend to enjoy pursuing “self-improvement”activities in groups and/or with gurus, coaches and cheerleaders. We also love novelty and the idea that we have somehow missed a less painful alternative. “You mean I can eat all the cookies I want as long as I don’t eat anything else? Sign me up!” “Let me get this straight, are you telling me that Oprah’s latest diet attempt is just celery and pudding?  I’ve got to try that!” Thus, in the employment of savants in the diet service industry, creativity is high by demand, complexity is low, and price is fairly high depending, of course, on the creativity and appeal of the marketing effort.


II. “White Shirt” Jobs at Risk for Software Replacement

(Low creativity, high complexity, high price)

By now you will have gotten the idea that the occupations that are the most vulnerable are likely those in which complexity is high, creativity is low (decision-making, unique problem modeling and solving, imagination and the exercise of individual experience and insight are low) and perhaps by chance, inertia, or oversight the market price still remains high. This sounds suspiciously like the market for “stuffed-shirt” experts or formulaic practitioners in all fields—the advisors in many cases who have gotten a job out of making our own lives either less complex or, ironically, more complex and effectively made a niche for themselves “between the wallpaper and the wall.” In an “ask-Google” or “Wikipedia” world, the need for and admiration of “Trivial-Pursuit” experts is endangered and shrinking. At risk are many professionals who have found their niche by mastery of a body of arcane detail and going “by the book.” This includes, for example, many lawyers, doctors, pharmacists, engineers, desk clerks, agents, bureaucrats, accountants, bankers, brokers, professors, and investment advisors.

Ironically, when Karl Marx first attacked the “bourgeoisie,” he probably never dreamed that it would be the free market and the advance of information technology that would finally actually kill them. If this honestly sounds like your job, you’re right to be worried. You may be living on borrowed time. If you, or your competitor could actually write a software program (or ally with a programmer) to produce a “best practices” compendium of what you do that is actually easy for the public to use (not “user-friendly” in the sense that it is produced by computer geeks for computer geeks) then you should do it first to reap the profits (If your software includes the possibility of self-improvement by learning or “machine-intelligence,” even better). Either that or make sure you practice your profession in a way that is always insightful, imaginative and innovative—and it wouldn’t hurt to sharpen your “people’ and marketing skills. Write “Turbo-Tax” instead of remaining a simple accountant or an employee of H&R Block. Especially consider this advice if you are not by nature a “people-person.”

It is useful to remember that where human contact is direct, enjoyable, and preferred by the market, jobs can often do well, even in competing against software substitutes that already exist. Take, for example, the much maligned and under-appreciated travel agent. Long ago, this occupation was widely expected to disappear with the preponderance of travel bargain websites, with the availability of do-it-yourself trip planners and direct ticketing. Travel agent employment has certainly shrunk. That it still exists at all is testimony to the fact that there is still a market for individuals who remove the tedium of planning and booking your own trip, and who can offer personal service and imaginative suggestions and an attractive personality to those who don’t like to negotiate countless websites. In surveying the landscape of technological substitution, it is worth remembering that there are many things we could do for ourselves, but prefer not to.

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(image provided by 123rf)


Imagine you are back in the first or second grade and back on the playground again during recess. Let’s say that you and Jimmy and Suzy and Janie have created a very ephemeral unit for storing value, keeping score and trading amongst yourselves. In other words, a hypothetical money. Your imaginary, very abstract unit of account happens to be “butterfly kisses.” Laughable as they may be to others outside your game, to you they are very real. So real that the four of you jealously track and guard your inventory of butterfly kisses earned and traded—and amongst yourselves, you do indeed trade them for candy, playground rides, etc. To your group, at least, they clearly have real value.


One day, you come storming in to Ms. Sandusky with tears of self-righteous injury springing from your eyes. “What’s wrong?” She says with concern.


“Jimmy just stole 200 of my butterfly kisses from me. That’s what!”


Ms. Sandusky is understandably puzzled. “Stole your what?”


“My butterfly kisses. Janie, Suzy, Jimmy and I keep track of them, who owns them, and how they are traded on a hill of wet sand in the corner of the sandbox. It’s official. ‘Mt. Sand’ we call it. We write the amounts with a stick—or rather Janie does. She’s the only one we trust as our banker. She’s the only one allowed to use the stick. We don’t really use the butterfly kisses themselves. We just trade them among us for all kinds of things—like rides on the teeter-totter. I had 400 butterfly kisses and Jimmy stole from me by changing the 4 to a 2.”


“Oh you dear children!” Ms. Sandusky exclaimed. “How clever and imaginative of you. But I can make everything better. After all, butterfly kisses are just imaginary but wonderful. Everybody should have as many as they want.” She takes a moment to write something on a post-it. “Here you go. I just gave you 200 new butterfly kisses on this post-it and I made it official by signing it. Now don’t lose them!”


“But… You can’t just create them out of thin air. They’re valuable because they’re hard to get. If you can just make them up any time you choose, they don’t mean anything! That’s not fair!” (Your childish brain is dimly groping with the concept of scarcity being intrinsic to value)


“Now that’s quite enough from you young man. I’m trying to be nice. You take this post-it and go back out there and play nicely.”


So you and your friends apparently made two errors in your money system. First, you did not make sure that your system (Mt. Sand) for tracking ownership and exchange of your currency was secure. Secondly, your choice of an abstract, ephemeral money, while it has real recognized value to you is not widely understood or seen to have value by the appropriate controlling or regulating authority (Ms. Sandusky).


Sadly, the parallels to “Mt. Gox” and Bitcoins are obvious. One legitimate function of government is protecting the sanctity of voluntary trades and property rights. Nevertheless it appears that most governments appear puzzled and somewhat threatened by the rise of a private monies and, in particular, private digital currency. Why should their reluctance to recognize and enforce the real, trading value of Bitcoins be surprising? After all, the rise of a workable private currency threatens their lucrative monopoly on printing intrinsically valueless fiat money and deriving a counterfeiter’s rent from doing so.




