Government is an entity the existence of which can only be justified on an ethical basis. More precisely, some argument must be made either in a consequentialist sense or in a deontological schema, to argue that a given government should exist. It is not an entity with any epistemological difficulties - none deny its existence as a physical object, or seek a metaphysical essence that defines it in accordance with profound deterministic laws. In fact, government seems to have inalienable presense. It is not in absolute question except among the minority who argue that it is possible for it to not exist. Instead, the argument for government is an argument for a particular kind of government as compared to another.
That being said, the argument for government is inseparable from the nature of the government. Since any government is nothing more than structural relationships and human personalities, these factors at a given point in history, real or theoretical, shape the argument, ruling out some forms of Government and making others more appealing. Because it is so human, Government ends up being more than what is official, inseparable from the society it is embedded in and responding in part to the political power of unofficial individuals and organizations.
From the available alternatives for making ethical evaluation as given at the outset, the deontological schema does not seem sufficient. In the absence of profound religious belief, it is hard to imagine a set of dictates that form the transcendental rules needed to make evaluations of government on a deontological basis. The process oriented arguments such as arguments for democracy, the use of principles like the categorical imperative or the veil of ignorance are not sufficient because though they define criteria for evaluating governments in terms of the means by which decisions are made, there is still another step of logical immediacy that must be taken by whomever is tasked with the decision. This step is to turn the deontological principle into a consequentialist policy goal so that policy consequences can be evaluated as either in accordance or dischordance with the governing principle.
The consequence value of anything that can be evaluated ethically is the sum of all future possibilities multiplied by their probability. Though the metric by which consequences are valued against each other need not be known absolutely, if consequences are to be ranked against each other, the entirety of the consequence space, when assigned values in the chosen metric, must be bounded. This is because any given consequence that gives more than zero probability to any unbounded point would cause the future possibilities sum for its corresponding region to diverge.
Ethical evaluations are a property of actions. Anything that is evaluated ethically must be turned into a bundle of actions. Thus, to judge an individual, that person must be reduced to their action history and or future; to judge a policy or even a government as a whole, is to reduce each policy to a bundle of action predictions. Since the action bundle abandons its source prior to evaluation, any two governments are essentially evaluated by the same underlying criteria.
So, if possible governments are to be ranked against each other for purposes of determining public policy, this amounts to ranking policies against each other. In turn, the policies are evaluated based on the action bundles that they contain. Action bundles are evaluated based on consequence values that in turn define policy goals. Thus, governments are ranked against each other according to the degree to which they achieve the defined policy goals.
Therefore, a government considering new laws is not constrained by the spirit of its existing laws. Existing laws are valuable as objects to be reverse engineered in an effort to determine previous policy goals and improve the consequence value functions. However, existing laws are not deontological principles constraining government legislation. Rights as defined by government do not create, of themselves, arguments against legislation that would curtail them. Tiered legal systems, such as those with constitutional procedure restrictions, exert force through their restrictions on policies and action bundles, not through any alteration to the consequence value function.
This confusion is felt throughout contemporary government systems, in which the policy goal itself is often erroneously defined down in scope to meet available resources. When government sets about to address some social issue, such as poverty, it is best to declare the total level of need, prior to the determination of how much of that need can be addressed. In this way, it is easy to evaluate the policy trade-offs of providing more resources to a given program.
As mentioned above, many aspects of government are informal. The Government in the United States has a responsibility - just as sacred as its guarantee of freedom of the press - to ensure that mass starvation does not occur. However, this responsibility is left entirely to privately operating farmers, with some level of regulation. Such arrangements are typical for many sectors of the US economy. When such a sector is confronted by its own inadequacy according to some policy goal such as an unmet level of need, the Government has more than simply the right to intervene in that sector of the private market, but an obligation to do so. These "private markets" are merely delegations of control by government, to achieve policy goals of that government in an efficient manner.
