Oakes

Social Capital

78 posts in this topic

Oakes,

Here is what I think you are saying.

Exchanges need money to occur. Money is limited so there are many exchanges that don’t occur for lack of money. Many of the exchanges that don’t occur are, if they were to occur, rational achievements of value. Furthermore, money doesn’t apply to certain exchanges such as a marriage. In order to cover these “lost” transactions we need to make up a currency that can apply to all exchanges and “print” off enough of this money so as to make sure that there is enough to allow all transactions to occur.

Is this what you are saying?

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I'm not "attacking" anything; I don't seek to replace our currency - rather, I seek to supplement it. The reason is that money profoundly affects the decisions we make, which means that some forms may be more suited for certain kinds of relationships than others.

Let me explain with a simplified example: An elderly man needs someone to bring him meals every day; a student is looking for a job to pay for college. The elderly man doesn't have enough to pay the student, so they go their separate ways, with the old man still looking for help, and the student still looking for work. What just happened here? There isn't any lack of need or any lack of ability, there is only a lack of money. This is the effect of scare currency like the dollar.

I do not mean to attack the dollar; it works great to push forward capitalism on a global scale and encourage competition and innovation, but in a truly free market we should be able to use different currencies as needed. What if, in the example above, a bank moves into town and sets up a mutual-credit system that local stores and the university agrees to accept. Now, there is never a lack of currency, because it is created at the moment of the transaction; the elderly man can add the cost of his care to his debit column, and the student can add the payment to his credit column. Employment has now spontaneously been created.

Money has THREE fundamental functions:

1) to serve as a universal medium of exchange;

2) to serve as a unit of cost for economic accounting;

3) to serve as a store of value for future purchases.

The last two are just as essential as the first. Creating money (or credit) out of thin air leads to DISASTER, because it destroys a currency's ability to do #2 and #3.

Money doesn't just serve to facilitate transaction, i.e., exchange or trade. Its most significant function is in fact something else: to serve as a unit of economic accounting, as unit of calculating cost. This unit of accounting is what underlies and makes possible a price system, in which economic planning is made on the basis of costs and revenue (by businessmen) , or of costs and income/wages (by laborers). Economic planning would be extremely difficult if not impossible if prices fluctuated rapidly, unexpectedly and continually because of the rapid and dramatic changes in the supply of money and credit.

Of course countless transactions do not occur everyday for lack of currency. I don't seek to purchase a water-front 40,000 sq ft mansion with all kinds of high-tech features because I "lack currency". I don't buy my own private jet for the same reason. Creating more money won't solve my "problem". Those destitute billions in the third world won't have their material conditions radically improved if they simply created more money, because a scarcity of money is not the problem.

-------

The following quote you provided confirms my suspicion:

Assume that a Martian lands in Denver on the wrong side of the tracks. He ends up in one of the ghettos and finds that the houses are run down, the kids not taken care of, the elderly in trouble, and the trees dying. He sees all these things, and discovers that there are people and organizations absolutely equipped and ready to solve every one of those problems. So this Martian asks, "What are you waiting for?" The answer: "We're waiting for money." "What is money?" the Martian inquires. "It's an agreement in a community to use something as a medium of exchange." Don't you think he may leave the planet believing there is no intelligent life here?

Lietaer clearly doesn't understand the nature and function of money and the causes of poverty.

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Is this what you are saying?

No.

The last two are just as essential as the first. Creating money (or credit) out of thin air leads to DISASTER, because it destroys a currency's ability to do #2 and #3.

You do not understand mutual-credit currencies. Creating money at the moment of transaction is not equivalent to creating it out of thin air. It still is based on a standard of value; in the LETS system, the standard is one unit = $1, and in the Time Dollars system, the standard is one unit = one hour (which restricts it to specific uses since one hour can be worth different amounts among the different professions).

Of course countless transactions do not occur everyday for lack of currency. I don't seek to purchase a water-front 40,000 sq ft mansion with all kinds of high-tech features because I "lack currency". I don't buy my own private jet for the same reason. Creating more money won't solve my "problem". Those destitute billions in the third world won't have their material conditions radically improved if they simply created more money, because a scarcity of money is not the problem.