One can only imagine the phone call…


“My account just got hacked into and fifty of my Bitcoins have been fraudulently transferred—stolen.”


“Your what?”


“My Bitcoins! They are a virtual digital currency whose supply is cryptographically controlled—ultimately there will never be more than 21 million of them created over the next 40 years. They are currently used in trading for more and more things and the exchange and record of ownership is tightly monitored and controlled by the Bitcoin exchanges.”


“Evidently not that tightly controlled, Mr. Wilson, or yours would not have been stolen. Twenty one million you say? Wow, that seems like a lot! Say, I’m a little a fuzzy on this digital stuff. Is your ownership of Bitcoins kind of like wins at ‘Angry Birds?’ You can bet I’d be mad if someone stole my ‘Angry Birds’ wins!’


“No! ‘Angry Birds’ is just an imaginary game. Bitcoins are real! They are a real digital currency with a real trading value recognized by millions!”


“Wait now I got you, Mr. Wilson. You’re like that caller we got an hour ago who reported the theft of 9,615 of his likes for a comment he posted on ‘Facebook.’ He was real steamed too!”


“It’s not at all like that! Bitcoins are real, the ownership of them is real, and they have a real value in terms of the real goods they can buy!”


“Well if they’re real, if property has indeed been stolen, then can you describe one for me—so that I will know it if I see it?”


“Well you won’t see them, since they only exist in cyberspace, but I will give you the code that identifies one of my Bitcoins. Just a moment now, I have it somewhere… Ah! Here it is—“65//+#4139AB**\\\\b16hedgehog%$@@#1312^. Does that help?”


“You bet it does. That helps us a lot. If you give me the rest of your allegedly stolen codes, I can then hand you over to Ed. He heads up our new Digital Property Restitution Division. As a matter of fact—I hope you don’t mind—I’ve taken the liberty of letting Ed listen in on this call. What do you think Ed, can we help Mr. Wilson get his Bitcoins back?”


“Sure, Tom. If Mr. Wilson will be kind enough to give us all the codes using his current e-mail address, we can certify his report of them and e-mail them back to him. We’re good at that and we have the staff to handle it—just now they smartly clicked 10,000 likes for that poor guy who had his likes hacked and stolen from his ‘Facebook’ comment. We’re just here to serve.”


“What? This is ridiculous! You can’t just make up my Bitcoins! They were illegally hacked from my account. You’ve got to find who stole them, where they are, and get them back for me. I insist on the return of my property and the prosecution and punishment of the thief!”


“Whoa there! Hold your horses! Raising your voice isn’t going to help anyone. I don’t like you attitude Mr. Wilson. Ed and I are doing our best to help. I don’t know that we would know what your property is even if we saw it—and we’re not likely to see it. After all, cyberspace is a mighty big place! If I could offer you a suggestion. Next time why not let this be a lesson learned. Store your wealth in something real, in good old-fashioned U.S. dollars—legal tender and backed by the U.S. Government. Putting your money in something as solid as a rock would have avoided this whole problem.”


“You idiot! Federal Reserve notes aren’t real! They’re just a fiat money printed at the whim of the Government and the Federal Reserve. They’re just as abstract as Bitcoins. But unlike Bitcoins their supply is unlimited…”




Farfetched? Ominously, in current court cases concerning the fraudulent transfer or use of Bitcoins, arguments are already being framed by legal defenses that no crime has actually occurred because Bitcoins are not really money. Don’t get us wrong. We are sympathetic to all private money efforts (including Bitcoins) and we believe economies and private markets are more than ready for their introduction and the eventual replacement of the disastrous, de-stabilizing combination of government fiat monies coupled with fractional-reserve banking.  The speed of exchange and record of ownership is technologically capable of supporting this evolution.


However, we prefer that the new, private money be backed by something of broadly recognized real value, aside from a hypothetical scarcity of cyber-money. That is why we prefer broad productive capital as the basis for exchange, valuation, and a store of value (for more detail read, Capital as Money, available from While electronic records of capital ownership and exchange could conceivably be hacked and stolen (as, sadly, is also the case of anything else that has value), at least shares of productive capital and index ETFs are widely recognized by governments as property and the theft or attempted theft of them is recognized as a crime.




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A recent glance at U.S. monetary data is astounding.  The money base (that is high-powered currency issued by the Fed and held by individuals and banks) stood, at year’s end, at approximately $3.6 trillion.  The M1 money supply (currency held by the public plus checking accounts – the normal “transactions” of money) by comparison was much smaller, standing at $2.6 trillion.  This strange twist is not new, it has persisted since the 2008 credit collapse and it shows how badly broken our traditional banking system was and how hobbled it remains.  The world has moved on, but apparently our anachronistic money and banking system has not.  When the monetary system is “normal,” M1 is usually much larger than the money base.  That is the case when the banks are lending out all or most of their excess reserves as a growing pyramid of loans, creating new money balances in the process through the expansion of checking accounts.  This is what has traditionally been referred to as the “banking multiplier” portion of the stock of money.   It is this old, nasty characteristic of the “fractional-reserve” banking system that has historically resulted in a large injection of uncertainty and instability into our financial system.  It is the reason that past Federal Reserve chairmen have bemoaned the uncertainty and difficulty of controlling the overall money supply and hitting monetary targets.  It is destabilizing because it joins bank lending and monetary expansion at the hip, resulting in the central bank’s lack of control over the total money supply.  This “fractional reserve” banking characteristic is responsible for a sad history of credit booms and busts, of periods of inflation and deflation.