The history of economic consensus in the academic discipline is entirely radical in nature. Those who are convinced that the free market is superior are, by and large, relying on ridiculous metrics. In actuality, the radical position has won not through demonstration of superior benefit, but through the disproof of fantastical harms arising from proposed types of market intervention by government. For instance, were the government to provide 1000 meals for the needy, it would be the duty of the opponent of such a policy to argue that moral equivalent of more than 1000 hungry mouths will be deprived through such an action. The same holds true for all manner of comparable criteria or interrelations of different values. Those that fear nebulous reductions of efficiency or freedom through such a trade off are guilty of a certain kind of vanity, the roots of which can probably be traced to dystopian novels.
By directing an agency to limit services through revisions of the very definition of need is to obfuscate the very goal that justifies the existence of that agency. The goals of Government should be to meet everyone's basic needs, to have no unpleasant labor, to provide for the safety of all, to ensure the total preservation of the environment, to further education among all members of society, etc. This is the only way to see the trade offs behind policy proposals for what they truly are. To decry such metrics as Utopian is simply an admission of a lack of understanding of the process of thought itself. To argue that taxation is theft is to invite ridicule. To say that the Government cannot afford to provide a service is merely to say that this service is on the margin and therefore the least important of all things on which money is currently being spent in the entirety of the society, a situation that almost never occurs in substantive policy discussions.
For sake of clarity, I'll now describe a few of the most effective policies for our current malaise.
1) Curtailment of the workweek. This policy is effective for reducing unemployment. Reduction to the workweek creates an incentive for employers to increase the number of employees. This of course represents a loss of income to existing workers, but it reduces the unemployment rate. Clearly it is better to have jobs for those without them than to have more money for those who already have jobs, so from an ethical standpoint this is an excellent policy. Furthermore, when France reduced its workweek, it actually had the effect of reducing the budget deficit as well, because it took so many people off of the unemployment rolls.
2) Lowering (not raising) the retirement age. Many, many individuals who are currently working in their 60s should be allowed to retire with the full benefits. A significant portion of these people have spent much more than 25 years of their lives working. Not only do they deserve a break, but younger people deserve to take the reins. Such a policy will help to alleviate so many social problems, it is really a shame that congress cannot find the money for such a program.
3) Free State undergraduate college with equivalent vouchers for private institutions. Once again, the crippling effect that the buildup of college debt has had on consumer spending and the quality of life of younger Americans should justify the creation of a free college system. The money for it could come from rich.
When a politician argues that there is no funding left in the budget, he does not realize the meanings of what he speaks. When he speaks to the populace, both speaker and audience proceed under the medieval notion that money is so tight that none is left to go around, that all of society is going without any luxury, that outcomes cannot be improved. None of these individuals know the first shred of economics. Their pride will not allow them to admit this when pressed, but in the end they cannot escape their own unclear train of thought. How else is such deference toward wealth in the face of chronic poverty to be explained?
Friday, November 13, 2009
Sunday, November 8, 2009
Expectation theory and the ethics of exchange
In his General Theory of Employment, Money and Interest (Harcourt & Brace, 1964), Keynes described the relationship between the actions of market actors, taken based on their knowledge of nominal data and ability to reason rationally, and the economic results of these actions, as being mediated by a system of expectations. The expectation represents the inevitable planning process that any actor must engage in some time before the market transactions themselves, thus allowing for uncertainty to be represented as the market's deviation from these expectations.
Properly speaking, Keynes distinguishes between "short term", dealing with the degree of utilization of existing capital, and "long term", dealing with the purchase or development of new capital (p 47). These terms can at times be misleading - a "short term" expectation can take quite a while to be realized. When evaluated in a purely rational way, long term expectations are almost always based on knowledge that is "very slight and often negligible" (p 149).
In my experience of the typical attitudes that individuals take toward economic realities, among the many unexamined vistas of everyday life, is the belief in some conceptual ethics of the exchange. It is typically assumed that the comparative value of that which each party acquires from the market in a given transaction gives a certain ethical character to that transaction. This ethical character is a function of six (3 pairs of 2) variables: some calculation of value of goods received by each party, an assessment of the character and social function of each party, and an assessment of the method by which the transaction was undertaken that describes a set of actions both parties should undertake. A transaction is generally ethical if it meets two criteria that are composed from these variables.
