Social Credit Views

Saturday, 30 March 2019 12:27

The Hydroelectric Dam and The Bottling Plant as Metaphors for Social Credit

Written by Arindam Basu and Oliver Heydorn
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      In this paper, two metaphors, that of a hydroelectric dam and of a water bottling plant, will be used to illustrate the Social Credit diagnosis of the ills that afflict the existing financial/economic order, the conventional methods that are employed to palliate its various symptoms, and, finally, Social Credit’s remedial proposals.

1stMetaphor: The Hydroelectric Dam

     As Arindam Basu has explained in a recent paper entitled “The Scales and the Dam: Static and Dynamic Conceptions of the Economy”: “A typical run-of-river hydroelectric dam, which uses a flow of water to generate a flow of electricity, may serve quite well as a metaphor for an economy that converts a flow of money into a flow of goods and services.”[1] That is, just as the hydroelectric dam employs a flow of upstream water to generate a flow of electricity, the economy employs a flow of money, in the form of producer credit, to generate a flow of goods and services. The hydroelectric dam itself can be likened to the productive capacity of an economy and the flow of water issuing forth from the dam and flowing downstream could be likened to the flow of consumer incomes (wages, salaries, and dividends). Further, just as a flow of costs and hence prices is attached to the electricity that the dam generates, so too is there an invisible flow of costs and hence prices which is attached to the goods and services that are produced by the physical economy.

Part 1: Diagnosis

     Using this metaphor as a point of departure we can easily explain in picture form the Social Credit diagnosis, i.e., what is wrong with the current financial/economic system.

A/ Social Credit’s 1stCriticism – artificial limitations on production (the artificial limit on producer credit)

     Imagine the case of a hydroelectric dam in which the flow of water entering the turbines from upstream, perhaps due to drought or to man-made interventions, is only sufficient to produce 25% of the electricity of which the hydroelectric dam is capable. In other words, the dam is not operating at full utilisation capacity because the relatively low flow of water is limiting the production of electricity.

     Social Credit observes that something similar can and often does happen in the case of the economy under existing financial conventions, that is, there are often artificial limitations on production in the form of a lack of producer credit.

     Consider, for example, the many instances where there is, on the one hand, the raw material, labour, machinery, technological know-how, etc., to meet, on the other hand, a real need on the part of the population for some good or service … and yet money, in the form of producer credit, is not issued to initiate and catalyze the desired production … simply because it is not created and made available for that purpose.

     This is how things stand at present. Because of purely financial reasons, we run our productive capacity at only a fraction of its total possible output, all the while there are people who are doing without needed goods and services.

B/ Social Credit’s 2ndCriticism – the production of waste (economic sabotage and inefficiency)

     Let’s us imagine further, and this is often actually the case, that some of the electricity which is produced by the hydroelectric dam is wasted, either in transport to its final destination, or by the end users themselves (such as lights left on when no one is using them).

     In the same way, Social Credit observes that a significant proportion of the artificially limited quantity of what we do produce in the form of goods and services, and hence a significant portion of our economic activities themselves, can be rightly qualified as waste in one form or another, i.e., in terms of quantity, quality, or both. They are things that people really do not need and/or which don’t profit them efficiently. Goods and services which contribute effectively and efficiently to human well-being are wealth; anything falling short of that involves waste to the extent that it falls short.

     Under the existing financial system, many things are produced and consumed because people are in some way forced, or at least heavily pressured, by artificial financial circumstances to produce them and use them. That is, our economic activities are not just artificially limited, they are often misdirected away from fulfilling our authentic needs in the easiest, most direct fashion.

     This phenomenon of waste cannot be properly understood, however, without first examining the third major criticism which Social Credit levels against the existing financial system and economic order. To that third and, in some ways, most basic of criticisms we now turn our attention.

C/ Social Credit’s 3rdCriticism – artificial limitations on consumption (the artificial limit on cost-liquidating consumer income)

     Imagine once again our hydroelectric dam.

      Let’s assume that, of the water coming from upstream and flowing down through the turbines, a portion of it is diverted after it has done its job of producing the electricity.

     Let’s say that some of it is absorbed into fissures in the rocks at the bottom of the gorge and ends up in the water table, while another portion of it is collected in huge subterranean reservoirs. 

     In this case, the water flowing downstream will be flowing at a far lower volume than the water coming from upstream and entering into the dam. Just by way of example, it might be as if for every 100 m3of upstream water flowing down through the dam per minute, only 50 m3/minute is being released as downstream flow into the gorge below.

     Again this provides a perfect ready-made image for conceptualising the third problem with the existing financial system which Social Credit identifies: the chronic lack or deficiency of consumer income.

     You will recall that the flow of consumer income was likened to the flow of water issuing forth from the dam and travelling downstream.

     Well, Social Credit claims that because only a portion of the flow of producer credit expended by productive organizations – whether private or public – is converted into consumer incomes (the rest being used to transfer capital and/or intermediate goods from one stage of production to another) there is a disparity or a gap between the rate of flow of costs and hence prices and the rate of flow of consumer incomes.