Obviously I am not talking about purchases that you are unable to afford. The elderly man will still have to pay off his debits via some kind of work, but the point is that the mutual-credit system allows that to happen more easily. He can "borrow" the student's work and pay it off later.

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Obviously I am not talking about purchases that you are unable to afford. The elderly man will still have to pay off his debits via some kind of work, but the point is that the mutual-credit system allows that to happen more easily. He can "borrow" the student's work and pay it off later.

This system sounds interesting to me. Let me try out a metaphor and see if I have this right. It seems as though what this would look like, in practice, is a kind of balance sheet (for instance, a bank's). I see this kind of like I do the required reserves, where a citizen might be required to keep a certain amount in case there's a run on "the bank," (whether that requirement is governmental or not). Is this similar to what the previous authors are advocating?

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Obviously I am not talking about purchases that you are unable to afford. The elderly man will still have to pay off his debits via some kind of work, but the point is that the mutual-credit system allows that to happen more easily. He can "borrow" the student's work and pay it off later.

Yes you are talking about unaffordable purchases: the elderly man doesn't have enough money to afford to purchase the college student's labor. Creating money (specifically credit) for the elderly man so that he can pay the college student is no different from printing a 1 trillion dollars in paper money and handing it over to "the poor" so that they can afford their necessities, provided that they pay it off later. This again is nothing more than money/credit creation out of thin air.

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Oakes, let's put aside for a second that your source is dripping with altruism.

Now, what problem does this "new system" solve?

If the old man had good credit, he could get a loan in the current system. He could use a credit card, for example. If he did not have good credit, how would it be rational for the bank to allow him to rack up debts in the "new system?" Why, other than self-sacrifice, should they do that?

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This system sounds interesting to me. Let me try out a metaphor and see if I have this right. It seems as though what this would look like, in practice, is a kind of balance sheet (for instance, a bank's). I see this kind of like I do the required reserves, where a citizen might be required to keep a certain amount in case there's a run on "the bank," (whether that requirement is governmental or not). Is this similar to what the previous authors are advocating?

What previous authors are you referring to?

Yes you are talking about unaffordable purchases: the elderly man doesn't have enough money to afford to purchase the college student's labor.

If you can pay off the debt, you can by definition afford it. Yes, the system can be taken advantage of - I said that in the opening post - that's why it only works in small communities where people can self-police the system.

Oakes, let's put aside for a second that your source is dripping with altruism.

Let's put aside for a minute that society itself is dripping with altruism. Steer clear of Guilt by Association - when altruists rub their muck over a capitalist idea, it does not automatically become invalid.

If the old man had good credit, he could get a loan in the current system. He could use a credit card, for example.

(1) The "loans" in a mutual-credit system are interest-free.

(2) The "loans" in a mutual-credit system aren't coming from a central bank, they are coming from the people themselves, quite unknowingly. This is ultimately what makes it such a good currency to build social capital.

(3) It is a fact that fiat currencies, by virtue of being issued by a non-omniscient central source, can never exist in completely adequate supply. This scarcity is good for competitive ends, but it can neglect communities: They might have lots of labor, but no money with which to trade with. Mutual-credit currencies are scarcity-free.

If he did not have good credit, how would it be rational for the bank to allow him to rack up debts in the "new system?" Why, other than self-sacrifice, should they do that?

See above (in this post) about the "taking advantage of" problem. As for self-sacrfice: As I understand it, the mutual-credit systems in operation now run by yearly subscription. Another idea is to charge a "demurrage" (anti-hoarding) fee on still accounts, which would have the added benefit of encouraging people to keep spending. Either way, there is profit to be made in this system.

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If you can pay off the debt, you can by definition afford it. Yes, the system can be taken advantage of - I said that in the opening post - that's why it only works in small communities where people can self-police the system.

(1) The "loans" in a mutual-credit system are interest-free.

(2) The "loans" in a mutual-credit system aren't coming from a central bank, they are coming from the people themselves, quite unknowingly. This is ultimately what makes it such a good currency to build social capital.

