Abstract:

 This paper explores the social implications of post-industrial technology and its effects in neoliberal economic models currently used in Western democracies. The changing nature of work (Landry, 2005), increases in global aging population, rapid environmental degradation and “the upcoming rise in consumer demand fueled by 1.7BN Chinese citizens that will be joining the middle class in the next decade” (Dobbs, 2015), underscore the urgent need to revise certain economic modeling assumptions in order to maintain the stability of democracies. The mathematical limitations imposed by technological innovation in the creation of wage based employment combined with a flawed framework of unlimited economic growth, point to an increased frequency in systemic risk and armed conflict as the future norm of the current socioeconomic system. Adapting institutional practices and economic frameworks to benefit from rapid change can help avoid further deterioration of established and emerging democracies and increase wealth creation in the short and long term. This paper will explore some of the existing challenges to creating a more efficient economic model adapted to support the digital economy, the construction of such a model, and outline the main institutional and monetary reforms that need to take place in order to enable this framework.

• Introduction:

The frequency and intensity of economic crises has increased significantly during the last twenty-five years[1]. Technological sophistication, increased transaction speeds and an exponential volume of simultaneous changes are causing powerful states to struggle with exercising economic control, creating employment, and sustaining the framework needed to facilitate peace. The purpose of adopting democratic practices is to provide human security, including personal freedoms, equal opportunities, as well as diminishing the risk of poverty experienced by individuals. When governments find themselves unable to mitigate the effects of systemic risk on poverty, ideological preservation becomes a secondary priority to achieving means of subsistence. Ironically, in an effort to avoid deviating from what is perceived as the only economic path to democracy, current economic practices are perpetuating a model that is highly vulnerable to financial and supply shocks, increasing the fragility of the ideological system that is attempting to protect.

One of the central concerns for democratic states in an era of economic uncertainty is to minimize poverty levels within their borders. Studies conducted in areas of urban crime and international relations have confirmed a positive correlation of 0.8 between poverty and armed conflict at the interstate and intrastate level[2] (Pugh, 1993). Widely accepted political discourse in developed countries portrays poverty as an exceptional circumstance rather than a widespread problem, implying that poverty affects only certain groups who deserve it. Challenging this view, longitudinal studies have shown that in the UK for example, individuals move in and out of poverty through out different phases of their lives[3] (Jenkins, 2011:3), with children, seniors and single mothers being at higher risk. This pattern is observed across all ethnicities, although some groups experience poverty more frequently, for longer periods or chronically. “It is very likely that all individuals will experience poverty at least once in their lifetime due to illness, divorce, job loss, discrimination, lack of opportunities… living as a child in a poor household or living on a fixed income after retirement exposed to inflationary pressures” (Giddens & Sutton, 2013). These findings make financial systemic risk one of the major indirect causes of armed conflict and a major contributor to long-term deceleration of human development[4].

Whilst Minsky warned decades ago, that in an attempt to create stability, the unlimited growth model combined with the incentive for investment and debt creation triggered by financial indicators, would result on sudden market shocks [5], this warning was widely ignored by neoliberal economics. The global incidence of shorter boom and bust cycles stretches the limits of centralized planning in providing individuals with the necessary tools to enable economic mobility. Some of the major challenges to maintaining full employment and an agile economic framework are: the steady progression of environmental degradation, the uneven distribution of human and natural resources by region, the different levels of unemployment distributed across cities, the diversity of education levels, rapidly changing technologies and the volatility of pricing in essential commodities. All these factors contribute to increasing the risk for semi-skilled and low skilled individuals of falling into variations of absolute poverty even while being employed, a phenomenon that is observed today in both developing and developed economies. Given that systemic risk is a global phenomenon, the monumental challenge for national institutions is to enable a framework that will minimize the risk of absolute poverty while maintaining social mobility in order to prevent armed conflict and promote stability. Contrary to popular belief in the benefits of military spending, recent research reveals the much greater benefits of the economics of peace, raising the incentive to devise a more efficient framework4.

