Chapter 3 The information content of money

The origins and evolution of money
The rules of currencies
“Debt money” versus “trade money”
The emergent effects of present currency rules
Keeping information about how money was created with the money

Money was invented to facilitate trade between individuals. Every currency contains information in the way that it captures and measures value, and in the way it enables us to exchange value. When money is created it represents the value of an asset.

Economic systems have the goal of maximising value. This book advocates the creation of special currencies for trading to achieve goals other than the accumulation of value. To accomplish this we can add to the information embodied in our money measure and, based on this extra information, vary money rules to include other functions that we wish to maximise. We also need to correct the deficiencies in the existing system where measures of value are compromised. Before we can do this however, we first need to understand the origins and role money.

Money that reduces in value the longer it is kept

The Ancient Egyptians invented some of the earliest money known to humans but it held very different characteristics to the dollars and cents that we use today. Their money began as a way of managing the grain supply.

Egyptians kept vast amounts of grain in stores. When a farmer deposited grain, the grain-keeper issued tokens which noted the date of deposit. When the grain was required, the farmer simply returned to the grain store, handed over his tokens and reclaimed his grain. However, he would always receive slightly less grain than originally deposited and the longer it took for the tokens to be returned, the less grain was given. The difference was recompense for the keeper of the grain and it also included a small allowance for rats and spoilage.

The tokens were sometimes used to exchange for other goods and services. They were a currency with the property that it reduced in value the longer it was kept. They also embodied a promise; a social contract where the grain-keeper agreed to return some grain when the tokens were presented. This meant that the system would fail if either the grain keeper did not honour the contract (perhaps through issuing more tokens than grain) or if the farmer forged or altered information on the tablet. The information content embedded in the tokens contained the rules for redemption, including a time component.

The effect of these rules would have been for the tokens to circulate rapidly because hoarding could only lead to loss. The tokens also represented the “real world” where there was spoilage the longer the grain was kept and where it took effort to build and guard grain stores.

In a similar vein but over a thousand years later, the brakteaten system of the Middle Ages saw a number of European communities issue silver plaques as a form of local currency. These plaques were recalled two to three times a year, whereby their size was reduced and they would lose a percentage of their value before being reissued. This “tax” was imposed by the local lords as a payment for keeping law and order. Because this currency became less valuable the longer it was held, people quickly found ways to spend it, or in other words, they got others to do productive work. Bernard Lietaer contends that the cathedrals of Europe were an emergent property of this system and that these cathedrals are still a productive asset as they bring tourists and pilgrims to the local communities.

A similar approach was attempted in the 1930’s when first the German town Schwanenkirchen, and later the Austrian town of Worgl, decided to issue their own currencies to stimulate the local economy. The Worgl currency was backed by the regular currency of the day (Austrian schillings) and could be redeemed at any time for the equivalent amount minus a fee. The currency also had to be revalidated monthly for a fee. This meant that money circulated rapidly and people who held the currency looked for places to spend it quickly before the monthly fee fell due. Under the system trade and employment flourished. For a brief year or two, both Schwanenkirchen and Worgl became towns of prosperity – until their currencies were closed down by their respective governments as it was argued that it could lead to inflation. The fact that a currency that decreased in value and which was backed by another currency could not lead to inflation greater than the underlying currency was either not recognised or ignored.

The monies described above were all created for a particular purpose and were designed to facilitate trade and the creation of wealth. Throughout their existence they continued to reflect the underlying asset on which they were based. These monies worked and worked well – some for hundreds if not thousands of years. Money with appropriate rules will facilitate trade and work towards system goals.

Coinage to Paper Currencies

A history of money can be found at

The form of money has evolved from cumbersome tablets and plaques to coins, then paper and finally to electronic impulses. This has been able to happen because money is information about the value of assets and the format in which it is kept is irrelevant. The history of money repeatedly shows that when the information content of money no longer accurately reflects the value of the underlying assets either inflation or deflation occurs, which in turn disrupts trading as it destroys trust, the important component for successful trading.

Typically made of precious metals, the face value of early coins reflected their gold or silver content and was not subject to the spoilage and diminishment of value that occurred in grain-based currencies. Coins were far more convenient to carry around than tablets and because of their intrinsic value, they were much easier to exchange than a plaque that embodied a promise of redemption by a potentially unknown trader.