First, a transaction is either fair or unfair depending on whether what is exchanged is distributed in proper accord with the social function and character of the participants. This is the fairness criterion. For instance, society would typically frown on a million dollar gift to a convicted murderer. Similarly, society condemns the shortsightedness of its own collective past, when great men such as Van Gogh and Poe were forced to live in poverty, this being the result of market failures whereby their genius went unrecognized and unrewarded.
Secondly, a transaction is either proper or improper depending on whether the transaction itself is undertaken in accordance with agreed upon rituals and methodologies. This is the propriety criterion. These rituals and methods are practically designed to ensure that formal (legal) and informal (customary) rules of procedure are followed. Generally, these are justified through a philosophic appeal to principles such as rights, duties, and virtues, but for numerous reasons it is probably better to treat the propriety criterion as a cultural object rather than a philosophic absolute. Most participants do not have a rigorous or conscious formulation of these principles and the realization of such principles depends on arbitrary rituals designed to prevent all manner of trickery. An example of an improper transaction that is otherwise fair might be a starving person stealing bread from a supermarket that throws some quantity of unsold bread loaves away at the end of each day. The propriety of economic transactions is an interesting matter, but I will not take it up further in this essay.
Though the analysis so far has already delved far beyond what the typical person thinks in conscious ethical evaluation, I feel that this captures the essence of what the typical person thinks intuitively when making ethical evaluations. Typically, when a person is asked to give reasons for their judgment, it will fall into one of these two criteria, based on the variables given. That my assessment is complete and accurate is of critical importance because I must now critique this system and draw a criticism of economic metrics from it; thus any weakness in the above will bias the conclusion.
Expectation in fact plays a crucial role in the formation of these ethical attitudes about our economic life. Speaking in general and imprecise terms, all accumulations of wealth (credits) are the result of agreements that goods and services will be provided to the wealth holders at some later date. Similarly, accumulations of debt are agreements that goods and services will be provided by the debtors at some later date. Here, I am not using these two terms in the exact conventional sense because even transactions taken in positive money terms can have these factors present. This might seem counter intuitive, but I will show that credit and debt as commonly understood - contracts between individuals with explicit terms - is in fact just one of many credit-debt arrangements that exist in the typical economy. Since most transactions in an economy feature money as one of the goods exchanged, and because goods-for-goods exchange is a less interesting case than goods-for-money, from this point forward the essay will focus on goods-for-money exchanges. The fairness of a transaction is determined by the expectation of future value of the goods produced or acquired relative to the future value of money received in exchange. Generally, when a person receives money as part of an agreement, he expects that money to have a certain value; however, nobody is bound to honor that money at the given value at the future date of spending.
This whole idea, rather labyrinthine in nature, can be illustrated by a thought experiment that shows two things: 1) that the quantity of a currency does influence its value; 2) that natural ethical assumptions cannot be separated from economic realities.
Suppose the economy features just two individuals, person A and person B. They have an economy of sorts where person A gives pieces of scrip to person B in exchange for goods (G) provided by person B. Without G, these individuals will starve; person B, in addition to offering some of these goods up for trade, produces enough G for himself. Given that person A has quantity Q of scrip, what price, in scrip, should person B demand in exchange for G?
In part, this thought experiment depends on the history of the economy. If, for instance, person A accumulated this scrip from person B over a period of 10 years prior to the start of the thought experiment through a reversal of the current roles, one might wish to set the payment such that it will take another 10 years for the scrip to be exhausted. Alternatively, suppose that person A accumulated this scrip while caring for a sick and dying person C. But now that person C has passed away, is it morally acceptable for person A to receive nothing in exchange for his efforts? In any case, the number of units of scrip is insignificant; only the portion of Q demanded counts.
This experiment is essentially ethical in nature. There is no other way to resolve the system except ethically. In fact, the scrip (money) only has value as an ethical tool to track (account for) the relative economic contributions of the participants. The social status and character of the individuals is significant. Supposing person A is Hitler, maybe it is best to let him starve (I can't believe I just said this)? Typically, though, it is clearly wrong to exclude person A on the basis that "scrip is arbitrary and worthless". From this, I deduce that person A has a economic right to participate. In time period zero, he must receive G for scrip even if scrip is worthless and he is expected to bootstrap tomorrow. Assuming that there is no other production source for G than what is controlled by B, it seems there is no option but to allow A to share access to the production source.
