Fixing the Root Bug The Simple Hack for a Growth-Independent, Fair and Sustainable Market Economy 2.0 Why getting rid of “jobs” (a human being as the unit of labor), the zero lower bound of interest rates and private monopolies – most notably that of untaxed land ownership – would solve most of our economic, social and environmental challenges and how it could be done easily and feasibly. Tuure Parkkinen COMPLIMENTARY SAMPLE Fixing the Root Bug: The Simple Hack for a Growth-Independent, Fair and Sustainable Market Economy 2.0 Version 1.3 – “Pioneer Edition” ISBN: 978-952-7102-00-8 (eBook) ISBN: 978-952-7102-01-5 (premium paperback, 8.5x11in) ISBN: 978-952-7102-02-2 (value paperback, 8.5x11in) Reparodigm Publishing Copyright © Tuure Parkkinen, 2015. First published 2014. This version in April 2015. All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the publisher, except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law. For permission requests, write to [email protected] with the title “Book content reuse request”. Cover design and graphs: Matias Piiparinen. Layout design and pagination: Tuukka Pykäläinen. For my goddaughter Tiitu who has a lot less to unlearn than most of us. PHOTO: HEINI LINDVALL About the author Tuure Parkkinen is an institutional entrepreneur, a philosophical economic engineer and a generalist passionate about asking relevant questions. He has studied industrial engineering and strategic management at Aalto University, successfully turned around an HR company and seen many industries and types of work. At the time of publishing, he is based in Helsinki, Finland. For requests and comments related to this book, e-mail: [email protected] | 5 Table of Contents Chapters included in this sample are marked green. PREFACE ................................................................................................................................................................... 13 ACKNOWLEDGEMENTS .................................................................................................................................... 15 INTRODUCTION AND OVERVIEW ................................................................................................................. 17 VIDEO LINKS ......................................................................................................................................................... 27 1 A BRIEF INTRODUCTION TO ECONOMICS ........................................................................................... 31 1.1 VALUE, PRODUCTION AND MARKETS ..................................................................................................................32 1.1.1 The Division of Labor – Cooperation and Sharing Information: The Philosopher’s Stones of Mankind’s Progress .............................................................................................................................................. 32 1.1.2 Societal Structures Facilitate Cooperation – Economic Systems Direct Resources .................................................... 35 1.1.3 Value Is Subjective and Perceived – Rationality Is Largely an Illusion ......................................................................... 38 Sidenote Box 113A: Objective Value Theories and Morality ........................................................................................................................47 1.1.4 Production Is for Consumption, i.e. Appreciation – ‘Productivity’ Has Many Units ................................................. 49 1.1.5 We Need a Market Economy Because of the Limitedness of Understanding and Empathy .................................... 54 1.1.6 The ‘Market Forces’ – How Prices Balance Supply and Demand .................................................................................. 57 1.1.7 Ownership as a Bundle of Rights ........................................................................................................................................ 66 Sidenote Box 117A: Ownership as an Idea, Feeling, Relationship or Extension of the Self? .......................................................................67 1.1.8 Labor and Capital (and Land?) – The Factors of Production ........................................................................................ 70 Sidenote Box 118A: Keynes’s Liquidity Preference Theory is Outdated .....................................................................................................76 Sidenote Box 118B: The Trouble with Measuring Capital Financially: ‘The Cambridge Capital Controversies’ and Piketty’s ‘Capital’ .81 Sidenote Box 118C: Marx’s ‘Capital’ Is Closer to Financial Capital ...........................................................................................................85 Sidenote Box 118D: Does Capital Provide Economic Security and Freedom? ...........................................................................................86 1.1.9 Companies as Competing Organizational Forms (Because Institutions Suck at Suicide) – ‘Pro-Business’ Is Not ‘Pro-Market’ .................................................................................................................. 89 Sidenote Box 119A: Memetic Evolution Outpaces Genetic Evolution .........................................................................................................95 1.1.10 Companies as Contract Bundles – Financial Assets Allocate Risks .............................................................................. 98 1.1.11 The Fundamental Imperfections of a ‘Free Market’ – Externalities and the Limitedness of Land.........................102 1.2 CREDIT, MONEY AND BANKING ..........................................................................................................................106 1.2.1 Money Facilitates Trade Through Liquidity and Broad Acceptability ...................................................................... 106 1.2.2 Credit – Delayed Payment Granting Chronological Flexibility ................................................................................... 109 1.2.3 Money as Credit – Real Wealth vs. Virtual/Fiduciary Wealth .....................................................................................110 1.2.4 The Difference between Origin, Nature and Purpose (of Money) – ‘Metallism’ vs. ‘Chartalism’ ..........................116 1.2.5 The Two Denominators of Currencies and Other Financial Instruments: the Reference Resource(s) and the Collateral .............................................................................................................................................118 Sidenote Box 125A: The Currency, the Accounting System and the Payment Interface – What We Mean by ‘Types of Money’ ......... 130 1.2.6 Banking: Accounting for Debts and Credits and Pricing Risks – There Is No ‘Fractional Reserve’ ....................131 Sidenote Box 126A: The Misleading Expression That ‘Banks Lend Other People’s Money’ ....................................................................136 1.2.7 Banks Need to Be Private Because Risk Has a Market Price ........................................................................................ 138 1.2.8 The Supply of Money Is Infinitely Interest-Rate-Elastic – The Money Supply Is Endogenous ...........................140 Sidenote Box 128A: Additional Reading on Money, Credit and Banking ..................................................................................................144 1.3 INVESTMENT, SAVING AND ECONOMIC GROWTH ........................................................................................145 1.3.1 Economic Growth Is the Increase in Produced and Traded Value – The Many Meanings of ‘Wealth’ ..............145 1.3.2 In a Closed Economy, Net Monetary Wealth Is Zero – Total Real Wealth Depends on Future Consumption and Capital Intensity (and Monopolies) .....................................................................................148 1.3.3 The Circular Flow of Income – Consumption, Saving and Investing ..........................................................................152 6 | 1.3.4 Foreign Trade: Current Accounts Are Also a Zero-Sum Game – Comparative Advantage vs. Absolute Advantage .................................................................................................................................. 155 1.3.5 Inflation Is the Rise in the (Nominal) Price Level – And Has Little to Do with the Quantity of Money .............. 158 2 COMPARING OBJECTIVES AND MEANS – DIFFERENT ECONOMIC SCHOOLS AND THE ROOT BUG HYPOTHESIS ....................................................................................................... 165 2.1 NORMATIVE PRINCIPLES – WHAT DO WE WANT FROM AN ECONOMIC SYSTEM? .............................167 2.1.1 The Libertarian Maxim of Freedom and the Paradox of Choice .................................................................................. 171 2.1.2 Life, Diversity and Sustainability as Normative Maxims ..............................................................................................174 2.1.3 Anarchist Communism: ‘Everyone According to His Ability, to Everyone According to His Needs’ ................. 175 2.1.4 Utilitarianism and Happiness Politics/Economics – Does