Exploring new alternatives to the current system requires reevaluating the purpose and effectiveness of existing institutions at the national and local level understanding their role in the creation of economic prosperity in the post industrial era. In order to avoid dismissal of new exploratory models based on ideological labels, it is necessary to move beyond the extremely limiting bipolar economic discourse that exists today. Any deviation from capitalism is automatically dismissed as socialist and associated with dictatorship, centralized planning and the abolition of private property. There is currently no alternative to a pure form of neoliberal models in democratic states, leaving democracy in a very fragile state in the event of economic failure. Furthermore, the obligations of citizens and companies towards the protection of natural resources may need to be revised in an effort for self-preservation to stop environmental degradation.

• Moving beyond the existing bipolar frameworks of centralized planning

Other areas of social studies, such as international relations, sociology and psychology have successfully moved beyond bipolar frameworks accepting the benefits of an increased variety of options when it comes to solving practical problems. Unfortunately, economics has not been able to break free from bipolarized thinking. Despite evidence presented by behavioral economists[6] that disprove the effectiveness of some economic theories in the real world, many governments continue perpetuating quasi ‘belief’ systems in flawed economic models. Once a ‘side’ is chosen as the absolute ideal of a socioeconomic system, any deviation is not seen as a possible improvement but dismissed as threat. Even in the wake of widespread systemic risk[7], and unsustainable debt to income ratios[8] that expose the mathematical impossibility to continue down the path of the unlimited growth assumption to create employment, scholars and governments continue to insist in the feasibility of achieving human security through the existing model[9]. Since we still live in a bipolarized ideological framework, the alternative to the failing economic model is seen as far worse and may serve as justifiable reason to continue down the same path. However, evidence suggests that both capitalism and socialism share many characteristics including a centralized approach, common purpose, and a failure to address the current global economic challenges, making the bipolarized argument inherently irrational. Both theories look at social organization and economics from an industrial technology perspective failing to foresee the disruptions caused by digital technology and being unable to manage them.

To move beyond accepted misconceptions and enable a dynamic framework, it is necessary to dissect the discourse surrounding capitalism and socialism not from the ideological point of view, but from the practical way in which these philosophies are applied. Socialism is a form of government that attempts to achieve equality for all. It is characterized in extreme cases by imposing public ownership of the means of production, the abolition of private property and a centralized approach to the production and distribution of available goods. As the dichotomy to socialism, the capitalist system claims ‘decentralized’ planning and social mobility combined with private property to promote economic equality. From a theoretical approach, both systems seem quite different; however, empirical evidence suggests that both systems are highly centralized and strive for a utopian ideal of equality through different approaches. Although ‘equality’ lacks an objective definition in either system, the concept has been used historically as a motivational tool to justify a variety of political actions in the pursuit of this vaguely defined ideal.

Socialism adopts a more proactive approach to centralized planning, where the production and distribution of goods are planned in advance and enterprises are controlled by government, intending to result in even distribution of goods, but also resulting in shrinking supply due to lack of economic incentives for innovations to meet a growing demand. While capitalism exercises central planning through a reactive approach, controlling the supply of currency (or purchasing instrument) and ‘correcting’ cyclical unemployment by encouraging heavy borrowing and issuing government transfers. Recent studies (Crouch, 2012: 409) have confirmed a high correlation between employment and debt, concluding that employment in a capitalist economy is highly dependent on private debt or government spending (public debt), both options being unsustainable in the long term. These findings lead to conclude that the capitalist market is completely dependent on an alternative form of centralized planning.

The execution of both ideologies depend heavily on survey sampling and very limited information to apply generic policies that often come very slow[10]. Both ideologies aim to protect citizens from violence and help them manage risk throughout the life course. Part of the monumental fragility they share in the postindustrial economy is the impossibility of applying effective policies at the local level due to rapidly changing demographics and technology and the limitations imposed by data lag. Therefore, continuing the debate between the effectiveness of socialist or capitalist approaches to economic modeling is a perfect example of the sunk cost fallacy, there is no additional value to be extracted from this discussion. At this point, both centralized approaches are quite obsolete in managing rapid change and systemic risk to enable a framework that provides human security. This means that choosing a ‘side’s is preventing scholars from exploring what is next for fear of being cataloged as one or the other. Breaking free from this extremely limited perspective allows economists to concentrate in some of the monumental challenges that will be faced simultaneously by the global economy in the next 40 years:

1. Replacement of large percentages of wage based labor for technology, diminishing the tax base to support the higher percentage of the unemployed and retirees.
2. Effects on state pensions caused by increased global aging with a lower worker per retiree ratio due to a decrease in birth rates[11].
3. Crop disruptions[12] due to environmental degradation combined with an increase in the global demand for goods from 1.7 BN new middle class participants in East Asia[13].
4. The repayment of extremely high debt to income ratios left by the 2008 financial crisis, requiring to allocate future income resources to repayment of debt, thus decreasing consumer demand[14].