Paper money made its first appearance in China as early as 600 AD but didn’t appear in Europe until nearly a century later. It arose for a number of reasons, not the least of which was that it was far less cumbersome than coins and that it was not subject to fluctuations in the availability of metals.

Embodying a promise to redeem the note (similar to the early tablets), the issue of paper money was backed by tangible goods such as gold reserves. As these currencies became widespread more and more banknotes were issued until eventually the value of circulating banknotes tended to far exceed the value of the metal reserves backing the currency. A problem in such a situation occurs when people ask that their banknotes be redeemed. Not all banks are going to be in a position to comply and bank failures follow. As problems compounded governments began to step in, regulating the issue of money, ultimately creating a single currency within a political jurisdiction.

Keeping gold reserves for paper money is impractical because the amount of money needed for trade far exceeds the value of available gold. Even so the USA kept up the pretence until 1971 when President Nixon went off the gold standard. However the purpose of the gold standard was to try to ensure that the value denoted on the paper money reflected the underlying value of the asset it represented by using gold as a reference.

Our present day problems such as outbreaks of asset inflation and third world debt are caused by the information content of money being compromised.

The Meaning (Rules) of currencies

The currencies of the world remain instruments to exchange and measure value in the same way the Egyptian tablets and later gold coins and paper currencies were created to facilitate trade.

However, if money was invented to facilitate trade why do we now have so much more money than we need? And why do we exchange so much more than needed for trade purposes?

Every day approximately AU$70 billion pass through the foreign exchange market. Yet each year the entire Australian economy only produces $240 billion of goods and services. How can the annual value of goods and services produced equate to only four days’ worth of trading? Australia has around $960 billion available for trading – a figure two orders of magnitude greater than the amount of money needed for trading value in tangible goods and services.

It is obvious that money has become something much more than a vehicle for exchanging value.

Modern money has come to be considered wealth in its own right rather than a representation of wealth. Large sums of money are used in trading but it is the money itself that is being traded, rather than a transfer associated with goods and services and other assets. How has this happened?

When money’s primary purpose was to make trade possible it encouraged specialisation and the benefits that flow from such a division of endeavour. But how much money do we really need for this purpose?

The amount we need is related to how often money is used for trades of items of value; how often these trades occur; and the time period between getting the money and spending it again. We want enough money to cover these activities. As long as money does not become valuable in itself there is no problem about creating new money. We create as much as we need, when we need it and there are various ways – such as regulation – to ensure that is exactly what we do.

Unfortunately, governments and financial institutions rarely adhere to the idea of creating only as much as we need. Today the conventional wisdom is that for a modern economy to work it is necessary to have inflation of between 1 and 2% and central bankers are instructed to this end. It is argued in this book that inflation is unnecessary and should not be tolerated as it leads to undesirable social effects such as moving resources from the poor to the rich.

It is necessary to understand how money is created today to see the problem.

In the 21st century, most money is created by generating debt or creating a debt asset. Governments give loans to banks and so create money. That is the banks are in debt to the government. Banks in turn lend the money to people who wish to use it and who have the capacity to pay it back. Banks are “only” allowed to lend a fraction of the money they have on deposit. They get a deposit of money and they loan say 90% of that amount. However, this money remains in the bank before it is spent and comes back as a deposit from someone who has supplied services paid for from the loan. The bank can now lend another 81% of the original amount. Doing this many times means that a bank can loan 9 times as much money as was originally deposited and it does this by creating debt assets or the promise to pay.

People use the money to create goods and services. When the loan creates an asset or a service then the money is backed by something of value. “Productive” loans create more value than the original value of the loan and this is how real wealth is created. This wealth has been earned and can now be loaned, backed by an asset that either exists today or will exist in the future.

All money loaned earns interest and the interest earned should be related to the value of the loan, which is in turn related to the value of the backing asset. A problem can arise when the value of the backing asset falls after the loan was made. This is not a problem if the risk associated with the fall in value of the backing asset is shared between the lender and the receiver, because both the lender and receiver will take appropriate care in conducting the trade. It does become a problem if either party can remove the risk.