An economy with more that two people is really no different from this one. It only appears different because there is a proliferation of goods and people, creating many alternatives for each possible situation, and making the calculation of fairness more complex. Essentially, though, the situation remains that every type of money (scrip), gets its value from the desire of others to labor in order to obtain it. Furthermore, the dictates of fairness can compel a person to adjust their habits: spend more or less, labor more or less, or ask for a different wage. It falls upon the government to ensure that these adjustments take place, because having a large economy does not ensure that a fair market comes about.
Before continuing, it is worth describing labor as it is used here, and what its product is for those involved. Typically, the laborer produces some good for a customer and receives a wage in nominal money. This money is usually converted immediately to goods that cover the cost of living of the laborer and his family. Thus, the laborer works with an expectation of the value of his wage. The wage is only valuable insofar as it is capable of being exchanged for the goods that the laborer expects to purchase. But the laborer cannot do any more than expect that he will be able to use his surplus in this fashion because he has negligible control over the availability of goods and their prices.
Rather than being an endless bounty of goods at smoothly increasing prices, the market is truly a discrete bundle of goods, the composition of which is relatively inflexible at any specific time. Over a series of expectation periods, the market adjusts in a fashion that can be described as "supply and demand" but within any given period, supply cannot adjust production levels at all. A manager may increase prices on a suddenly popular item in an effort to capture more profits, but he cannot magically make his factory larger. The typical arrangement is for only a portion of the total money to come to market at any given time period and exchange for the total quantity of new production. Though all dollars up to the spending threshold are worth a given amount, each dollar beyond that is only expected to have some value for future consumption. The actual value of this currency cannot be included in the current calculations of credit and debit because for the vast majority of this money it is really not possible for it to be spent - current production levels cannot absorb it and thus it is worthless in the current period. This is of tantamount importance for the nominal credits accumulated by workers. If, for instance, every worker had some credit and decided simultaneously to use their credits as substitutes for work, these credits would be worthless because only other laborers could complete that work. But we know that there must be a credit-debt pair created for each wage unit, or that wage unit is worthless, and the typical expectation is that it is not. The quantity of wages given out in the economy is very large, and there is no coordinated effort to ensure that all of this accounting balances out; faith is placed instead in the market.
Therefore, in the creation of both credits and debts there is typically the absence of systematic agreements as to when these services will be rendered, principally because the majority of savings will continue to be saved, allowing for smooth changes in consumption that the production level can adjust to. Furthermore, there is usually the absence of the explicit statement of conjunction: if a person is said to have credit, someone else must have debt. This is truly a statement of expectation, since the imprecise nature of credit and debt mean that individuals are both 1) looking at personal future consumption and labor rather than the present; and 2) depending on economic conditions to allow them to either acquire a sufficient level of goods or provide a sufficient level of labor value.
Note also that in order for this system to maintain clarity, credit and debt must pass through and cancel out. Pass through describes the notion that when A, who has a unit of credit from B, acquires a unit of debt to C, that unit of credit passes to C, such that now B has a unit of debt to C. Cancel out means that if as a result of pass through a person can be said to owe to himself, that unit of debt is canceled. The important corollary here is that at any given time, debtors only owe creditors.
Note also that individuals have a psychological drive to accumulate money to a certain point. This is due to the desire to have economic status, security, and provide for retirement. I shall call this the threshold of comfort. In one sense, it is wrong for people to be uncomfortable, but in the way it is used here it means only that the individual has an active drive to earn money in excess of what he spends.
The most counter-intuitive aspect of this model is the existence of these credit-debt pairs in an economy where all the members may hold positive quantities of money. In order to understand this, suppose that the money system was one that depended in the vast majority of transactions on specie - literal coins or paper money - rather than checks, bills of exchange, etc. Furthermore, assume that the quantity of this specie is constant. Even in this system, the "effective" supply of money is not constant. The velocity of the money (the rate it moves through the economy) will determine the incomes of each member and their consumption level. However, in this system, the only way to save any money is to remove it from circulation. Thus, any individuals who are creditors in this system will have accumulated currency beyond their threshold of comfort, and any individuals who are debtors will have injected currency into the system from their initial store of currency beyond their point of comfort, or who started at a low level and have not yet reached an acceptable level of comfort. Because the initial state of the system features a positive quantity of money, and because this money is associated with individuals, the credit-debt system reflects changes in specie level from some initial position. The quantities of specie held by each person gain their value from the existence of individuals willing to work to earn that specie. In order for this to occur, some individuals must be below their threshold of comfort.