The complexity and speed of these changes will happen unevenly at a national and global level, requiring states to come to terms with the limitations of the centralized approach, thus recognizing the need to revise institutional purposes and organizations at all levels. The advent of the postindustrial era places the new economics debate outside the limitations of existing models. The current level of technological sophistication makes the central planning approach very fragile. Therefore, the next logical step for economics is to devise a system that that supports optionality[15] allowing for frequent trial and error without the downturn created by market shocks. This is precisely the challenge that the next section of this paper intends to explore.

• The ‘antifragile’ economic model: using complementary currencies as a method to offset systemic risk

The aforementioned sections introduce the urgency to design a more robust economic framework in order to avoid armed conflict, supply shortages and to avoid socializing the cost of negative externalities and market failure. At first glance, it would seem that adding more variables to the financial equation would be counterproductive in offsetting systemic risk. However, some examples will be cited to illustrate how the use of complementary currencies can result in increased economic resiliency. Professor Nassim Taleb (2012) has conducted extensive research related to the fragility of centralized frameworks and has concluded that handling change at a smaller scale is more efficient and robust in the short and long term, due to advantages on reaction speed, and customization of the solution to its environment[16]. However, implementing change at a smaller scale in a national territory introduces some challenges to the current socioeconomic framework. While states and cities are encouraged to enact their own policies, the monopolization of currency issuance and monetary policy, leaves economically depressed regions very few options to generate additional wealth without the help of the federal government. In order to benefit from constant change, local governance and national economic framework need to be designed to protect certain goods from the perils of systemic risk while allowing enough flexibility to promote healthy competition. One way to achieve this is through the partial decentralization of currency issuance, allowing local, national and global currencies to coexist simultaneously in the national economy. The key to successfully using multiple currencies without aggravating the state of systemic risk is to assign specific uses to each one.

To illustrate an example in the implementation of different currencies, we start by assuming an economy with two bundles of goods: X representing food for instance and Y representing other goods. In the graph below, we start from a budget constrain of $600 dollars for a person who makes $10hr requiring 60 hours of work a month to meet minimum food consumption. Px and Py have been equated to wage and we are assuming 1 hr of work equals 1 unit of production of either Y or X bundle. Notice that the budget line at point A, Y=0 when consuming 60 units of X. The budget in point B is achieved by reducing production time of good X to ¼ implying that the MPLx has increased 4 times. Leaving the new slope as -1/4x, resulting in consumption levels of (60,45) for X and Y respectively[17].

 

The challenge is finding a way to move consumption from point ‘A’ to ‘B’ without introducing government transfers or a raise in wages. In this case we have introduced time as a complementary currency to measure production and payment of good X (food). Introducing the option of food production through industrialized urban farming at the community level can theoretically result in a cheaper price measured as MPLx (food production) being higher than the MPL measured in wages for the same time worked. This is achieved by eliminating supply disruptions and the aggregate nominal cost of inefficient production, by reassigning time in the more efficient production of a basic need resulting on increased productivity at a lower ‘price’. The savings in hours worked to attain the same level of food consumption should result in an increase in consumption of Y goods (assuming the level of minimum food consumption remains unaltered due to the principle of diminishing utility). Individuals in the communities can have the option to purchase food with ordinary currency for $600 month, or participate in the production and purchase the same amount for 15 hours[18] of work increasing their income by $450. The above outcome is possible without resulting in market failure, increased taxes or creating additional debt. Furthermore, setting the price of essential needs in terms of minutes for instance, (5 pounds of tomatoes priced T2 minutes of worked hours) protects citizens from inflationary pressures, reduces poverty and promotes a fairly stable local demand based on steady discretionary income. This is assuming the production levels of food remain the same or improve over time due to incentives to cut production time.