13106574_mThus a minor and unheralded blessing of our current situation is that the “normal” bank expansion of the money supply is not working now.  Why?  Because private banks are in the aggregate either too scared or too tightly regulated to lend—or both.  They are appear to be huddled down and cautiously accumulating all the excess reserves they can get.  This has been the case now for a number of years as the Fed has been desperately throwing high-powered money at the banking system without much effect on aggregate bank lending, “quantitative easings” 1, 2, 3, and so on.  Be thankful the traditional bank multiplier is not working.  If it was, inflation would now be roaring.   To the observer, the Fed is reminiscent of a peculiarly dull child who is flooding a campfire with more and more gasoline, evidently unaware that the embers are totally dead.  Nonetheless splashing about in gasoline is a dismaying behavior to behold.  Clearly it is fraught with danger, as any small spark could and would trigger a real conflagration with all the puddles of gas lying about.

Yet there is hope even for the very slow-witted.  In the back of the child’s mind there is somewhere the vague realization that more and more gas might not be a good thing.  The Fed has the same realization.  Somewhere in the recesses of their minds even central bankers are uneasily aware that flooding the economy with liquidity can somehow raise the risk of future inflation.  Didn’t they read it somewhere?  Thus, they embark on the “taper.”

Since bank lending has failed the strongest attempts by the Federal Reserve to re-ignite it for a number of years, why don’t we congratulate ourselves and just live without it.  The economy is evidently functioning and lending is occurring through other mechanisms—it is just that private banks and their lending are evidently playing a far reduced role.  A market economy evolves and moves on as new lending mechanisms arise as old ones diminish or fail.   The idea of linking bank lending activity to the growth of the overall money supply was always a crazy, de-stabilizing Ponzi scheme in any case—attractive mainly to bankers.  Good riddance to it.  The Fed should take this opportunity to quietly enact several new years’ resolutions for its one hundred and first year.  First and most importantly, set the bank minimum reserve requirement at 100%.  Given where the money and banking system is right now it would be a moot point with little aggregate effect.  For the future it would help make the monetary system more rational and stable.  For the first time in its history, the Fed would actually have a chance to precisely target and control the supply of money.

What should the central bank do next?  We could think of a couple of suggestions.  Follow a “rule of one.”  What do we mean by that?  To simplify the money supply process that Fed should get out of the role of manipulating monetary policy and simply issue “one” of something.  For example, one dollar (in other words divide all wages, prices, and monetary quantities by approximately 1/H or 1/$3.6trillion).  This could be a monetary policy that is understandable to all and possible to implement.  Even the most intellectually challenged central banker should be able to get their arms around the idea that the size of the U.S. money supply is pegged at just one dollar.  After all, with a fiat money units don’t matter, but keeping the supply stable and predictable does.

After the Fed realized that, with its “rule of one,” it really wasn’t doing anything in terms of monetary policy, it could logically move to the final step.  At that point, the Fed could realize that it had evolved into an unnecessary appendix.  It could give the nation a wonderful present after presiding over 100 years of bad policy and chaos since its creation and simply disband itself.   In a technologically advanced, instantaneous exchange, debit-card economy, it is high-time to move on from fiat money to a private, market based unit of exchange and valuation.  What could or should that be.  It could be something with engineered, hypothetical scarcity, such as Bitcoins.  We would suggest an exchange and valuation good, a money, based upon the real fundamental value of broad index units of productive capital.

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Let us imagine an economy burdened with a nefarious, covert clique of counterfeiters.  This group (perhaps with the letter “G” painted on the back of their shirts) desires to steal real output from the stolid producers of real output.  They accomplish this by sometimes printing fraudulent paper money (one sub-group of them) and sometimes by issuing debt (another subgroup of them) or fraudulent IOUs promising interest and principal payments during the future in return for “borrowing” real output from naïve lenders.  Of course, since they really are producing nothing of value, themselves, they realize it will actually be impossible for them to pay off the debt they have issued and they have no intention of doing so.  However, they don’t want the gravy train of stolen output to actually come to an abrupt end with a default on their debt—it’s too lucrative and too much fun.  What to do?


Saving the day, a bright member of their gang suddenly realizes that the two cliques can actually cooperate to their joint benefit.  They can buy back the debt they issued by printing yet more worthless currency to repurchase it—so long as the public is naive or stupid enough to accept the entire fraudulent, synergistic scheme.  They go so far as to label these actions “open market purchases”.   Of course, these illicit activities actually result in some artificial “market” rate of interest on their dubious bonds.  That peculiar lending rate is just an accidental result of the cumulative behavior of the issuers of the worthless currency and the fraudulent debt.  To think of this rate as some sort of “risk-free” benchmark seems absurd.  After all, it can easily be manipulated by both the thieves supplying the “bonds” as well as the resultant inflation rate of prices in terms of the counterfeit currency. How could anyone be so silly as to think this interest rate was particularly important or meaningful—that it was some sort of meaningful “benchmark”?  Clearly, no one would be so blind as to think of it as some sort of a “risk-free” rate of return.  In fact, if this nefarious clique of counterfeiters and fraudulent borrowers threatened to desist, pack up, and exit our imaginary economy, the remaining honest producers surely should and would applaud. It would be strange if they could be panicked at the clique’s threatened shutdown of operations and wonder how their economy could go on without them.


Now, in comparison, let us consider the economy we actually live in.  But wait… it appears the two economies are not so different.  If you are a skeptic about the real value to our economy of public goods and government services, then you may agree.  We have a central bank that issues worthless currency at whatever level it chooses and usually issues it by the means of buying back previously issued treasury debt.  The combined scheme is used to finance government spending—either purchasing economic output directly or transferring wealth or claims on output from those who voted against the political incumbents to those who voted for them.  That is the traditional spoils system or “public choice theory” of representative democracy.  In so doing, our economy strongly resembles the hypothetical one that we previously imagined.   Surprisingly, many of us consider the peculiar borrowing rate determined by Fed and Treasury collusion and manipulations to be particularly meaningful.  If it’s not, what should we use for a logical “benchmark” rate of return?