The modern financial system has evolved so that lenders can remove their risk associated with lending money. This is done by loaning money against an asset and if the asset falls in value then the lender does not suffer a loss because they have a lien against other assets of the debtor. This has happened recently with house prices in many countries. The lenders are too willing to lend against houses because they will suffer no loss if the house prices fall. This means that house prices will rise, resulting in an asset bubble that must inevitably burst.

The consequences of too much debt money

One problem in the current system is that it allows excessive (or unpayable) debt to be repaid from the real assets of people who were not involved in the creation of the debt. As an example consider the 2007 sub-prime lending crisis in the USA, which occurred due to too much debt being created by financial institutions. Because of the interconnectedness of the money systems, the debt will be paid for by the entire world community through an increase in interest rates for everyone who has debt. The risk is unlikely to be borne by those who issued the debt because, for the most part, the debt has been “off-loaded” through the use of other financial instruments built on top of the initial debt. Ultimately the debt will be paid for from real assets where some of the borrowers will pay from their future wages; many will pay from increased interest charges; and others with real assets will pay because of inflation.

In the 1930s, the 1980s and again in the 2000s we’ve witnessed a very direct transfer of wealth from farmers to financial institutions through no fault of the farmers. Financial institutions lend money to farmers but demand that the loans are covered by other assets. If Farmer John’s crop fails, the institution takes the real assets even though the loan was made against the crop.

Similarly, banks lend money for houses against the anticipated income of the person. If for some reason the income drops, the interest rate on the loan increases, or the value of the house decreases, the lending institution does not suffer a loss because it can claim the value of the real assets. The net effect of this is to transfer wealth from those who have little money to those who have money or who can create debt.

Because it is apparent that the “money owners” can make more money without effort or enterprise on their part, it becomes desirable for individuals to accumulate as much money as they can through whatever means they can. This leads to societies where the accumulation rather than generation of wealth becomes the most desirable goal for an individual. This is played out in a great many ways including counter-intuitive outcomes where accountants and lawyers tend to head companies and governments rather than innovators and engineers.

Inflation is a transfer of value from the owners of tangible assets to the issuers of the currency. The reason is that the currency issuers build an inflation factor into their interest rates. In effect it is the ‘house’ percentage in the currency gamble stakes. While it is small and when there is little debt it is not important but like all gambling establishments it makes sense to increase the turnover. It could be argued that any money system that allows inflation is allowing the transfer of wealth from the producers to the currency issuers. This is important because it means that interest rates include a factor for inflation.

The effect of interest rates on investment is particularly significant. The higher the interest rate the faster an investor will want to see a return on investment. While this is reasonable for some investments, it does not make sense for goods and services produced over a longer period of time. Such short-term thinking results in investments flowing towards quick returns rather than greater returns over a longer period. As we will see later, this has implications for the renewable energy sector.

Other emergent properties from the rules around money

Money gives us a way of measuring the value of traded goods and services. In its current form it does not include other factors that we might value and it does not include any goods and services that are not traded. In other words, the money economy recognises consumption but fails to value other aspects of life.

We overcome this by the allocation of funds to “good causes”, the arts or to the environment. We give baby bonuses to new parents or provide pensions. The problem is that these funds remain outside the market system and we have relatively poor ways of allocating resources to non-consumables or to things we value but not with regular money. It would be desirable to devise better resource allocation for non-consumables and for things that have no trade-measurable value, or indeed to create adaptive learning systems to manage the allocation. That is, money could be used as a way for people to express preferences for non-consumption items and its information content (or meaning) could be adjusted to reflect this need.

As an example because of climate change it becomes desirable for people to consume fewer goods that cause increases in emissions. There is a case for paying people not to generate greenhouse gases as well as charging them when they do generate greenhouse gases.

If we agree that money now represents wealth and that buying and selling money is a trading activity involving the transfer of wealth from one agent to another, we could treat these transfers the same as other trading activities such as imposing taxes. If we sell assets, we pay capital gains tax. If we sell goods and services we pay a Goods and Services Tax or Value Added Tax. For money to be treated the same as other wealth assets we could impose equivalent taxes when money is transferred. We don’t of course, because the transfers of money assets are orders of magnitude greater than the transfer of other wealth and trades. However, if we did, the taxes on other transfers could drop and the speculative transfers that make up many of the reasons for money trading may reduce in frequency and effect.