Introducing a third ‘official’ currency (such as crypto currency issued only upon production of a tangible good or service) can add robustness to the system by providing a framework to formalize otherwise informal economic transactions that take place under conditions of economic failure. Studies conducted by the World Bank reveal that different informal transactions take over economic activities during economic crises due to the short supply of national currency. In Nigeria for example, it is estimated that 80-90% of job creation happens in the informal economy allowing individuals to achieve some level of subsistence through other means of trade[19]. Furthermore, the informal economy has consistently remained resilient to regime collapses and armed conflict across regions. Regulating and formalizing the use of crypto currency as a tool for self-correction of markets, can fuel self-employment and innovation required to jumpstart depressed local economies. Regions with high unemployment and a small or non existent tax base can rely on crypto currency as a way of alternative payment for services and goods that can create employment and maintain peace in the short and long term. This solution can empower cities to choose the currency combination that will satisfy their unique demographic needs, while decreasing reliance on taxation and government transfers to address welfare. Additionally, failure of the central banking system should not result in the complete collapse of social structure because citizens could quickly switch their activities to an alternative mode of formalized payment.

Based on the additional wealth that can be created by diversifying the use of currencies applied to specific purposes, it can be argued that the current centralized model greatly limits the creation of short term and long-term wealth by limiting economic freedom of local communities[20]. When economic activity is dependent on a single flawed centralized model that can’t repair itself, the system enters a downward spiral of decreased demand, unemployment and increased debt, thus creating a self fulfilled prophecy of fierce competition and scarcity. The Greek economic collapse is a good example of this cycle, a country rich in resources with a healthy working force that falls into the trap of failed central planning resulting on an artificial scarcity crisis. Furthermore when a high percentage of household income is spent on bare necessities it means that the majority of worker’s time is spent simply trying to make ends meet; there is little room for innovation, research, expenditures on leisure or personal services, precisely the kind of activities that fuel employment and expansions of the PPF.

• Obstacles to the implementation

The level of technological sophistication achieved by advanced societies combined with a flexible economic framework facilitated by multiple currencies, can simultaneously promote economic freedom, and increase short term and long term wealth by abandoning the reliance on a centralized unlimited growth model that currently fuels employment. However, the implementation of a decentralized model would require regulation from a participatory democracy at the community level. Designing such a system can potentially accelerate the rate of change and innovation, turning systemic risk into opportunities for economic and technological improvement without the downfalls of a chain reaction (a good example of optionality). Additionally using a stable non-speculative currency such as time to pay for basic items like food, or certain kind of housing, provides a stable minimum standard of living that is not dependent on wealth redistribution and it is narrowly defined, indirectly minimizing the risk of absolute poverty. The institutional and ideological barriers that stand between this plan and the materialization of the model include revising the roles of national and local organizations, redefining the work week, and enacting law that defines the obligations of citizens and entities towards their nations and the environment, in order to ensure minimum conditions for democracy and economic mobility to exist.

One of the most important components for the creation of a representative democracy that promotes true economic freedom and mobility is to define equality by very concrete standards. Empirical evidence suggests that democracy has a hard time persisting under conditions of extreme deprivation and unequal access to certain basic human needs[21]. Therefore, when referring to an equal right to access resources needed for subsistence, this definition is required to be timeless; it applies to today and all subsequent generations, underscoring the need to understand the role of modern property rights in ensuring this objective. Current laws assign ‘use’ rights without outlining the limits between use and abuse of natural resources. This means that an individual, can legally use his/her land to generate or keep hazardous waste[22], while simultaneously making their neighbors sick and exhausting the utility of this resource, effectively shirking the supply of an otherwise renewable resource. The issuance of permits to dump pollutants in the air, land or water fails to encourage resource preservation, since the cost of the permit is much smaller than the cost of remediation, effectively socializing the cost of resource exhaustion. This is a very serious issue that should not be taken lightly. Environmental degradation is a clear consequence of this legal loophole, which is creating higher risks for extreme poverty and depleting long-term wealth creation thus contributing to economic inequality and systemic risk.