Rather than further diverging into a complex discussion of money, it is probably best to simply summarize the way this is represented in more typical money markets. Since money supply is increasing steadily in most economies, money is somewhat easier to acquire. Therefore many people feel they are better off. This does good things for psychological reasons, and it prevents the economic harms that result from too little or too much savings.
There are two general situations which fail the fairness criterion that individuals may freely achieve through an unregulated market.
The first is overaccumulation, the acquisition of an unusually large amount of savings by a portion of the population. Though conditions vary from one economy to another, there is always a threshold beyond which the mere accumulation of wealth by one group will hurt other groups. As individuals become involved in market activity, they essentially enter into agreements that whatever debts are created can be paid back. Unbounded accumulation is a tacit violation of this agreement. Recall that as shown above, credit must correspond to debt, and debt can only be paid off through exchange of the products of labor for wealth. Thus, the "free market" as a social structure allows individuals to shirk their responsibility to allow others to participate.
The second is the debt trap, as seen everywhere in America these days. In this situation, a group of individuals end up acquiring literal debts and are then denied the participation opportunities that would allow them to pay down these debts. Those who have truly been wronged are those who expected to be able to pay these debts off, but either through misunderstanding of the terms of debt acquisition or through a lack of economic opportunity found that their expectations were wrong. This situation risks moral hazard for social policies that might be designed to correct it, because some people could truly be irresponsible about this, but not attempting to address the issue seems like throwing the baby out with the bath water.
The call for regulation then follows along several strands:
It is not merely enough to ensure that a person is adequately compensated for his labor today. It is necessary to also ensure that the economic state tomorrow is such that he will receive his due when he spends what he has earned. In particular, he wants to be able to live comfortably off of his earnings at a time when he can no longer work. For this reason, a system like social security is brilliant. It would be impossible, following from the uncertain nature of nominal accounts, to ensure that future prices and production levels will be sufficient to allow a person to live off of his savings in retirement, regardless of the arbitrary savings level that is designated "sufficient". In a more general sense, the government is responsible for ensuring that the economy maintains some level of stability, and everyone expects the economy to be stable.
Taxation and wealth redistribution seem like the most straightforward alternatives by which individuals can be pulled out of debt traps and pushed down from positions of overaccumulation. Taxes on total assets are the best kind. It is not how much a person earns in any given period that mark them as overaccumulative, but their total position. Furthermore, many individuals are involved in economic schemes that depend on high wealth levels to secure unreasonable incomes. In keeping with the credit-debt theory, such schemes are nothing but impoverishments for everyone else. Aside from the necessary financial regulations, the best way to diffuse such schemes is to use wealth taxes to counteract such accumulations.
It seems that our economic reality ought be determined almost completely by human psychology. To look at economic objects and ask "what kind of thing is this?", to pierce to the semantic veil, is to reveal that ultimately an economic rule is a description of a human psychological bias. There is no other way to describe the choices we make as part of our efforts to produce and distribute goods, and because of the arbitrary points of determination that the above model takes, it is one that accommodates, to a great degree, our particular desire for fairness that must not be denied. It is a truth that has confronted the philosopher.
Properly speaking, Keynes distinguishes between "short term", dealing with the degree of utilization of existing capital, and "long term", dealing with the purchase or development of new capital (p 47). These terms can at times be misleading - a "short term" expectation can take quite a while to be realized. When evaluated in a purely rational way, long term expectations are almost always based on knowledge that is "very slight and often negligible" (p 149).