(3) It is a fact that fiat currencies, by virtue of being issued by a non-omniscient central source, can never exist in completely adequate supply. This scarcity is good for competitive ends, but it can neglect communities: They might have lots of labor, but no money with which to trade with. Mutual-credit currencies are scarcity-free.

I see, the mutual-credit system sounds as if it's based on a Keynsian fallacy: that unemployment results from a scarcity of money.

And may I point out on the contrary, that fiat currencies are far more than adequate in supply--in fact, so much so to the detriment of the economy. I don't believe anyone here supports fiat currency: most are advocates of the gold-standard, the scarcest currency in the entire world.

Would you care to elaborate on why you think a scarcity of money is a major economic problem, allegedly causing unemployment, poverty and the diminution of "social capital"?

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And may I point out on the contrary, that fiat currencies are far more than adequate in supply--in fact, so much so to the detriment of the economy.

Are you talking about inflation? It's true that printing too many notes can be just as bad as not printing enough. With mutual-credit currencies, however, money is always in exactly the right supply.

I don't believe anyone here supports fiat currency: most are advocates of the gold-standard, the scarcest currency in the entire world.

Sorry, it's out of habit that I use the word "fiat" to refer to all centrally-issued money. I understand that backed currency is distinct from fiat, but what I mean is that centrally-issued money can never be printed in exactly the right quantity.

Would you care to elaborate on why you think a scarcity of money is a major economic problem, allegedly causing unemployment, poverty and the diminution of "social capital"?

I've already done so - read what you quoted.

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(1) The "loans" in a mutual-credit system are interest-free.

Suppose I am a bank. How is that a selling point to me?!?

(2) The "loans" in a mutual-credit system aren't coming from a central bank, they are coming from the people themselves, quite unknowingly. This is ultimately what makes it such a good currency to build social capital.

I don't accept that it is a proper economic goal to build "social capital." The whole thing smacks of hippies talking of peace and brotherhood, if you will excuse the expression. Oakes, it's nothing against you... it's just that your source, the idea of the moment you are trying on for size, is full of references to altruism. I would have tuned out and dropped it like a hot potato after the first few sentences. Apparantly, you have a VERY strong desire to wring any good you can out of even the most unlikely of sources. My advice is that you're wasting your time. If it looks like a duck, walks like a duck, and quacks like a duck... chances are that it isn't going to stand up and sing show tunes. I'm not attacking you here... I've just noticed the exact same thing that Stephen did about you and I'm giving you the same friendly advice.

This scarcity is good for competitive ends, but it can neglect communities: They might have lots of labor, but no money with which to trade with. Mutual-credit currencies are scarcity-free.

This is what banks and loans are for.

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I don't accept that it is a proper economic goal to build "social capital." The whole thing smacks of hippies talking of peace and brotherhood, if you will excuse the expression. Oakes, it's nothing against you... it's just that your source, the idea of the moment you are trying on for size, is full of references to altruism. I would have tuned out and dropped it like a hot potato after the first few sentences. Apparantly, you have a VERY strong desire to wring any good you can out of even the most unlikely of sources. My advice is that you're wasting your time. If it looks like a duck, walks like a duck, and quacks like a duck... chances are that it isn't going to stand up and sing show tunes. I'm not attacking you here... I've just noticed the exact same thing that Stephen did about you and I'm giving you the same friendly advice.

I’ll have to second inspector. I don’t think that Social Capital is even a valid concept to discuss. I refuse to discuss ideas about Social Capital (as in what’s the best way to accumulate it) until you can show me how it’s a valid concept.

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If you can pay off the debt, you can by definition afford it.

Since the old man in your example has a bad credit rating by definition, we definitely do NOT have a good reason to believe he'll be able to repay the loan. If he could, he would not have a bad credit rating.

(1) The "loans" in a mutual-credit system are interest-free.

So you're telling me to loan my money out for free, when I could put it into a bank and collect interest? Why would I want to do that?

This scarcity is good for competitive ends, but it can neglect communities: They might have lots of labor, but no money with which to trade with.

If their offers are not competitive, why would anyone take them?

