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Friday, 08 March 2019 17:31

The Hydroelectric Dam as a Metaphor for Social Credit

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     In a recent paper entitled “The Scales and the Dam: Static and Dynamic Conceptions of the Economy”, Arindam Basu has introduced a brilliant metaphor that can be adapted in various ways to explain both how the economy functions under the existing financial system and how it would function under Social Credit: “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]As Arindam notes, this analogy can be developed further in a variety of ways.

     There is a particular adaptation of it which I wish to introduce for the purposes of illustrating the Social Credit approach to finance and to economics in a way that is perhaps clearer than has hitherto been possible.

     So let us imagine that yes, 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.

     Using this metaphor as a point of departure we can easily explain in picture form both the Social Credit diagnosis, i.e., what is wrong with the current financial/economic system, and the Social Credit remedies, i.e., what should be done to fix it.

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 50% 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.
 

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 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.

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 some 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 as an example, it would 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.

 Conventional Economic Management

     Now, before we look at how Douglas proposed to rectify the system, it would be instructive to  consider how the present system attempts to compensate for the chronic lack of cost-liquidating consumer buying power in the form of income. This imbalance has to be dealt with somehow in order that some kind of equilibrium may be achieved.

     It is possible and it is sometimes the case that the economic system achieves parity between the flows by lowering the flow of costs/prices, thus bringing them into closer range of consumer incomes. This happens whenever businesses sell below cost for a fixed period when times are bad or when they do so to liquidate their operations because they are headed for bankruptcy. This will allow them to pay off as many creditors as possible.

     It would be as if the stream of costs generated alongside the electricity of the hydroelectric dam were deliberately reduced in order that it was closer in volume to the downstream flow of water (which, by our analogy, represented the flow of consumer incomes). 

     But the problem with this method is precisely the fact that it does not meet all costs and thus leads to business and economic stagnation. For this reason, it is preferable to lower costs using government financing, as is the case when governments subsidize production, if one is going to attempt to close the gap by lowering costs.

     Generally speaking, the better and more effective manner of closing the gap is to increase the flow of consumer incomes so that it equates to the flow of costs/prices. This would be tantamount, in our analogy, to increasing the downstream flow of water so that its volume mirrors or corresponds to the costs of electricity (which, by way of illustration, we could assume to be $100 per m3, if every 1m3of upstream water flowing through the dam generated 100 dollars in costs) and hence, given our previous stipulations, to the flow of upstream water moving down through the turbines.

     Increasing the flow of consumer incomes often takes the form of new production, i.e., an expansion of production facilitated by borrowed money from the banking system. This expansion can be either public or private. It is most advantageous when it takes the form of capital production, rather than consumer production, since capital production, while adding to the flow of consumer income by distributing additional wages, salaries, profits and dividends, etc., will not add in the immediate or near future to the flow of consumer costs and prices, or, in the case of government production, of taxes. Thus, governments may build roads, hospitals, schools, harbours, airports, pipelines, other forms of infrastructure, whether needed or not, while business may produce more factories and buy more machinery and rely on clever advertising to sell the output some time down the road. An egregious example of this method of filling the gap would be when a government decides to go to war, at least in part, as a method for re-inflating a struggling economy.

     Insofar as all of this and other forms of production are accomplished mainly to provide additional incomes via jobs and profits so that what we have already produced can be paid for and distributed, it is waste … the same result could have been effected without all of the added work and the necessity to pay for and absorb its future output simply by the state ‘writing a cheque’ for the missing income, more on that soon.

     To revert to our image of the hydroelectric dam, expanding production would be akin to building a second or third hydroelectric dam ever so often and injecting their downstream flow into the flow of the first dam so that the downstream flow of the first would equate (if there were any purpose in doing so, which is stretching the metaphor a bit) to the upstream flow coming down through the turbines.

     This is why there is such an emphasis on economic growth under the current financial system. The economy must grow, must expand, at an exponential rate whether the resulting production is truly needed or not, just to maintain equilibrium between the flow of consumer goods and services and the flow of consumer incomes.

     Another way of increasing the flow of consumer income would be to get consumers to borrow new money into existence viamortgages, car loans, student loans, personal loans, credit cards, lines of credit, installment buying plans, etc. This adds to the flow of consumer buying power, does not increase the flow of costs in production, but does add to the flow of costs that will be debited against future consumer incomes.

     This would be equivalent to a group of fire trucks using their hoses to add to the flow of downstream water at the bottom of the dam (thus increasing consumer buying power), but of course whatever they put in they will eventually have to take back out (to maintain the integrity of the metaphor). It would work as a method of increasing the general flow of downstream water because the rate at which additional water is added is greater than the rate it will be removed, just as consumer debts are generally contracted at a faster rate than they are paid off and hence the body of outstanding consumer aggregate debt grows over time.

     A final method for compensating for the gap is to export more than you import, or to establish a ‘favourable balance of trade’. This actually lowers the gap in two directions: it lowers the flow of costs/prices that must be recovered from consumers domestically and it increases the flow of consumer buying power in the form of the profits and incomes of the exporting companies.