We can think of two candidates.  First, if you live in an economy that enjoys an average rate of growth of say 3% from year to year, then expecting such a future return on wealth or savings that you loan to another is not such a farfetched idea.  In fact, it seems reasonable to expect it as a reward for deferring your own consumption for one year.  Another logical benchmark is the rate of return to a piece of productive capital.  After all, if you choose not consume all the output you produce, then you would likely consider “investing” it.   That is, creating a tool that will make you able to produce more output in the future.  The expected average rate of return to an investment in such a tool or piece of productive capital also seems a logical benchmark rate of return.


Let us suppose that the annual average rate of growth of our real economy is some rate, n.  Secondly, let us define the real average rate of return to a piece of productive capital as r(k).  It may or may not surprise you that there is a strong, logical argument, in a transparent economy in which individuals try to maximize their sustained level of prosperity, these that two rates will tend to converge toward or to equal each other.  That is, r(k) = n.    (Forget about a “risk-free” rate of return.  There isn’t one.  In an uncertain world, you won’t find it anywhere—especially not as a promised rate of return of government bonds or bank accounts.)  To see how and why the real return or marginal product of productive capital should converge to the growth rate of the economy, you may want to read our book (Capital as Money).  Alternatively, you can follow the brief argument sketched out below.  It was first made by originally by an economist named James Tobin and is popularly referred to as Tobin;s “Q.”


Suppose we consider a very simple economy where output can be either immediately consumed or invested in order to create capital or an investment good that helps produce more output in the future.  A simple intuitive example is corn—it can either be eaten as current consumption or dried and planted in order to produce more corn in the future.  In this very simple economy, suppose that the price (in terms of whatever monetary good is being used) of a unit of output steered toward consumption is P.  The price of the same unit of output steered toward the creation of future production or capital is P(k).      Further let us suppose that the real natural rate of return or interest in this economy is, in fact, just its average annual growth rate, n.  For simplicity, suppose there is no inflation of the price of consumption goods and that P is therefore expected to be stable.    Then the equilibrium price of a piece of capital will be nothing more or less than the sum of the expected returns to that piece of capital over future periods discounted to a present value using the real interest rate, n, and stated in terms of the price of a typical piece of output.  Thus, in annual periods,




(1)     P(k) =   P*r(k)/(1+n)+P*r(k)/ (1+n)^2 +P*r(k)/ (1+n)^3… +P*r(k)/(1+n)^i…




P(k) = the price of a unit of output used to create a piece of productive capital


P = the price of a unit of output used for current consumption


r(k)= the real marginal product of a piece of output turned into a capital good (in terms of output)—expected to be constant.


n = the real rate of growth of the economy.


A^b means that A is raised to the power of b.


i = refers to the ith period or year.


It turns out that equation (1) can become, without too much ado (using some re-arrangement and the algebra of the sum of an infinite geometric series);




(2)    P(k)/P = r(k)/n




What is the intuition of equation (2)?  It is surprisingly simple (and hopefully a major reason why James Tobin was awarded the Nobel prize in economics). The ratio P(k)/P, or Tobin’s “Q” provides a clear and elegant behavioral explanation of optimal capital investment.  First, suppose that a unit of output turned into a capital good is currently more valuable to the market than the same piece of output turned into a consumption good.  Then P(k) > P or Tobin’s Q >1.  If this condition is true, it is also true that r(k) > n.  In that case, current output will be steered by the marketplace toward the production of more capital goods.  Until what?  Until the marginal product of capital falls, thereby converging to the growth rate of the economy.  At that point of market equilibrium r(k) = n and Q =1.   This is the same result as the “golden-rule” capital intensity of the Solow neoclassical growth model (for further explanation you should read Capital as Money).  On the other hand, if the current market value of a unit of output invested to create a capital good is less than the value of same unit of output consumed as a consumption good, then P(k) < P or Tobin’s Q <1.  Thus, output will naturally be steered away from investment and toward consumption by the marketplace.  Until what?  Until capital becomes scarce enough in production that its marginal product rises to r(k) = n and Q once again is equal to 1.  Thus, a logical, rational market mechanism exists in a free-market economy that tends to drive us toward the optimal market-determined capital-intensity or aggregate level of investment.  Notice this mechanism has nothing at all to do with government or central bank manipulation of interest rates.  In fact, when such distractions exist, all that can be said for them is that they will tend to thwart or confuse the capital market in realizing the optimal level of productive capital creation.  It is this always present decision of all individuals and all economies of whether to consume or invest at the margin that causes us to recommend that units of broad productive capital should, in fact, be our medium of exchange and natural store of value—that capital should be our money.


This beautiful and elegant picture grows cloudier when we introduce sustained fiat money growth and inflation.  We would like to say that fiat money growth is perfectly neutral in exerting real economic effects upon the real return to capital, investment and the capital-intensity of the economy over the long run.    Unfortunately, the design of our ham-handed tax system, either by accident or intention, allows no such benign result.


To see why, consider the following thought experiment.  Suppose you own a stock during a period where its market price exactly doubles.  Unfortunately, during the same period the average price of all other goods, including the consumer price index, exactly doubles as well.  Realizing that your stock price appreciation has just kept pace with general inflation, you conclude that the real capital gain on your stock is precisely zero.  Carefully noting that fact on your tax return when you sell your shares, you report to the IRS that since there was no real capital gain on your shares, you owe no real tax—especially since the government or central bank’s monetary policy was responsible for the sustained rate of inflation in the first place.   Good luck with that completely reasonable argument!  Since capital taxes are typically not indexed to inflation, this is an important reason why a rise in the interest rate, taken alone, should generally exert a negative effect upon the future returns to a stock (growth or value).  Most rises in market interest rates simply reflect a rise in the actual or expected inflation rate.  In terms of equation (1), above, an increase in expected inflation does not net out in the effect on the numerator (P growing at the inflation rate) and the effect on the denominator (the discount rate becoming (n + Inflation rate)) because r(k) is reduced by taxes that are not inflation-neutral falling upon the real rate of return to capital.  In addition, there is nothing neutral about our witches’ brew of asymmetric tax rates. They will generally exert real distorting effects everywhere, including the split between investment and consumption.