Mutual-credit currencies are scarcity-free.

In other words, any old man can get any amount of credit he wants, regardless of whether such credit is sound.

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He sees all these things, and discovers that there are people and organizations absolutely equipped and ready to solve every one of those problems. So this Martian asks, "What are you waiting for?" The answer: "We're waiting for money."

Money is not the reason those problems are not being solved. If the needy had anything to offer in exchange for their problems being taken care of, they could barter. But they have nothing to offer; not even a credible promise that they will pay eventually.

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Thanks for all your replies - I will consider this the Objectivist reaction. I'd like to ask you all a question:

Say I live next door to you. I ask if I can borrow some nails to build something. Would it be against your self-interest to part from those nails without having me pay or sign an IOU?

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Thanks for all your replies - I will consider this the Objectivist reaction. I'd like to ask you all a question:

Say I live next door to you. I ask if I can borrow some nails to build something. Would it be against your self-interest to part from those nails without having me pay or sign an IOU?

Depends on a few things. How much do those nails put me out? Can I reasonably expect for you to return the favor?

Nails, remember, are not a particularly liquid asset. So it's different than if you asked for dollars.

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How much do those nails put me out?

Let's say a buck, not even that.

Can I reasonably expect for you to return the favor?

If you give me something, it automatically leaves an imbalance, making it much more likely that I would lend you a hand in the future. This, after all, is what social capital is all about.

Nails, remember, are not a particularly liquid asset. So it's different than if you asked for dollars.

Let's try it: I, as your neighbor, want you to lend me 5 bucks. Will you insist on charging interest?

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Say I live next door to you. I ask if I can borrow some nails to build something. Would it be against your self-interest to part from those nails without having me pay or sign an IOU?

If I have the nails you need, it is no sacrifice for me just to give them to you. Forget the IOUs. It's a simple neighborly thing to do. Maybe you'll keep an eye on my house when I'm away.

Just living on the same block, other things being equal, engenders common values and a feeling of good will that is worth a lot more than a few nails.

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Say I live next door to you. I ask if I can borrow some nails to build something. Would it be against your self-interest to part from those nails without having me pay or sign an IOU?

No. Therefore, no "mutual-credit system" necessary.

If, on the other hand, you were asking for ten bottles of expensive wine to serve your party guests, I would ask you to pay me at least the amount I bought them for--in cash. Again, no mutual-credit system necessary.

Let's try it: I, as your neighbor, want you to lend me 5 bucks. Will you insist on charging interest?

No. But if you wanted me to lend you a thousand dollars, I would ask you to pay me at least the amount of interest my bank was paying (and that provided that we were good friends).

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If I have the nails you need, it is no sacrifice for me just to give them to you. Forget the IOUs. It's a simple neighborly thing to do. Maybe you'll keep an eye on my house when I'm away.

This is what I was thinking. When you do something generous for someone (assuming this person isn't a jerk), there is an imbalance in the trade that sparks further acts of generosity later on. I think some Objectivists in this thread may have forgotten this when analyzing my currency idea.

No. Therefore, no "mutual-credit system" necessary.

I would argue that it streamlines this very process. Now when I ask you for a favor, I may not repay you directly, but I may decrease my credits by mowing someone else's lawn, who may then use his credits to pay you for something. It's like the difference between barter and a money economy.

If, on the other hand, you were asking for ten bottles of expensive wine to serve your party guests, I would ask you to pay me at least the amount I bought them for--in cash. Again, no mutual-credit system necessary.

That's understandable, but mutual-credits are not for big trades like these.

No. But if you wanted me to lend you a thousand dollars, I would ask you to pay me at least the amount of interest my bank was paying (and that provided that we were good friends).

Again big trades involving thousands of credits wouldn't occur (I would imagine the credit limit would be far less). But since you're okay with lending a small amount to a friend without interest, this should answer your previous questions about why interest-free loans would be in your self-interest.

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If you give me something, it automatically leaves an imbalance, making it much more likely that I would lend you a hand in the future. This, after all, is what social capital is all about.

If it were YOU, Oakes, it would be no issue. You'd get the nails. Providing, of course, that I had them to spare.