     It would be as if some of the electricity produced by the dam were sold to foreigners in exchange for more water to increase the flow of the downstream water. This would close the price-income gap in both directions; prices are lowered as some of the product, the electricity, is sold abroad, while the flow of incomes is increased domestically. 

     Filling the gap with more debt-money from the banks is inflationary because the associated costs which it generates will eventually filter through to consumers as increased prices, taxes, or debt-serving charges. In order to maintain the standard of living under these conditions of steadily increasing financial strain, people will demand wage and salary increases to compensate. But these too are costs and eventually they will filter into the consumer market as increased prices. The purchasing power of each unit of currency thus depreciates over times.

Social Credit Economic Management 

     So how does Social Credit propose to correct the artificial lack of producer credit and how does it propose to correct the artificial lack of cost-liquidating consumer income?

     Obviously, the financial system needs to be redesigned. A National Credit Authority would be established and tasked with the responsibility of ensuring that the financial system will be flexible and accurate enough to provide whatever monetary parameters and support the actualization of the physical economy requires. A fundamental Social Credit axiom reads as follows: “Whatever is physically possible (and desirable) should be financially possible.”

     In the case of credit for production, the productive capacity of society, composed of raw materials, labour, machinery, know how, etc., could be regarded as the assets against which new money can be created and issued for the purpose of catalyzing production. If there are unmet needs for goods and services on the one hand, and an unused capacity to supply those goods and services on the other, then additional money for production can and should be created until those needs are satisfied or until society’s useful productive capacity is fully drawn upon. In the case of the latter eventuality, additional credit could still be issued to expand society’s useful productive capacity accordingly. 

    In terms of our metaphor of the hydroelectric dam, if the dam is only working at 60% of its capacity and the demand for electricity requires an additional 20% of capacity in order for the demand to be fully satiated, then the idea is that more water should be funneled through the turbines by one method or another to increase electricity production to 80% of capacity. 

     While it may not always be possible in the physical world to increase the flow of upstream water moving through a dam, it is always possible in the financial realm to increase the rate at which producer credit is created and can be made available to productive organizations, provided there is a) a demand for the resultant production (and consumers are therefore willing and able to pay for it) and b) there are adequate resources to meet that demand. Unlike water, money consists in intangible numbers and we can create as many of those as is necessary to put the productive mechanism in action. There should be no artificial limits on the flow of producer credit such as exist under the current financial system.

     Similarly, there should be no artificial limits on our consumptive power in terms of cost-liquidating buying power or income. As it stands, for every 100 dollars in cost-prices that must be recovered from consumers, we are only automaticallyprovided through the same productive process a portion of the necessary purchasing power in the form of incomes, let us say 50 dollars (just to illustrate the point). The additional consumer purchasing power necessary to clear the remaining production has to be obtained from additional production unrelated to the production currently on the market, or from consumers borrowing new money into existence, or from favourable trade balances, etc.

     Social Credit proposes that the National Credit Authority will also be tasked with the responsibility of determining the size of the recurring price-income gap in each economic period and will compensate for it by creating and issuing free of debt, or of any necessity of repayment, supplementary consumer credits in the form of a Compensated Price Discount and in the form of a National Dividend. 

     The compensated price would be a discount across the board on all retail goods and services which would mirror the real costs of production. Since the real costs of producing anything are the consumption incurred in that production (i.e., the costs of the raw materials, labour, machinery, etc., used up in production), nothing should ever cost more in financial terms than the costs associated with the corresponding consumption. Unfortunately, because companies in the line of production often have to collect money to recover capex expenditures (the water absorbed into the water table in our hydroelectric dam metaphor), the prices of goods and services are artificially inflated above the money that consumers have been given to offset those prices. The compensated price effectively takes those capex charges out of prices, thus bring them into closer range of consumer incomes, while simultaneously reimbursing via the action of the National Credit Authority the out-of-pocket expenses of the retailers, so that their financial costs can be met in full.

     This would be equivalent to the state providing the hydroelectric dam with a flow of credit equivalent to the costs represented by the water absorbed into the water table so that consumers will not be charged directly for such costs.

     The remainder of the gap will be made up of the dividend. This money would be a direct disbursement of debt-free credit to consumers in equal proportions as an income delinked from employment status.

     This would be the equivalent of the state increasing the flow of downstream water.

     Both the compensated price and the dividend will be issued in lieu of all the conventional methods that are currently relied on to the fill the price-income gap. When these monies are received by retailers they will be used to pay down lines of credit (in which case the money is destroyed) or they will be used to restore working capital (in which case the money will not be re-injected as expenditures, except alongside a corresponding set of new costs).

     In this way, the financial system will be restored to a state of a perfect and automatic self-liquidating equilibrium, where the flow of costs and hence prices is mirrored by an equal flow of consumer buying power in the form of cost-liquidating income. It will no longer be necessary to try to meet our costs by the futile exercise of attempting to borrow ourselves out of debt.

 

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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?fbclid=IwAR3kAc0BnfyhjGaWeiS_R_gT0eFQJnxUQLGBDF4-twxVbWYSWShGUFWBqBU

[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 Tuesday, 26 March 2019 20:44

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