The difficulty we have created for ourselves on a global scale as money has become transferable is that there is an inbuilt tendency for the accumulation of money to become an end in itself and for different agents to think of ways of inventing or creating money that is not backed by promises that can be honoured, or by true wealth.

Does any of this matter? Well yes it does. It leads to instabilities in what is called the “true economy”. Instabilities in one part an economy are never isolated. Too many risky home loans in the USA leads to increases in the cost of loans in the rest of the world. Asset speculation in Sydney leads to higher house prices throughout Australia and results in housing becoming unaffordable to new buyers. It also transfers real wealth to overseas suppliers of money when the asset boom inevitably contracts. It means that financial institutions become the most profitable places to invest even though they create little true wealth and that those who have money assets, for whatever reason, become richer at the expense of those who don’t. It leads to a distortion in the distribution of wealth both within countries and between countries. It means that enterprises that produce real wealth have to compete for funds from institutions that accumulate wealth from debt money. As a consequence the producers then have to distribute more of the wealth they create to the financiers for the services they render.

Of more importance it means that wealth as measured by consumption will continue to increase at an expanding rate to the detriment of the long term sustainability of the planet.

What can be done?

We know these undesirable effects happen because we observe them everyday in the existing system. The distribution of wealth in communities is heavily skewed to the rich and in most countries the distribution is becoming more pronounced. We continually see asset bubbles and shifts in the value of assets unrelated to their underlying worth. We see community investment stifled in favor of individual consumption.

We can solve the problem and we can do it relatively simply. The Rewards system allows us to increase the information content of money and to include goals into our economic systems other than the accumulation of wealth. We can achieve this by creating sub-economies for investment in particular asset classes or in particular forms of expenditure. In future chapters we will outline how these sub-economies work and how they can be introduced simply and effectively with the creation of limited purpose currencies. We will also explain how the rules for these currencies can be tailored to address specific problems associated with the investment in an asset class or spending on particular forms of consumption.

The Rewards system returns currency to its original purpose, removing the inherent instabilities present in the current highly connected economies of the world where most money represents debt. It can be introduced gradually by addressing the most urgent problems first. New economies based on new currencies can be regional, community, asset class or type of service based.

21st century communications and information processing capacity have done away with the efficiency imperatives that drove the establishment of a single currency. For the first time we are in a position to make our money more information rich. Rewards offers us a way to invent currencies to solve particular problems and include goals other than the accumulation of individual wealth.

All quiet at Fraser – CT letter 16th October

I would consider myself to be a reasonably politically aware person. I take notice of policies of politicians and I send letters to the editor and to my political representatives. I heard the election announcement – but I have no idea who is running against Bob McMullan in the seat of Fraser. Even Google does not know. Whoever you are please come out of the woodwork and let us get Bob to promise us something. Bob please tell use what you are going to do for Fraser and promise us a few goodies otherwise we may have to start up a “Goodies Party” to turn us into a marginal electorate.

Chapter 2 – Rewards for low cost policy outcomes

Rewards for low cost policy outcomes

The nature of economies and adaptive systems;
Creating new goals for new economies;
Rewards as the least-cost solution to achieve agreed social outcomes

Adaptive systems and complexity economics

The Macquarie Dictionary defines “humanism” thus: ” any system or mode of thought or action in which human interests predominate.” In adopting a humanist approach to public goods provision, our primary aim is to remove the divide between private and public benefit, creating a system that works for the good of all at the same times as offering individual incentive and reward.

Demanding benefits to multiple parties does increase complexity, creating new relationships within the system along with a need to somehow predict and manage the results of those interactions. It requires what is known as an “adaptive system”, one that is never static, modifying its behaviour in order to adjust to the changes going on around it. Such a system can be seen in the behaviour of a termite colony. Remarkably organised though the colony may be, there is no overall guiding hand determining how the system should operate. Each ant obeys relatively simple rules that govern its behaviour, reacting to its immediate stimuli and its interactions with other ants. The termite colony behaviour is an emergent property of the sum of the individual interactions.