In my experience of the typical attitudes that individuals take toward economic realities, among the many unexamined vistas of everyday life, is the belief in some conceptual ethics of the exchange. It is typically assumed that the comparative value of that which each party acquires from the market in a given transaction gives a certain ethical character to that transaction. This ethical character is a function of six (3 pairs of 2) variables: some calculation of value of goods received by each party, an assessment of the character and social function of each party, and an assessment of the method by which the transaction was undertaken that describes a set of actions both parties should undertake. A transaction is generally ethical if it meets two criteria that are composed from these variables.
First, a transaction is either fair or unfair depending on whether what is exchanged is distributed in proper accord with the social function and character of the participants. This is the fairness criterion. For instance, society would typically frown on a million dollar gift to a convicted murderer. Similarly, society condemns the shortsightedness of its own collective past, when great men such as Van Gogh and Poe were forced to live in poverty, this being the result of market failures whereby their genius went unrecognized and unrewarded.
Secondly, a transaction is either proper or improper depending on whether the transaction itself is undertaken in accordance with agreed upon rituals and methodologies. This is the propriety criterion. These rituals and methods are practically designed to ensure that formal (legal) and informal (customary) rules of procedure are followed. Generally, these are justified through a philosophic appeal to principles such as rights, duties, and virtues, but for numerous reasons it is probably better to treat the propriety criterion as a cultural object rather than a philosophic absolute. Most participants do not have a rigorous or conscious formulation of these principles and the realization of such principles depends on arbitrary rituals designed to prevent all manner of trickery. An example of an improper transaction that is otherwise fair might be a starving person stealing bread from a supermarket that throws some quantity of unsold bread loaves away at the end of each day. The propriety of economic transactions is an interesting matter, but I will not take it up further in this essay.
Though the analysis so far has already delved far beyond what the typical person thinks in conscious ethical evaluation, I feel that this captures the essence of what the typical person thinks intuitively when making ethical evaluations. Typically, when a person is asked to give reasons for their judgment, it will fall into one of these two criteria, based on the variables given. That my assessment is complete and accurate is of critical importance because I must now critique this system and draw a criticism of economic metrics from it; thus any weakness in the above will bias the conclusion.
Expectation in fact plays a crucial role in the formation of these ethical attitudes about our economic life. Speaking in general and imprecise terms, all accumulations of wealth (credits) are the result of agreements that goods and services will be provided to the wealth holders at some later date. Similarly, accumulations of debt are agreements that goods and services will be provided by the debtors at some later date. Here, I am not using these two terms in the exact conventional sense because even transactions taken in positive money terms can have these factors present. This might seem counter intuitive, but I will show that credit and debt as commonly understood - contracts between individuals with explicit terms - is in fact just one of many credit-debt arrangements that exist in the typical economy. Since most transactions in an economy feature money as one of the goods exchanged, and because goods-for-goods exchange is a less interesting case than goods-for-money, from this point forward the essay will focus on goods-for-money exchanges. The fairness of a transaction is determined by the expectation of future value of the goods produced or acquired relative to the future value of money received in exchange. Generally, when a person receives money as part of an agreement, he expects that money to have a certain value; however, nobody is bound to honor that money at the given value at the future date of spending.
This whole idea, rather labyrinthine in nature, can be illustrated by a thought experiment that shows two things: 1) that the quantity of a currency does influence its value; 2) that natural ethical assumptions cannot be separated from economic realities.
Suppose the economy features just two individuals, person A and person B. They have an economy of sorts where person A gives pieces of scrip to person B in exchange for goods (G) provided by person B. Without G, these individuals will starve; person B, in addition to offering some of these goods up for trade, produces enough G for himself. Given that person A has quantity Q of scrip, what price, in scrip, should person B demand in exchange for G?
In part, this thought experiment depends on the history of the economy. If, for instance, person A accumulated this scrip from person B over a period of 10 years prior to the start of the thought experiment through a reversal of the current roles, one might wish to set the payment such that it will take another 10 years for the scrip to be exhausted. Alternatively, suppose that person A accumulated this scrip while caring for a sick and dying person C. But now that person C has passed away, is it morally acceptable for person A to receive nothing in exchange for his efforts? In any case, the number of units of scrip is insignificant; only the portion of Q demanded counts.