     You see, while all of the money expended by producers must be recovered in prices from the consumers (who alone can liquidate costs) in order for them to avoid bankruptcy, the system of production under existing banking and cost accountancy conventions, does not automatically distribute sufficient income to consumers to offset the costs and prices that are simultaneously being generated.

     In our metaphorical dam of the economy, if 100,000 dollars are being expended on a particular productive programme, it is as if only 50,000 dollars are being released as income, in which case producers will be looking to recover 100,000 plus profit from consumers when the consuming public has only be given 50,000 in incomes. There is therefore a gap or a deficiency of consumer buying power to the tune of 50,000 dollars.

     The primary reason for the gap in the metaphorical dam is the same as with our hydroelectric example.

     Just as some of the water, in the physical dam, is being diverted in our imagined example, into the water table and into reservoirs, so too, some of the producer credit is being diverted into other channels during the process of production such that, while it enters into the flow of costs, it is not being transformed into consumer income either at all or not at the same rate that it is being put in.[2]

     In other words, some portion of producer credit is being withheld, either permanently or temporarily from the consumer market.

     The water being absorbed into the water table is equivalent to producer credit that is used to pay off a capital loan or Capex expenditures and can thus never contribute to the flow of consumer incomes in the same period (money used to pay off bank loans is destroyed and money used to repay other forms of capital investment will only end up in consumer hands if they are invested in a separate project with its own costs), while the water collecting in the reservoirs is akin to the producer credit which ends up collecting in the depreciation and maintenance reserves of the various companies in the chain of production and is only transformed into consumer income at a slower rate than it is collected … and even then it is only ever re-injected into the economy alongside a new and separate flow of costs.

The Core Problem: “Finanz Über Alles

     Such is the nuts and bolts of the Social Credit diagnosis. Now, you will notice that both at the level of production and of consumption the existing financial system artificially limits and/or misdirects our physical economic activity.

     In essence, this means that as far as the relationship between the real, physical economy on the one hand and the financial system on the other is concerned, the financial system and its commodity, money, is in the driver’s seat. The physical economy and our desire to make use of it is thoroughly subordinated to financial control.

     But this is an inversion of the due order, of the order which should obtain between finance and the real economy if the latter is to fulfill the true purpose of economic association: the delivery of goods and services as, when, and where required with the least amount of resource consumption and of human labour.

      Instead of wagging its financial tail as, when, and where required – which would be the due or proper relationship between finance and the real economy, the ‘dog’ of the physical economy is ‘wagged’ as, when, and where required by the financial tail. Instead of being a mere accounting medium, an adjunct of the physical economic activity, a neutral tool, money has become the driving or determining force of what and how and whether we do things.

     It is this improper subordination of the real economy to finance, of real credit to financial credit, which constitutes the very heart of the economic problem according to Social Credit. 

----------------

The Second Metaphor: The Bottling Plant

      Now, in order to more adequately visualize how the existing economic system attempts to cope with the various problems which the subordination of the real economy to finance causes (especially the price-income gap) and how Social Credit’s monetary reform proposals would restore the proper arrangement between the two by reversing the relationship of subordination, it is necessary to introduce a second metaphor, that of a water bottling plant.

     Having established the dam as a metaphor for describing the relation of the flow of financial credit to the production of goods and services, Arindam Basu has also suggested that the metaphor of a bottling plant may be used to symbolize the connection between the flow of money and the consumption (or, more precisely, the sale) of goods and services.

The Consumer Market

     As in the dam metaphor, the flow of water represents the flow of money, and the flow of electricity represents the flow of products (i.e. goods and services): the bottling plant, by uniting these two flows to generate a line of water bottles, is analogous to the consumer market where money meets output and thereby generates a flow of liquidated costs.  It should be emphasized that the dam exists for the purpose of supplying the bottling plant - i.e., that's where its power is ultimately destined to be used. In other words, production is conducted for the purpose of selling output in the consumer market.

The Price-Income Gap.

     Now, It is also essential to note that bottling plant requires a flow of water equal to the upstream flow entering the dam, in order to utilise in full the electricity it receives from the dam: this reflects the simple fact that all costs of production have to be recovered from the consumer.  However, as noted earlier, the downstream flow, (i.e. the flow of water leaving the dam) is less than the upstream flow - since some of the water is absorbed or sequestered.  Furthermore, not all the downstream flow enters the bottling plant: a certain portion flows elsewhere, which is a reflection of the fact that not all consumer incomes are spent - the portion flowing elsewhere representing savings.

     Consequently, there is a major gap between the upstream flow entering the dam ('prices' - or strictly speaking, the costs of production) and the downstream flow entering the bottling plant ('incomes' - or more precisely, consumer spending), which must be covered if the bottling plant is to employ all the power it receives.  Failing this, power goes to waste and ultimately the dam is required to shut off some of its turbines.

Inventories

     We can develop this metaphor further by introducing accumulators (batteries) in the bottling plant, which store electricity for later use. These represent the inventories of firms operating in the consumer market.  Once these are filled, production must cease since it is clearly absurd for a firm to produce more when it cannot sell its existing stock - just as it is absurd to keep charging fully-charged batteries.