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“Hey Ed how’s it going””

“Not so hot Jill, but I guess you can see that for yourself.”

“Sorry,” Jill replied with concern.  “I wasn’t going to mention it but you do look pretty motley Ed.  Seeing you now reminds of the time you got caught in that rockslide a few years ago.  You look pretty hungry too—your ribs are showing.”

“Yeah, Jill, I’m missing a few chunks.”  Ed regarded himself sadly.  “Even the end of my tail is missing and I doubt that will ever grow back.  They worked me over pretty good, I don’t mind saying.”

“What!?  Who worked you over?  What happened Ed?”

“Well, I was trying to catch rabbits at Red Gulch when a group of the Federal Coyote Police caught me before I even got any.  They found I didn’t have a rabbit permit and said they were going to teach me a lesson—I guess they did.  Nowadays it’s illegal for a coyote to catch rabbits without purchasing a rabbit permit first.”

“That’s nonsense Ed.  I catch rabbits the next valley over and I don’t have a permit—and not just any rabbits, mind you, but plump, tender cottontails.  What does a coyote do, if not catch rabbits Ed?  It’s what we’re about—our ‘raison d’etre,’ if you don’t mind my saying so.”

“Don’t worry Jill, the Feds will get around to you soon enough.  Mark my words.”  Ed sadly replied.

“Well why don’t you just get a rabbit permit then?”

“It’s not so simple Jill.  You need rabbits to buy a rabbit permit, but you can catch rabbits without one.  So here I sit, unemployed.”  Ed sighed.

‘Unemployed!  How can a coyote be unemployed?  We either catch rabbits or we starve.  If you’re self-employed, you cannot be unemployed.  It’s that simple—it always has been.  So you’re ‘unemployed’ just like Ned over there.   I haven’t seen him catch a rabbit in ages, but he’s all plump and glossy.”

“Well, Jill, I’m not exactly like Ned.  I don’t have his connections to the government and I don’t have his mind.  Ned gets a weekly allotment of rabbits from the Feds because he’s performing very valuable R&D that benefits all of us coyotes.  Thank goodness for Ned.”

“What’s R&D?”

“Research and Development Jill.  Ned gets ideas that are supposed to help all of us other coyotes be more productive in catching rabbits, even though I’ve never seen him catch a rabbit himself.  It’s important and valuable stuff he supposedly comes up with.  He says we need more coyotes performing government research.  In fact, his thinking time is so important that the government now officially counts as part of our economy’s total production of final goods per year.  That’s what they call Gross Coyote Product or GCP and Ned’s thinking, alone, actually makes our total value of coyote production larger.  I only wish I had his brain.”  Ed sighed again, sadly.

“What!  Are you for real?  This is the biggest crock of you-know-what I’ve ever heard.  It’s a scam Ed.  If Ned’s R&D, or whatever you call it, is so valuable, then let him prove it the old-fashioned way—by catching more rabbits himself.  That’s how new or better ideas should be rewarded.  If there is such a thing as “total coyote production,” it should be measured by summing up how many rabbits we catch in total.  It should not be measured by adding up rabbits and ideas.  What nonsense!”

“You just don’t get it Jill.  Ned told me you’re a barbarian, not a progressive.  It’s very important for the government to be able to measure the size of our total output in order to know what level of coyote services to provide for all our benefit and how many rabbits to tax and borrow from us in order to finance those services.  Ned says we are lucky to have a coyote government working so diligently to protect the general welfare of all of us.  According to Ned, whatever rabbits we give to them, it’s far less than they deserve.”

“And that’s not all, according to Ned, the coyote government has way underestimated the value of our total production or GCP because it has also failed to include qualitative improvements in output.  Products get better over time as new technology or thinking is embedded in them.  Ned says that’s important because a bigger economy means government borrowing and taxation can be increased to provide yet more government services for all of us.  I just wish I could get some.”

Jill was shaking her head incredulously as she listened to this.  “Qualitative improvement?  How can that be?  The only output we coyotes produce that matters is rabbits, and a rabbit is still a rabbit!  What nonsense!  Have you seen any ‘qualitative improvement’ in the rabbits you eat?  I haven’t.”

“I wouldn’t know, Jill.  It has been such a long time since I have eaten a rabbit, I probably wouldn’t be able to tell.”

Jill looked at him sadly.  “Poor Ed.  You really have had a tough time haven’t you?  What have you been eating to survive?”

“Well at night I started sneaking into the organic farm and scarfing down quinoa, radicchio, edame and acai berries.  I guess I’ve gotten pretty brazen because I’m so hungry—Now, I just eat in broad daylight right in front of the humans that run it.  They’re OK.  Since they don’t have guns, they just shout and run around beating pans.  I ignore them.  I don’t need a permit to eat this stuff because the coyote government doesn’t tax or regulate it.  That’s why more coyotes, like me, are becoming vegan.”

Jill looked at him blankly.  “Quinoa, acai berries, vegan…?”  She echoed.

“Yeah, at least I’m getting my anti-oxidants.  Ned says it’s just as well for me because a vegan diet is healthier anyway.  Still, I can’t help noticing he still eats only rabbits, himself.”