This experiment is essentially ethical in nature. There is no other way to resolve the system except ethically. In fact, the scrip (money) only has value as an ethical tool to track (account for) the relative economic contributions of the participants. The social status and character of the individuals is significant. Supposing person A is Hitler, maybe it is best to let him starve (I can't believe I just said this)? Typically, though, it is clearly wrong to exclude person A on the basis that "scrip is arbitrary and worthless". From this, I deduce that person A has a economic right to participate. In time period zero, he must receive G for scrip even if scrip is worthless and he is expected to bootstrap tomorrow. Assuming that there is no other production source for G than what is controlled by B, it seems there is no option but to allow A to share access to the production source.
An economy with more that two people is really no different from this one. It only appears different because there is a proliferation of goods and people, creating many alternatives for each possible situation, and making the calculation of fairness more complex. Essentially, though, the situation remains that every type of money (scrip), gets its value from the desire of others to labor in order to obtain it. Furthermore, the dictates of fairness can compel a person to adjust their habits: spend more or less, labor more or less, or ask for a different wage. It falls upon the government to ensure that these adjustments take place, because having a large economy does not ensure that a fair market comes about.
Before continuing, it is worth describing labor as it is used here, and what its product is for those involved. Typically, the laborer produces some good for a customer and receives a wage in nominal money. This money is usually converted immediately to goods that cover the cost of living of the laborer and his family. Thus, the laborer works with an expectation of the value of his wage. The wage is only valuable insofar as it is capable of being exchanged for the goods that the laborer expects to purchase. But the laborer cannot do any more than expect that he will be able to use his surplus in this fashion because he has negligible control over the availability of goods and their prices.
Rather than being an endless bounty of goods at smoothly increasing prices, the market is truly a discrete bundle of goods, the composition of which is relatively inflexible at any specific time. Over a series of expectation periods, the market adjusts in a fashion that can be described as "supply and demand" but within any given period, supply cannot adjust production levels at all. A manager may increase prices on a suddenly popular item in an effort to capture more profits, but he cannot magically make his factory larger. The typical arrangement is for only a portion of the total money to come to market at any given time period and exchange for the total quantity of new production. Though all dollars up to the spending threshold are worth a given amount, each dollar beyond that is only expected to have some value for future consumption. The actual value of this currency cannot be included in the current calculations of credit and debit because for the vast majority of this money it is really not possible for it to be spent - current production levels cannot absorb it and thus it is worthless in the current period. This is of tantamount importance for the nominal credits accumulated by workers. If, for instance, every worker had some credit and decided simultaneously to use their credits as substitutes for work, these credits would be worthless because only other laborers could complete that work. But we know that there must be a credit-debt pair created for each wage unit, or that wage unit is worthless, and the typical expectation is that it is not. The quantity of wages given out in the economy is very large, and there is no coordinated effort to ensure that all of this accounting balances out; faith is placed instead in the market.
Therefore, in the creation of both credits and debts there is typically the absence of systematic agreements as to when these services will be rendered, principally because the majority of savings will continue to be saved, allowing for smooth changes in consumption that the production level can adjust to. Furthermore, there is usually the absence of the explicit statement of conjunction: if a person is said to have credit, someone else must have debt. This is truly a statement of expectation, since the imprecise nature of credit and debt mean that individuals are both 1) looking at personal future consumption and labor rather than the present; and 2) depending on economic conditions to allow them to either acquire a sufficient level of goods or provide a sufficient level of labor value.
Note also that in order for this system to maintain clarity, credit and debt must pass through and cancel out. Pass through describes the notion that when A, who has a unit of credit from B, acquires a unit of debt to C, that unit of credit passes to C, such that now B has a unit of debt to C. Cancel out means that if as a result of pass through a person can be said to owe to himself, that unit of debt is canceled. The important corollary here is that at any given time, debtors only owe creditors.
Note also that individuals have a psychological drive to accumulate money to a certain point. This is due to the desire to have economic status, security, and provide for retirement. I shall call this the threshold of comfort. In one sense, it is wrong for people to be uncomfortable, but in the way it is used here it means only that the individual has an active drive to earn money in excess of what he spends.