Let's try it: I, as your neighbor, want you to lend me 5 bucks. Will you insist on charging interest?

For 5 bucks, no. I would write down an IOU, though. (mostly because I forget things if I don't write them down)

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But since you're okay with lending a small amount to a friend without interest, this should answer your previous questions about why interest-free loans would be in your self-interest.

I think you may be onto a false analogy. Our willingness to help our neighbors doesn't necessarily translate into the need for a large computerized central generosity database. Of course, feel free to prove me wrong, but right now I'm just not seeing it.

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I would argue that it streamlines this very process. Now when I ask you for a favor, I may not repay you directly, but I may decrease my credits by mowing someone else's lawn, who may then use his credits to pay you for something.

You didn't understand. I would give my neighbor the nails for free. No repayment is necessary, therefore no credit system is necessary.

Again big trades involving thousands of credits wouldn't occur (I would imagine the credit limit would be far less).

So all we're talking about is little favors? Then why make such a fuss about it all?

But since you're okay with lending a small amount to a friend without interest, this should answer your previous questions about why interest-free loans would be in your self-interest.

A small amount to a friend, yes. A perhaps-not-so-small amount to some needy old man, no.

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A small amount to a friend, yes. A perhaps-not-so-small amount to some needy old man, no.

This, I think, is a crux point. Correct me if I'm wrong, but I see some context-switching taking place here in Oakes' thinking.

Because Objectivists are willing to lend/give SMALL amounts of money to PEOPLE THEY PERSONALLY KNOW, then he asks why are we not willing to lend/give LARGE amounts of money to people we DON'T know?

Knowing a person personally is something that cannot be replaced by a computer, a ledger, or a central monetary social credit system. Furthermore, we don't WANT it to be. Our generosity is subject to our PERSONAL JUDGMENT, and that's the way we like it. Attempts to create systems in which people we do not have the ability to judge are beneficiaries of our credit/capital are horrifying to me.

Does that help explain my resistence?

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If I have the nails you need, it is no sacrifice for me just to give them to you. Forget the IOUs. It's a simple neighborly thing to do. Maybe you'll keep an eye on my house when I'm away.

This is what I was thinking. When you do something generous for someone (assuming this person isn't a jerk), there is an imbalance in the trade that sparks further acts of generosity later on. I think some Objectivists in this thread may have forgotten this when analyzing my currency idea.

But there is a difference between kindness or benevolence on a personal level directed towards a specific individual, and codifying and generalizing this this into a social and economic structure. Personal benevolence towards your friend or your neighbor is not a commodity for trade on the open market.

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You didn't understand. I would give my neighbor the nails for free. No repayment is necessary, therefore no credit system is necessary.

Like I said, when you provide a favor for someone, it creates an imbalance in the trade that will be returned at a later date. Benevolence begets benevolence.

So all we're talking about is little favors? Then why make such a fuss about it all?

This thread is about social capital. The main point of mutual-credits is not to make big corporate-level trades, but to facilitate social interaction.

A small amount to a friend, yes. A perhaps-not-so-small amount to some needy old man, no.

Nobody is forcing you to exchange with any particular person.

Because Objectivists are willing to lend/give SMALL amounts of money to PEOPLE THEY PERSONALLY KNOW, then he asks why are we not willing to lend/give LARGE amounts of money to people we DON'T know?

<snip> Attempts to create systems in which people we do not have the ability to judge are beneficiaries of our credit/capital are horrifying to me.

Like I said above, nobody is forcing you to exchange with any particular person. You can, of course, use mutual-credits with those who you don't know, in which case the advantage is that you can GET to know more people. As in life in general, it is up to you to judge their character, and whether you'll trade with them anymore.

Personal benevolence towards your friend or your neighbor is not a commodity for trade on the open market.

I hope the above answers this. Mutual-credits do not create an "open market" in the sense you mean; they are restricted to small communities. When A does a favor for me, and I pay off my credits mowing B's lawn, we have just created two social links instead of one. I may not have known B, but through these exchanges I can get to know him and evaluate his character.

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