Human society is much the same except we have the advantage of being able to change the rules under which we individually act. Over the past 5,000 years humans have evolved an amazing society yet it was not planned in the sense of planning a building. Humans have not become more intelligent in the sense of an increase in innate ability, yet we have created the modern world. This world has happened because we have been able to communicate and because we have worked out the economic system called trading that enables individuals to specialise and so become more productive.

In his book “the Origin of Wealth” Eric Beinhocker outlines the theory of complexity economics, proposing the idea that the world economy is the end result of an adaptive system designed and planned by no one. It has, he suggests, arisen through the activities of individual entities operating with relatively simple “trading rules” and who are involved in mutually beneficial trading. Complexity economics or adaptive economics explains the rich world of economics as an emergent property of a system that has at its core the idea first expressed by Adam Smith in “An inquiry into the nature and causes of the wealth of nations”. Wealth is created when people specialise in an activity and hence become good at doing that task. They benefit from their activity by trading some of their output with others who have specialised in other activities. The economic world as we know it is an emergent property of this system of trading where individuals each seek to maximise their own wealth and to conduct their trades in ways that will work.
The underlying rules of trading depend on trust that the others with whom one trades will obey the rules of the trade. Thus successful trading economies evolve where both parties benefit and where the rules are enforced. First and foremost of those rules is that both parties should benefit and the trade should be “fair”.

A review of Beinhocker’s book in the Economist gives a summary of the main ideas in the book and ends with the following.

For the moment, then, evolutionary economics remains a niche pursuit, not the intellectual revolution Mr Beinhocker predicts and hopes for. It is ironic that evolutionists, of all people, should have such trouble reproducing themselves.

This book gives a way for the ideas to be reproduced in economic systems and for Beinhocker’s vision to become a reality.

New goals for new economies

All adaptive systems require a purpose. In economic systems this goal has been to increase the wealth of communities. At present wealth is measured by consumption, or the monetary value of the output of goods and services. As consumption increases, wealth multiplies and our capacity to create more wealth also grows. The system is built on the idea that each entity within the system will attempt to increase its own wealth.

This positive feedback loop has been the driving force behind economic development. We cannot understand nor predict exactly what will arise from it but we do observe that it works and it increases wealth. We can also estimate what will happen if it continues. In the case of the generation of energy we know that if we continue to produce energy by burning fossil fuels we will radically change the environment under which we live – almost certainly for the worse.

What would happen however if we modified an economic system to include goals other than consumption as the measure of success? If we change some of the rules under which we trade it may be feasible to alter the outcome of the system in ways that are more benign. In fact it becomes possible to build economic systems with goals other than wealth generation.

Emissions trading is an example of this kind of tinkering. The goal is to reduce greenhouse gas emissions, so we invent the concept of a right to create emissions and allocate this right to different people. Next we need to reduce the number of emission rights until we reach the desired result. Unfortunately as outlined earlier, this is extraordinarily difficult to do and it is unlikely to achieve the result we want in the time needed.

The humanist approach suggests an alternative set of changes to the trading system; changes that are more likely to succeed because they create a way of harnessing the market’s collective endeavours to achieve an objective. Rather than creating rights to emissions, for example, the humanist approach first requires changing the rules of trade to favour the goal which in this case is the production of non-polluting sources of energy. As is essential for trade to succeed, these rules have to be equitable for all participants in the market.

It can be done in the following way. People who generate greenhouse gases could pay extra for the privilege. This extra money can now be used to reward those who, through their behaviour, generate fewer greenhouse gases. One of the rules applied to this money however, is that the rewards must be used to invest in ways of further reducing greenhouse gases. It’s an approach that is not all that different to existing frequent flyer and frequent buyer marketing models. The person supporting the desired behaviour is rewarded. The difference is that those contributing to the problem (or using the resource) provide the funding to reinvest in alleviating the problem.

As these new rules work towards the goal of the economic system, participants will recognise them as fair and will be prepared to abide by them. The regulations can be enforced by inventing a special currency to record the results of these trades and excluding any rule-breakers from the arrangement. The system is guaranteed to reduce greenhouse gas emissions because it has set in process a positive feedback loop that people will abide by. It will not cause any economic dislocation.