The most counter-intuitive aspect of this model is the existence of these credit-debt pairs in an economy where all the members may hold positive quantities of money. In order to understand this, suppose that the money system was one that depended in the vast majority of transactions on specie - literal coins or paper money - rather than checks, bills of exchange, etc. Furthermore, assume that the quantity of this specie is constant. Even in this system, the "effective" supply of money is not constant. The velocity of the money (the rate it moves through the economy) will determine the incomes of each member and their consumption level. However, in this system, the only way to save any money is to remove it from circulation. Thus, any individuals who are creditors in this system will have accumulated currency beyond their threshold of comfort, and any individuals who are debtors will have injected currency into the system from their initial store of currency beyond their point of comfort, or who started at a low level and have not yet reached an acceptable level of comfort. Because the initial state of the system features a positive quantity of money, and because this money is associated with individuals, the credit-debt system reflects changes in specie level from some initial position. The quantities of specie held by each person gain their value from the existence of individuals willing to work to earn that specie. In order for this to occur, some individuals must be below their threshold of comfort.
Rather than further diverging into a complex discussion of money, it is probably best to simply summarize the way this is represented in more typical money markets. Since money supply is increasing steadily in most economies, money is somewhat easier to acquire. Therefore many people feel they are better off. This does good things for psychological reasons, and it prevents the economic harms that result from too little or too much savings.
There are two general situations which fail the fairness criterion that individuals may freely achieve through an unregulated market.
The first is overaccumulation, the acquisition of an unusually large amount of savings by a portion of the population. Though conditions vary from one economy to another, there is always a threshold beyond which the mere accumulation of wealth by one group will hurt other groups. As individuals become involved in market activity, they essentially enter into agreements that whatever debts are created can be paid back. Unbounded accumulation is a tacit violation of this agreement. Recall that as shown above, credit must correspond to debt, and debt can only be paid off through exchange of the products of labor for wealth. Thus, the "free market" as a social structure allows individuals to shirk their responsibility to allow others to participate.
The second is the debt trap, as seen everywhere in America these days. In this situation, a group of individuals end up acquiring literal debts and are then denied the participation opportunities that would allow them to pay down these debts. Those who have truly been wronged are those who expected to be able to pay these debts off, but either through misunderstanding of the terms of debt acquisition or through a lack of economic opportunity found that their expectations were wrong. This situation risks moral hazard for social policies that might be designed to correct it, because some people could truly be irresponsible about this, but not attempting to address the issue seems like throwing the baby out with the bath water.
The call for regulation then follows along several strands:
It is not merely enough to ensure that a person is adequately compensated for his labor today. It is necessary to also ensure that the economic state tomorrow is such that he will receive his due when he spends what he has earned. In particular, he wants to be able to live comfortably off of his earnings at a time when he can no longer work. For this reason, a system like social security is brilliant. It would be impossible, following from the uncertain nature of nominal accounts, to ensure that future prices and production levels will be sufficient to allow a person to live off of his savings in retirement, regardless of the arbitrary savings level that is designated "sufficient". In a more general sense, the government is responsible for ensuring that the economy maintains some level of stability, and everyone expects the economy to be stable.
Taxation and wealth redistribution seem like the most straightforward alternatives by which individuals can be pulled out of debt traps and pushed down from positions of overaccumulation. Taxes on total assets are the best kind. It is not how much a person earns in any given period that mark them as overaccumulative, but their total position. Furthermore, many individuals are involved in economic schemes that depend on high wealth levels to secure unreasonable incomes. In keeping with the credit-debt theory, such schemes are nothing but impoverishments for everyone else. Aside from the necessary financial regulations, the best way to diffuse such schemes is to use wealth taxes to counteract such accumulations.
It seems that our economic reality ought be determined almost completely by human psychology. To look at economic objects and ask "what kind of thing is this?", to pierce to the semantic veil, is to reveal that ultimately an economic rule is a description of a human psychological bias. There is no other way to describe the choices we make as part of our efforts to produce and distribute goods, and because of the arbitrary points of determination that the above model takes, it is one that accommodates, to a great degree, our particular desire for fairness that must not be denied. It is a truth that has confronted the philosopher.
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