The tragedy of the commons is a dilemma arising from the situation in which multiple individuals, acting independently, and solely and rationally consulting their own self-interest, will ultimately deplete a shared limited resource even when it is clear that it is not in anyone’s long-term interest for this to happen.

The total amount of credit in society is a Commons.

We create new money by issuing credit. That is, governments create money by giving loans. Banks are also allowed to do this. Not all loans result in an increase in money because we can use existing money and loan it – and the majority of loans do not end up increasing the total money supply.  Unfortunately the way the monetary system works it is not possible to distinguish which loans increase the total money supply and which ones don’t.

To try to control the total amount of credit in Society we restrict the amount of new money by only giving credit to people who already have money (or assets they can sell to get money).

So our system of credit creation is one where those who have money can get new money by getting interest bearing loans.  They can then use this new money to get more loans. So it ends up that the people who have assets keep getting more credit and so reduce the amount of credit available to those who do not have assets.  The problem with this system is that if we create too much money then the value of the money drops because we have more money than there are things to buy and so we get inflation. Also rich people start to run out of things to buy and so they spend their money on bigger and bigger houses and other forms of conspicuous consumption.  The other problem is that the money and assets ownership gets skewed so that some people end up owning most things because they are the only ones who can get credit and so get their hands on the new money that the banks and governments create. A more subtle problem is that people with assets tend to spend the extra credit protecting the value of their existing assets and this stifles innovation and creates monopolies and oligopolies.

The Tragedy of this system is that the monetary system causes booms and busts as it causes too much credit to be issued.  This causes inflation and the so called business which sometimes becomes recessions and depressions.

The solution to the problem is to give interest free loans to those who do not have assets – but require them to invest the loans to create new assets that will repay the loans.  That is we create new money with interest free loans that must be spent building productive assets. The income from the new productive assets will repay the loans.

Rich people can still get credit but we do not create new money when we give credit but use money that already exists.  So the principle is

  1. Create new money by giving interest free loans to the poor and require them to invest the money to create new assets that will repay the loans.
  2. If we make a loan secured against an existing asset then we should use existing money and we should pay interest on the loan.

This will fix the GFC, stop the business cycle, and stop inflation.

If the interest free money is used as Rewards for consuming less energy and the Rewards are used to build renewable energy plants then we will rapidly replace our fossil burning energy plants and start to reduce the levels of greenhouse gases in the atmosphere.

One thought on “The Global Financial Crisis is a Tragedy of the Commons.

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