We call this approach Rewards. Rewards can be applied to any economic system with a clearly defined objective. The main prerequisite is the invention of a special purpose or limited currency which can then be used to measure the success of our objective. In the case of Energy Rewards the goal is to reduce greenhouse gas concentration. In systems terminology we:

  • create a new economic system defined by a new currency – Energy Rewards;
  • state the objective of the system – to reduce greenhouse gas emissions for minimum cost;
  • establish the rules of the system which are the rules placed on the creation and use of the currency, all of which are designed to achieve the overall goal.

The system is adaptive because it has rules that can be varied, such as: who gets Rewards, who pays for Rewards and where the Rewards are spent. Past experience has proven the ability of adaptive systems to attain their goals so we can be assured that this system will achieve its objective of reducing greenhouse gases in the atmosphere.

We can solve the problem of the commons by building targeted economic systems that address new goals and which can be measured on criteria that are more inclusive than wealth generation.

Rewards as a Restricted Market

We can define an economic system as a system that allows the transfer of value. Markets have proven to be efficient at achieving this when value is defined within the system and by the rules associated with the method of exchange or the currency. In a market we have something to sell, a set of sellers, a set of buyers and we have something called money as the way of choosing a preference. Markets are adaptive learning systems and a market will learn to produce goods and services for the lowest cost.
What happens in a market is that sellers adjust their behaviour depending on the actions of buyers. That is prices go up and down, and other behaviours – like advertising – influence the decisions made by the buyers. A typical objective of buyers is to minimise the amount of money they spend to satisfy their needs while the sellers attempt to maximise the money received. Markets work when there are many buyers and sellers, and where the buyers are free to choose. The total system has the goal of supplying the most goods for the least amount of money. That is we produce the most goods for the least cost. Sellers are driven to supply goods for lower and lower costs or to supply more for the same. Complications arise when the buyers have different criteria for choosing amongst the different offerings and the sellers vary what it is they are selling. But this is also the “magic” of the market. Markets work because there is variety in the system and because buyers and sellers can vary the criteria for how they value the goods being sold without necessarily telling the other party.
Markets become inefficient when they are constrained in ways that prevent the freedom of choice and reduce the need to innovate. Examples are not enough buyers, not enough sellers and not enough money to allow choice and innovation. Difficulties also arise when choice is restricted through rules and regulations. The most common market restriction with public goods is the restriction in the number of buyers or in the number of sellers. This commonly occurs where there are “natural monopolies” such as water reticulation systems, sewage infrastructure and transport routes.
A market requires a method of measuring value. This measure of value or currency is a critical part of the market system and how it is defined and its meaning will greatly influence the outcomes of the market system. When we talk about a market economy we are really talking about many markets. There is a market in health, a market in energy, a market in entertainment. These markets overlap and by using a common currency for all markets we enable wealth in one area to move between markets. However there are many currencies and these are most commonly based on geographic areas. We have a currency for Australia and another for Japan. We also have private currencies such as frequent flyer points and we have many electronic currencies such as telephone minutes on prepaid phones. These currencies may or may not be allowed to be transferred one to another, enabling value to move from one market to another.
A modern problem with currencies is that some of them have taken on a new role which has become intertwined with the old role of measuring value. This new role entails having value itself. That is, money has become wealth itself and trading in money now competes for trading in other goods and services. The implications of this are explored in the next chapter but the fact that the measure of value now has value can cause inefficiencies for a particular market. That is, the definition and rules surrounding the currency used for trading is are an important part of any market.
The approach advocated in this book to overcome some of the difficulties that restrict, constrain or interfere with the working of markets is to create new limited-purpose currencies for markets where the use of a general currency is in some way prevents achieving multiple goals. We believe that restricting currencies for a given market allows that market to deliver the most economically efficient solution to a given problem.
The full details of Energy Rewards are given in a later chapter but in summary, the goal of greenhouse gas reduction can be solved by creating our own adaptive learning economy. We start by defining a market that encompasses infrastructure to produce energy with low greenhouse emissions and infrastructure that reduces the need for energy. This market place does not include infrastructure that produces energy with unacceptable greenhouse emissions. This approach will result in infrastructure that produces the most energy for the least cost. Adding a cost to the price of energy when emissions occur will also result in the lowest cost solution to reducing emissions for Energy production. This will happen because supply and demand within the Energy Rewards market place will work just as it does in any other market, driving towards maximum value for lowest cost.
A Rewards approach allows markets to generate desired goods and services but with multiple goals. For Energy Rewards one goal is the least cost and another goal is low greenhouse emissions. In an unconstrained market the least cost will always win and with current technologies this will have high greenhouse emissions. By constraining the currency for trading in energy infrastructure we can achieve multiple goals efficiently. Using Energy Rewards does not preclude other methods of directing trading (such as the trading of emissions permits) but rather it complements and enhances the effectiveness of cap and trade systems.