“Ned only says that because he’s part of it!  Government services!  Listen to yourself!  What are you talking about Ed?  We’re coyotes!  The main thing we need is to be able to catch and eat rabbits—and not have them taken away from us by other coyotes who are regulating, taxing, controlling or ‘thinking’ for us.  We should eat meat not vegan.  We can rely on ourselves, Ed.  What we need is freedom—not some coyote clique or cabal that has just cleverly positioned itself to steal production from the rest of us.  It’s the same old story wrapped up in new clothing.  Government working hard to serve the ‘public interest’—the ‘greater good’.  What blather!  At rock bottom, a coyote is still either just catching rabbits or stealing them, no matter how elaborate or dressed up the explanation.  Can’t you see that?”

“I don’t know Jill.  I’ll admit all this stuff just my head spinning.  I don’t have Ned’s mind and apparently I don’t have yours either.   The only thing I know for sure is that I’m still hungry.   Sometimes I just wish that I could get away from all these regulations, rabbit licenses, taxation, and measurement of coyote production.  Wasn’t it better in the old days when we just caught rabbits, ate them at our leisure, let the sun warm our backs as we rested with full bellies, and enjoyed life?  It seems like whenever we get too concerned with measuring stuff, especially somebody else’s stuff, bad things happen.”

“That’s better.  Now you’re sounding more like the old Ed.  There’s hope for you yet.”

“Seriously, Jill, is there still some place we could go and live like that? Like we used to?”

“Well, my cousin Toby says that it’s still possible to live like that in Wyoming.”

“Let’s go to Wyoming.”

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We have preferred capital as money (the benchmark of value and the exchange good) because it seems to us the most natural choice.  After all, the central decision of a free market economy faced by every consumer is what to consume and what to invest (or, put differently, whether to consume now or enjoy a greater amount of consumption later).  It is, at the margin, a production or consumption decision that needs to be made efficiently, on average, in order to result in an optimal economy.  Optimality, in our view, is measured by an economy achieving the maximum future growth path of per capita consumption.  It is stark choice that would and should face each individual consumer every time a unit of capital is given up for a pizza.  The opportunity cost of consumption is especially clear to us, if there is no intermediate good involved in this decision.  That is why we believe that units of broad productive capital are the ultimate money—not commodities, not restricted supply-constrained fiat monies (or virtual commodities) such as Bitcoins, and certainly not government-controlled fiat monies.  A unit of productive capital is intrinsically valuable because it will produce a stream of output over the future.  It incurs an opportunity cost to create because current consumption must be given up to create it.

Although the capital invested has real value, the shares that represent its ownership can be diluted by the inflationary issue of company managers.  Examples of companies that have done this are, unfortunately, not hard to find.  Other companies have retired shares to increase their value.  On balance, the historic return performance of the U.S. broad capital market as represented, for example, by the S&P 500 is impressive compared both to the real and nominal growth of the U.S. economy.  This is testimony to the fact that dilution on average has either not been overdone or to the fact of historic underinvestment in productive capital relative to its optimal level, or both.  Creating a greater incentive to correct underinvestment in productive capital so that a greater per capita consumption path can be attained is our major motive for preferring capital as money—the benchmark of value and the medium of exchange.  At the “golden-rule” capital-intensity, the real return to capital will converge to the growth rate of labor plus the growth rate of labor productivity (read Capital as Money for a more detailed explanation).

Finally, there is another beautiful reason for capital to be money.  In an economy that uses capital as its money, let’s suppose you are a lazy or distracted actor.  You choose not to consume all of your income, for example, but you simply cannot be bothered to think much more than that about the allocation decision or you postpone it.  Probably a more common behavior than we care to admit.  In a capital-as-money economy, your decision not to invest, but rather to simply accumulate money balances, results in you becoming, possibly unintentionally, an owner and holder of more capital by default.  In so doing, you raise the price of capital and stimulate the actual investment in new productive capital.  What a wonderful default characteristic that would be in an under-invested real world economy such as ours.  To see why, consider a lazy consumer in our current fiat-money economy.  When they passively accumulate excess income now, it typically will end up as added balances in a bank savings or checking account.  From there, through the magic of fractional-reserve banking, it is likely to be lent out to some new “credit bubble” activity or other dubious if not fraudulent consumption.  It is probably unlikely to actually find its way to actual new investment in productive capital.

As a theoretically stable, strong private money, Bitcoins, in our view is the next best monetary alternative.  With no intrinsic value, its universality, its simplicity, its growing acceptance, and the faith of the market in its fixed supply are powerful attributes.  If the supply is ultimately fixed, then the real value of Bitcoins will steadily increase at the average real growth rate of the economy.  That Bitcoins are actually gaining traction and acceptance in exchange and value is of huge significance.  The fact that their scarcity and hence value is artificially created is ironically, at the same time one of their greatest strengths and a potential weakness.  Costless to produce, its acceptance and value are irrevocably tied to a faith that its supply is inviolate.  Were Bitcoins to be successfully gamed, duplicated or counterfeited, all bets would be off.  At this point, all the proponents of Bitcoins would hasten to assure us that this is a logical impossibility given the technical sophistication of Bitcoin creation and exchange control.  Yet to raise the concern, however unlikely, is necessary to any who have witnessed the history of unlimited cleverness and greed of humans.  Bitcoins can become a superb private money, but there is no magic.  Avoiding abuse of any private money still requires its users to be astute and vigilant.  We are too familiar with the manipulation and abuse of central bank/government supplied currencies.

Some may be surprised that we would rank an artificial, fixed-supply commodity money superior to an actual commodity money such as gold or silver.  After all, these commodities have the attribute that their ultimate supply is limited by nature.  Further, precious metals have historical record of use that compares favorably with that of the Federal Reserve.  The problem of commodity monies lies in the natural supply.  It is determined not just by nature but also by demand and technology.   Playing either no critical role or a lesser role in production, their highest value is often as money and is ultimately dependent upon their relative scarcity to other goods.