Furthermore, the perpetuation of such property laws is in direct conflict with the duty of member states that support the UN security mission and council (193 countries thus far). The UNDP 1994 report officially included human security in the agenda of UN priorities [23]. The concept of Human Security includes the duty of states to provide their citizens with access to food, clean water, health services, and protection from external and internal forms of violence among others. How can governments ensure access to basic resources while supporting laws that freely give away the right to exhaust them in exchange for a fee? If we are to promote true equality of opportunity, present and future generations should have similar access to at least all forms of renewable resources and water. The cost and responsibility for remediation of environmental contamination should be absorbed by production cost of firms, leading to cleaner practices, lower consumption and protection of perpetual supply. The UN Security Council has been endowed with the task to punish inhumane acts of enslavement or extermination. Depriving present or future generations from access to food, water or resources needed for life is an act comparable to nothing less than genocide. Under this legal framework, contamination of natural resources without remediation could be effectively classified as a crime against humanity and pursued to the full extent of the law. Exterminating a human life in the present time is a punishable crime; therefore, present actions that promote the same outcome in the future, should be treated with the same severity. Modern property laws should outline the limits of exploitation in a way that clearly defines preservation as an effort to maintain certain original state.

The second obstacle to implementing an economic system with multiple currencies is to redefine the role of national and local institutions in relation to the welfare of their citizens. “Due to the advent of digital technology the tension between forms of centralized government and the forces of globalization is growing” (Giddens & Sutton, 2013), leading to an ever increasing degree of difficulty in providing economic stability and enacting timely policy that addresses the diverse needs of the population. Daniel Bell (1987) argues that “national governments are becoming too small to address global disruptions and to big to serve the needs of particular cities or regions…national politics are trapped between globalization and localization issues”. However, contrary to the impression that the nation state is becoming obsolete, we find that the state still plays an irreplaceable role as a representative and protector of the citizen’s interest in the international arena. Therefore, by identifying the strengths of representative and participative democracies in a flexible economic framework, states can redefine the roles of national and local governments to specialize in satisfying different requirements for the provision human security. National governments can specialize in providing military protection, negotiating trade agreements and enacting laws that promote human security, such as redefining the ‘work week’ and supporting worker’s right to take unpaid monthly leave to work in community farms during business hours if beneficial to them. City governments can take the responsibility of executing strategies to promote welfare, job creation, and self organization to ensure minimum standards of living, ensuring adequate supply of basic needs, and enforcing environmental remediation; Leaving the legislation and provisioning of education and health services to the state level.

Comprehensive legislation that outlines the conditions under which resources may be exploited for private benefit in combination with flexible economic framework and a specialized government system should lead in the short term to a sharp decline in the production of unnecessary items, and a decrease in the percentage of what is currently cataloged as ‘formal employment’. The initial shock to employment could be absorbed at the local level utilizing a customized combination of formalized complementary currencies to ensure welfare during the transition. However, in the long term it should result in the development of cleaner technology, a stable demand of normal goods, an increase in the demand for luxury goods. Furthermore, beginning the roll out phases of a multiple currency system in economically depressed localities can potentially result in offsetting immediate shocks, increasing employment and disposable income both in the short and long term.

• Conclusion:

Research conducted by McKinsey & Co confirms that the advent of the digital era will have 3000 times the effect that the industrial revolution had in the 1700’s[24]. This impact will be felt most dramatically in consumption and disruption in the supply of commodities. Therefore, it is imperative to revisit old economic assumptions to verify the validity of their application in today’s socioeconomic environment. The creation of a model that has a positive effect in both the short and long term will not happen by debating about which centralized approach is better, but by iterating on different combinations of cooperative game theory based on realistic models of human behavior, something that is not enabled by the current economic framework, where change equals major disruptions. The analysis of game theory axioms reveals that, player strategies and ultimately the possible equilibrium outcomes are bound by the rules of the game[25]. This means that if we wanted to create long term supply stability of some good or promote environmental conservation, the pay off for individual pure strategies should not be in conflict with these goals. This is to say that in a framework that creates no short-term incentive for individuals to preserve a long term supply of good X, the probability of observing this outcome in the market is near zero. Therefore, modern economic debate should be focused around which incentives (including immediate personal loss for non compliance) have a higher probability of allowing individuals and society to take full advantage of disruptions in the post industrial era in a decentralized environment. Economics can supply the mathematical probability of certain outcomes based on the interaction of incentives and cost facilitated through policy and legal levers. The combination of complementary currencies and specialization of government level in provision of human needs, is only one of ‘n’ ways to turn market shocks into opportunities while increasing short term and long term wealth and economic freedom despite systemic risk. I remain optimistic that alternative forms of cooperative game theory will surface in the near future to create ‘new rules’ that will increase the probability of achieving these outcomes over a relatively short period of time.