Chapter 1 – Reconciling self interest and the public good

Reconciling self interest and the public good

The conflict between individual benefit and community gain;
The inherent problems of penalty and regulations based strategies;
Introducing the third way – Rewards for cooperation and mutual benefit.

In a world populated by more than six and a half billion people and with finite resources, the provision of public goods seems to be on a permanent collision course with the pursuit of individual interests.

It’s a conflict that has been pondered by philosophers since humans first began living in groups, but increasing population pressure and a new sense of environmental fragility seem to be exacerbating the issue in the twenty first century. Dubbed “The tragedy of the commons” by Garrett Hardin, the conflict occurs in relation to a shared, finite resource and problem that arises when an individual is presented with a choice between personal gain or one that benefits all. According to popular thought, the course of action resulting in personal gain will win out almost every time.

The classic parable used by Hardin, and before him, by nineteenth century writer William Forster Lloyd, describes the problem by considering an English village common as the finite resource. Used by herders as pasture for their flock, the common has a fixed capacity to support x number of animals beyond which overgrazing occurs and the pasture will become degraded and unable to support the flock. If individual herders wish to maximise their personal benefit from the common they will need to add to their flock before the other herders take up the commons’ spare carrying capacity. However if each herder follows this path of self interest, too many animals will be added to the commons resulting in overgrazing, ruining the opportunity for all.

Hardin concludes, “Therein is the tragedy. Each man is locked into a system that compels him to increase his herd without limit – in a world that is limited. Ruin is the destination toward which all men rush, each pursuing his own interest in a society that believes in the freedom of the commons.”

To bring the parable into modern terminology, simply substitute the phrase “public good” for “the commons”. Public Goods are items or services that share two main characteristics: non-excludability, meaning that if the good is available to one, it is equally available to all; and non-rivalry, such that consumption by one entity should not reduce the capacity for another to consume it or benefit from it. A good example is the air we breathe. It remains freely available to all and regardless of how much air one person consumes it in no way impinges on the availability of air for others. Other often-quoted examples include the defence of a nation, traffic lights and street lighting, and the content of copyright. Global Public Goods, as the phrase suggest are Public Goods that are not confined by national boundaries, such as peace and health.

The question of the Tragedy of the Commons remains as relevant today as it was in the 1800s and it has become a matter of particular concern to governments around the world. It poses a problem that stymies the provision of any public good. Consider these modern day examples.

Carbon emissions are causing major environmental problems. Even with full knowledge of the issue businesses are increasing their use of fossil fuels and many urban dwellers persist in purchasing large, fuel-hungry vehicles rather than opting for public transport. The finite public good– our quality of atmosphere – is degraded due to individual and business desire for short term personal advantage.

Water provides another example. Over the past decade much of Australia has experienced severe drought resulting in the introduction of water restrictions in every capital city. Yet throughout this period total water use continued to exceed sustainable levels. Other examples can be seen in the depletion of ocean fish stocks through overfishing; and forestry, land clearing and agricultural practices that result in erosion and soil salinity.

These resources are all freely available yet finite in quantity. Plus they are all public goods that fall within the scope of government management and administration. To date this has largely occurred in one of two ways:

  1. Regulating the use of the resource in question; and
  2. Creating and allocating “rights” to the resource.

One of the most common economic means of regulating a public good is through the imposition of taxes or levies. While the income from such taxes is usually considered part of the government’s consolidated revenue there are examples of the money being used to help rectify the negative attributes – or negative externalities – of an activity. To alleviate the problems of air pollution a government could impose a tax on those who create and contribute to the pollution problem. . Regardless of what the regulations are or how they are imposed, this approach is ultimately one of coercion.