In this light, the U.S. economic history of the 19th century is instructive.  Each major gold discovery—California, Rocky Mountain, Alaska, etc.—was coupled with, not surprisingly, a period of gold inflation (see, for example, The Monetary History of the United States, by Friedman and Schwartz).  The brief period during which we flirted with a bi-metallic standard (gold and silver) was even more volatile.  During the recent run-up in the price of gold and silver, much of the addition to the supply of these commodities has been obtained not only by finding new sources, but rather by us now enjoying the technological capability that makes it possible to more intensively re-process previously uneconomic ores or waste.   Thereby, we essentially “re-mine” previously uneconomic finds.  This should come as no surprise.  When the percentage of the Earth made up by gold, silver, or any other natural commodity is considered—its stable supply and therefore its stable value relative to other goods and services is not at all assured.  Remember, technological innovation, itself, is an economic good (it improves human or physical capital)—it is induced by investors seeking a return, it is not accidental.  Speculative cycles in the value of gold relative to other goods and gold “booms” or “busts” real or imaginary is what led many to conclude that a gold-standard economy would be inferior to one that boasted an “intelligently-managed” government/central bank fiat money.  Sadly, we know where that led.

This is why we prefer the alternative of a fixed-supply cyber commodity to a money based upon a real one.  After all, were it to be corrupted, mismanaged or violated in any way, it could simply be rejected and replaced by a superior alternative.  Of course, any of the three private monies—capital, Bitcoins, or commodity—would lie outside the direct control of the government.  With the demise of the regulated, fractional-reserve banking system and a system of direct lending instead (which seems to be already happening) a money based upon any of them would be vastly preferable to the hopeless money and credit morass we find ourselves in.

For those interested in a more detailed exploration of money, banking, capital and some of the topics discussed in this blog, we recommend checking out the link on this webpage to Capital as Money.   At your preference, we are pleased to announce that the book can now be purchased for either dollars or Bitcoins.  It’s the least we can do to enthusiastically encourage the adoption of an exciting, alternative private money.

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We can sadly remember watching with a mixture of helpless horror and fascination the video of those unfortunate individuals who wandered out on the quiet beaches of Southeast Asia before the Indian Ocean Tsunami. What were they thinking? We can only imagine… “What a day, the tide is out so far! I can find all kinds of treasures that never are never usually uncovered by the sea. What surprises await me?” Sadly, for them, there was a big one.

Inflation is analogous. Most of our fellow citizens are pragmatic beachcombers. They are simply not interested in theories or threats of future inflation that has not yet materialized. Most of them do have the time or inclination to listen to lectures on the superiority of Bitcoins, capital or other private alternatives for money. Most do not realized that failed money and banking policy are responsible for the largest U.S. economic collapse since the Great Depression and its disappointingly gradual recovery. Right now inflation is nowhere and interest rates, if one can get a loan, are very low. As long as inflation is a non-event, dollars will do just fine and Bernanke’s Fed will provide plenty of them.

Is the inflation tsunami assured? Well put it this way, quantitative easings 1 through n have pumped an unprecedented amount of intrinsically valueless fiat money into the U.S. economy. That inflation has not already occurred is only due to the fact that the U.S. money, credit and fractional-reserve banking system is still broken. When it finally regains its greed and euphoria, watch out. The only way then to stop the inflation tsunami would be for the central bank to re-absorb high-powered money at exactly the right rate to maintain price stability. Can this be done? Is the Federal Reserve and Bernanke up to the challenge? Let’s just say that if they are, it will be the first time in the 100 year history of the Federal Reserve. Clearly the odds are heavily stacked against avoiding the financial tsunami. It would be a feat akin to stopping the Titanic on a dime.

As if that weren’t enough, the public sector hyenas are already barking and salivating at the near-term prospect of the departure of Bernanke from the Federal Reserve. They have all kinds of grandiose, crack-brained spending agendas that will require the full-force fire hose of fiat money to be turned on to finance them. Incredibly, they think that under Bernanke the Federal Reserve has been too tight! If you thought that the rounds of quantitative easings were over the top, just wait! Over the next year or two the Titanic will not stop on a dime. Instead, it is likely to get a new captain who will order full speed ahead and the lookouts sent to bed. The new Fed Chairman will not be an inflation hawk.

When will our financial beachcombers care? When the purchasing power of the dollars in their accounts or wallets is rapidly being devoured by the fire of large and pervasive price increases—when the inflation tsunami has really struck. Then, interest in private monies—Bitcoins, commodities, and capital—will seriously emerge. Real assets will be one of the few havens of value in an inflation fire. Only when serious inflation strikes, will most individuals be open to and interested in storing their value and managing their trades in a different way. Open to the argument of al alternative private money.

The discerning reader may now object, “But I seem to remember that the stock market or the value of capital did not fare so well during the last major U.S. inflation of the 1970s? Why is capital then a haven for value?” Because, dear reader, the value of capital and the return to it was then and still is denominated in dollars. Moreover the tax burden that fell upon it—capital gains, corporate income tax, etc.—rose with inflation. Therefore capital was clearly not inflation neutral. Given our current tax structure, it still isn’t. However, if capital was money or the benchmark of value of all other goods, then, of course, there would have been no fiat money inflation of the 1970s. Remember, inflation is everywhere and anywhere an outcome of the expansion of a fiat money at a faster rate than the underlying growth rate of the economy, as Milton Friedman has so famously and accurately observed. It is just as accurate to think of inflation as a devaluation of a fiat currency—being printed at too high a rate—as it is to view it as a general rise in prices.