Mathematical Appendices

References

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[1] Please refer to the “IMF Systemic financial Crises Database” cited in the sources for more information on frequency and intensity of financial crises.

Acknowledgements: Special thanks to Qin Wei, PhD Candidate at Temple University in Philadelphia, for helping validate mathematical models and providing insightful feedback.

[2] See Ikejiaku. Poverty-Conflict Nexus: Revisited. Explores the links between poverty and conflict

[3] Longitudinal studies conducted from 1991 to 2008 by the British Household Panel, studying a total of 16,000 individuals revealed that about 50% of children experience poverty (defined as an equivalized income below 60 per cent of the median) at least once in a 9-year period. “Children who have experienced poverty and women have a higher risk of experiencing poverty after retirement” (Giddens & Sutton 545-547)

[4] To understand the economic benefits of peace vs. conflict please see reference to “The Economic Cost of Violence Containment” report published by the Institute for Economics & Peace.

[5] For detailed mathematical support on Minsky’s models, see publication by Terence Tai-Leung Chong, et al. “Explaining the Financial Instability Hypothesis with Endogenous Investment: A Nonlinear Model Predictive Control Approach.”

[6] For further information see Thaler, Richard. “Misbehaving: The Making of Behavioral Economics”.

[7] The 2008 financial crisis has been officially named ‘The great recession of 2008’, from which the world is yet to recover 7 years later.

[8] See Crouch “Employment, Consumption, Debt, And European Industrial Relations Systems.”

[9] Human security defined in the UNPD 1994 report as” freedom from violence, food security, freedom of speech, equal opportunity…”. See full report for more details.

[10] Due to data lag and heterogeneity of local needs generic policies are slow to implement and ineffective in many cases in the long term.

[11] See “No ordinary disruption” by Richard Dobbs et al., and “The future of a generation” by Walter Ewing on US aging demographic research and “Some Macroeconomic Aspects of Global Population Aging” by Ronald Lee and Andrew Mason.

[12] See EPA publications related to the impacts of climate change in food supply.

[13] For more information see “No Ordinary Disruption” by Richard Dobbs et al.

[14] See Bellamy on “The Household Debt Bubble”.

[15] Optionality is the property of asymmetric upside (preferably unlimited) with correspondingly limited downside (preferably tiny).” See Nassim Taleb. “Antifragile”.

[16] Extract from Nassim Taleb’s “Antifragile”. “Optionality will take us many places, but at the core, an option is what makes you antifragile and allows you to benefit from the positive side of uncertainty without a corresponding negative side” (P.171)

[17] See appendix A for supplemental mathematical information

[18] Hours are an example derived from the use of technology in production of food. The savings in working time are realized from producing more food per hour than the individual can pay for an hour of work for $10hr.

[19] “Informal employment broadly defined comprises one-half to three-quarters of non-agricultural employment in developing countries: specifically, 48 per cent in North Africa; 51 per cent in Latin America; 65 per cent in Asia; and 72 % in sub-Saharan Africa.” (Alter Chen: 5)

[20] See appended mathematical models for a detailed explanation of the effect of multiple currencies in consumption

[21] “ Substantial empirical literature investigates the link between democratic consolidation and economic well-being, typically finding this link to be positive.” (Linz et al)

[22] See permit regulations for the ‘disposal’ of hazardous waste into water, air and ground for the UK, US referenced in sources.

[23] UNPD 1994’s report on Human Security referenced in sources

[24] See Dobbs et al. “No Ordinary Disruption” for a detailed explanation on the impact in economic resources.

[25] See Nash, John. “Two-Person Cooperative Games” and “Equilibrium Points of N-Person Games”.