The second approach, dividing up the commons into property rights, can be viewed as the “selfish” alternative. It attempts to preserve the integrity of the commons by restricting access to the resource so that it will not be entirely depleted. In addition it offers a limited group of individuals the opportunity for personal gain if they manage the resource correctly. The method is frequently used in relation to fishing – where limits are placed on the quantities or types of fish allowed to be caught; and in land clearing, where quotas are set specifying how much land may be cleared annually. It is also being adapted to non-traditional solutions through activities such as emissions trading.

Arguments for either approach paint a bleak picture. A major problem with systems that create rights is the difficulty of defining those rights, especially given by definition, rights to a public good are rights to something that is already freely available. The difficulty is compounded by the impossibility of the task. Because rights trading depends to a large extent on the accuracy of the measurement then its effectiveness will depend on how well it is done. In the case of a fishing trawler, how accurate is the tally of fish really going to be? Once the net has been cast is it possible to limit the catch to the exact quantity and type of species allotted to the trawler?

Moreover, an appeal to selfish interests works only if enough people share the same interest. In other words expecting people to cooperate based on financial gain works only if everyone is motivated by financial gain. It has been debated that in modern culture people are largely no longer motivated by shared interests, but instead choose actions based on values. Asking people to adapt or change their behaviour to accommodate potentially diametrically opposed values is a request that goes against one’s culture and it rarely works.

Coercion as a force for remedying the tragedy of the commons is equally limited in its effectiveness. Coercion requires the cooperation of the public, as few modern societies are able to enforce regulations in the face of sustained rebellion. And to gain the cooperation of the public requires general acceptance of the basic values behind the regulation, or a common values system. In today’s pluralistic and fragmented societies, such a values system is increasingly unlikely to be found.

As long as we remain locked in to these two approaches – regulation or rights – we will continue to grapple with public goods as neither way can be successful in the long term. The result is the decay of the common good and it is the natural outcome of a competitive mindset.

This book describes a third way that any organisation – federal, state or local government, community association or charity – can address the problem of the provision and protection of public goods. Adopting the principles of humanism, it resolves the “Tragedy of the Commons”, achieving sustainability by making cooperation in the best interests of all. Above all, it resolves the issue both equitably and democratically.

Letter to the Editor CT Oct 4th on Health

The current political debate on health revolves around whether the Federal Government, The States, or Local Boards are to be in charge of spending taxes on hospitals. Another solution is to let each citizen take charge of spending part of the tax. Here is how it could work.

Each year anyone who wishes to participate is given an amount of medical money to spend on approved medical services. They may decide not spend their medical money and save it for later years. When they spend their medical money they contribute a percentage of their own money depending on the service.

What will happen? Medical services – including hospitals – will run like normal businesses. They will be able to compete for customers and they will keep the funds paid for with medical money. People will be able to choose between going to a doctor or a nurse or a hospital. New cheaper forms of medical services will arise naturally. People will tend to accumulate medical money – not spend it – because they can use it in following years.

Chronic illnesses, accidents, emergencies will be covered by the existing safety net. Medical facilities including hospitals will become more accountable to their patients. Funds will go to areas of need because the funds follow the patients and not the political whims of the latest election campaign. There will be no change to the medical infrastructure only to how taxes are disbursed. The system is easily adjusted by changing the rules around medical money. It can be introduced incrementally, cheaply and voluntarily and can be done by the Federal government without requiring State agreement. As more join so it removes the need for the State Federal bunfight over health funding.

Letter to editor on distribution of money

Christian Seibert (CT Oct 2nd) says that we need a fair way to share the increased energy cost caused by putting a price on carbon. He then outlines how this might be done. There is another more equitable, more effective way to share the cost. The money collected from a carbon tax or from trading in emissions permits can be distributed back to the population in inverse proportion to the amount of greenhouse emissions for which the person was responsible. The money given to these people must be spent on ways to save energy or to generate emission free energy. This would give a triple benefit in reducing greenhouse gases. It increases the price of energy that causes emissions, it pays people not to pollute and it gives funds to build infrastructure to reduce emissions. It might sound difficult to do but it is a relatively simple task using modern communications and Internet technology. A carbon surcharge of 10% distributed this way would give Australia zero emissions in less than 20 years. A surcharge of 30% would give Australia zero emissions in 10 years.