Of course, Bitcoins and other private monies aspiring to be the accepted benchmark of value and medium of exchange would face the same issue as capital, as long as their value was denominated in terms of the prime adversary—dollars. With an ultimately fixed supply, Bitcoins can be expected to appreciate at the nominal growth rate of the economy. When dollar inflation comes, transactions in them would occur at increasingly higher dollar values. Expect the government tax man to come knocking at the door. This will make them non-dollar inflation neutral as well. The cure? Redefine the game of value in terms of Bitcoins or capital instead of dollars. When the monetary value of a Bitcoin or capital is just one, there is no “capital gain” and the problem is solved. Of course, this logical outcome will not come without a serious fight, since the government will then have been stripped of its most fundamental financing power. Its fundamental power to steal. Its tool that has historically allowed monarchs, dictators, entrenched bureaucrats and politicians, and other such thieves to have their cake and eat it too. Governments have traditionally enjoyed the privilege of being monopoly counterfeiters, of printing fiat money with abandon, thereby stealing real output from the rest of us. Then, adding insult to injury, governments could tax the value of our real assets, because they were appreciating in fiat money value, thereby stealing real output from us yet again!

Readers who are interested in further development of the arguments presented here are urged to obtain our recent book, Capital as Money. It can be purchased by means of link to this website. We are so excited and enthusiastic about the recent optimistic traction of an alternative, private currency that we now encourage readers to choose the option of purchasing our book with Bitcoins.

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Those familiar with the arguments and ideas of Capital as Money and also with “Bitcoins” will observe some striking similarities.  Both are attempts to replace our badly flawed and de-stabilizing fiat money and fractional reserve banking system with a simpler and more logical alternative.  Both take advantage of current technological exchange capability to build a private, endogenous, market-driven good used in exchange and valuation.

“Bitcoins” can be thought of as an artificial, infinitely divisible, cyber-commodity money whose supply will ultimately be fixed at a constant level.  Its fundamental value lies in this fact.  At eventual equilibrium the average value in exchange of a “Bitcoin” can be expected to be increasing at the growth rate of the economy.  Further, “Bitcoins” has the important advantage of already being initially employed, with growing success, as a private alternative money in exchange and valuation.  Another important advantage is that it doesn’t need banks to dilute or ruin its pure properties in value and exchange.  But what will that growth rate of the economy naturally be?  That is one of our fundamental reasons for advocating productive capital as money.

As we suggest in our book Capital as Money, we believe a broad index of capital as is the most logical choice for a privately determined money. Using capital as money could free the economy from our current fiasco of central bank manipulated fiat money, interest rates, and credit bubbles.  Capital as money also eliminates the role or need for regulated private banks and their associated Ponzi-scheme of leverage in repeatedly de-stabilizing our, money supply, our economy and its markets.  The beauty of using broad capital index shares as money lies in several attributes.  First, productive capital has a clear basis in the value of the real output it is responsible for producing.  This value is derived from the real marginal product of capital in production of output– also equal, at the “consumption-maximizing” capital intensity, to the rate of growth of the economy.  Further, using capital as a store of value and unit of exchange would tend to lead our under-capitalized economy toward the optimal level of investment and capital-intensity, referred to as the “Golden Rule” path in the economics literature.  Finally, broad productive capital not only has value, but it could be argued that it is the truest foundation of value in a high-tech market economy which is steadily moving toward minimization of commodity and labor inputs.

Both Bitcoins and Capital as Money represent good answers to a market need to replace our present badly flawed money, banking, and credit system.  Both are a recognition that we can do far better.  We are technologically past needing a central bank driven, regulated and exploited money system.  We are ready to emerge to a more rational alternative.  Only history and bureaucratic inertia keeps our present central-bank driven monetary system in place.  Both Bitcoins and Capital as Money seem infinitely preferable to what we are currently saddled with.  Which should prevail?

Both of them!  They are remarkably complementary.  A money founded on the value of productive capital (the economy’s tools of production) has the important advantages of being based on something of real value—in fact, perhaps the most fundamental real value of all within a market economy.  Its use as a store of value and medium of exchange will tend to drive the economy to a long sought optimal level of capital investment and capital intensity in production (read Capital as Money).   A money based on “Bitcoins” will have simplicity, divisibility and, given a stable fixed supply, and hopefully a relatively stable level of convertibility into other goods—in particular capital.  The two of them working harmoniously together could be the basis of a wonderful modern monetary system—a truly market-determined money based upon the growing real value of the economy.  Both of them are enabled by the technological fact that now the velocity of money in exchange is not a constraint or speed limit, but rather is simply determined by the cumulative demand for trading to satisfy human needs and desires.  The advance of technology has now permitted real freedom, instantaneous exchange.  The need for traditional banks and their role in creating money and pyramids of leverage, if it ever really existed in the past, has now certainly vanished.

In our view, the money that will emerge victorious in the marketplace of ideas is the one that will offer stable convertibility into a broad share of productive capital.  Without convertibility into something real, any number of costless-to-produce private fiat monies could compete, along with the promise of a fixed supply, with “Bitcoins.”  How would one choose amongst the potentially proliferating alternative candidates?  However, “Bitcoins” appears to be the first viable and acceptable alternative for a private market-based money—the unique position and acceptance it currently holds is not trivial.  If the value of “Bitcoins” was anchored by fixed convertibility into broad index shares of productive capital, the combination would be unbeatable.  Hence, the title of this blog.

The arrival of modern, market monies symbolizes the technological end of our current convoluted sad farce of a money and banking system.  The old system will not be missed.  But until it is entirely eliminated it can still inflict great damage.  Similar to a thrashing elephant with a fatal bullet in the brain, that doesn’t realize it is dead yet, it can still stumble about in its death throes crushing individuals, their property, and their wealth.

To celebrate the emergence of the first of the modern market monies, and our wish for their eventual success in simplifying exchange, protecting the wealth of all of us, and establishing a more rational market system of exchange and valuation, we must do what we can to support this welcome free-market trend.  Therefore, within the next several weeks we will begin to price and accept payment for our book, Capital as Money, in “Bitcoins.”



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