 

Part Two: Symptoms and Cures

A/ Conventional Economic (Mis)management

Debt-Finance

     One obvious method of getting more water to the bottling plant is by drilling for it.  At first glance, this seems to be a satisfactory solution - but it soon becomes evident that the drilling is lowering the water table or emptying reservoirs, leading to even more water being absorbed or sequestered in the long-run (thus increasing the difference between upstream and downstream flows), and eventually entailing even more drilling to fill the gap.

     This is, of course, the method of filling the price-income gap through increased debt - which invariably results in a greater gap in the future due to debt repayments, (not to mention interest and unspent bank charges), necessitating even more borrowing. This debt-money may be distributed to consumers directly as loans, or indirectly as incomes/profits viaincreased public or private production, especially capital production. The downward debt spiral is quite analogous to digging deeper and deeper into a hole.

Other Methods

     Alternatively, one could transfer surplus electricity to another dam-plant complex in exchange for part of its water supply, thereby shifting the problem to someone else.  This represents running up a trade surplus, which reduces one's own price-income gap, but only at the expense of exacerbating someone else's.

     Similarly, one could drill in someone else's turf for the water one requires - in return for permitting him to do so on one's own turn in the future.  This is analogous to foreign investment, where funds from outside are used to cover the gap, but will need to be repaid later: the gap in the present is thus covered only at the expense of re-creating it in the future.

      It should be clear that none of the conventional methods solve the problem of the gap: they simply deflect the problem to another time or another place.  Furthermore, just as continuous drilling damages the land, so too does ever-rising debt damage society.

B/ The Social Credit Solutions.

The National Dividend

     Let us imagine a bottomless lake in the vicinity of the dam-plant complex.  It is easy to see that a sufficiently large channel from the lake to the downstream flow - and thereby to the bottling plant - would suffice to solve the problem of the gap permanently.

    It may come as a surprise to many, but such a bottomless lake does indeed exist in the financial sphere.  It is coinage sovereignty: the power of the State to create money in any quantity whatsoever.  The channel that supplies the downstream flow with the water it needs, is the National Dividend - money created by the State (ideally through an independent government body like a National Credit Commission), supplied to consumers as a periodic payment issued independently of employment status and (most of it, presumably) spent on the goods and services that the economy has already produced.

The National Discount

     There is another method of solving the problem of the gap. By aerating or carbonating the downstream flow, it is possible to increase its size even without increasing the volume of water - and thereby ensure that all the power received by the bottling plant is properly utilised.

     This is analogous to the other Social Credit solution to the problem of the gap, the National Discount, (also known as the Just Price or the Compensated Price): the application of a rebate  on all retail goods and services (similar to a subsidy but financed by the State's coinage sovereignty) that enables the existing flow of consumer incomes to purchase the entirety of the goods and services that an economy generates.

     Both remedies not only eliminate the gap in the present, but - and this is the key difference with the conventional methods - do so without making it larger in the future or larger for anyone else.  That is why they are solutions, not deflections.

Conclusion: Managing The Flow.

     Almost all the major civilizations that we know of, arose on the banks of one or more rivers.  Managing the water flow, so as to avert, or at least mitigate, droughts and floods, was one of the key challenges facing their members, and over the course of centuries, they rose to this challenge, and through their success in meeting it, laid the foundations for the subsequent splendour of their societies.

     In the late nineteenth and early twentieth centuries, men mastered another flow - that of electricity - and here again, their success paved the way for the technological wonders that we take for granted today. Such has been humanity's success in managing both these flows, that, outside war zones, disaster zones and some poor, remote areas, no one feels compelled to stock up on either water or power, thanks to the steady, secure, and sufficient supply of these to the general public.

    The long overdue challenge for mankind is to establish a similar supply of money: one that is secure, steady and sufficient for the day-to-day requirements of the individual.  It should be noted that this is, technically, a much simpler task than providing water or electricity, since money is a creation of man, whereas the other two have to be drawn from nature.  Perhaps this is also why the political difficulty involved is so much greater.

     Only once the provision of a steady, secure and sufficient supply of money is achieved, will we finally be able to concentrate fully on managing the most important flow: the flow of time that constitutes our lives.  

 

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[1]Arindam Basu, “The Scales and the Dam” http://www.socred.org/s-c-action/social-credit-views/the-scales-and-the-dam

[2]Cf. A.R. Orage, The BBC Speech on Social Credit: “Now while the fact of the Gap is the important thing, the explanation of the gap offered by Major Douglas appears to me to be convincing. He says that much of the money put into the Productive system as bank-loans never, in fact, gets out as Income during the same period in which it is put in. It is used simply to transfer capital Goods from one factory to another, and thus while it adds to the Price-stream, it does not add to the income of us shoppers.” http://www.socred.org/images/other-authors/BBCSpeechOnSocialCredit.pdf

 

 

 

 

Last modified on Saturday, 30 March 2019 13:27

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