no third solution

Blogging about liberty, anarchy, economics and politics

SEC Outlaws Interpersonal Loans

November 27th, 2008

Citing a TechCrunch article indicating that the SEC is shutting down Prosper.com, Jason Kolb comments on The Money Mafia known as the Federal Reserve system. There is some merit to what he has to say, but I think he overlooks the most important points. I wasn’t able to leave a comment at Jason’s post for some reason, but I was going to respond here anyways.

To review, Prosper.com is a peer-to-peer lending network which matches people who need money, with people who have money to lend. According to the TechCrunch article, the SEC claims that Prosper was selling investments, or could reasonably be construed by the layperson as selling investments, and therefore needs to cease and desist until registering with the SEC and falling under its regulatory umbrella. Prosper, as you might imagine, has maintained all along that it is not selling investments, it’s merely facilitating the free exchange of inter-personal loans.

Kolb comments,

The key here is that Prosper itself was not lending or borrowing, it was simply matching up willing borrowers and willing borrowers. It also provided additional services such as collection and tracking.

As far as I’m aware, this is all true. They charged a nominal fee for this service, just like eBay charges a nominal listing fee for its service: matching buyers and sellers. On eBay, the goods for sale are generally tangible. On Prosper, the “goods” for sale are interpersonal loans. The people lending money through prosper are not purchasing a security, an “investment” from Prosper.

Kolb is correct when he says, in regards to this case, “The SEC is simply acting as the enforcement arm of our private national banking cartel (emphasis in original)”, however, I think he misunderstands the nature of a central banking cartel, or at the very least, grossly overestimates the ability of individuals beholden to a banking cartel, to extricate themselves from its stranglehold by using its funny money.

The real fact is, if private citizens were allowed to freely lend to one another, the private banking cartel that is our central banking system would lose the little control they have over the economy.

Wrong. Prosper.com attempts to work within the current, broken monetary system.

As long as people are coerced into using FRNs, which can be inflated at will, the banking cartel to which he alludes maintains enough control of the monetary system to make sites like Prosper essentially a novelty. The fact of the matter is that the individual, lending on prosper, is simply not permitted to create money out of thin air in the same manner as the member banks of the Federal Reserve system. The banks’ legal privilege is the ability to create money from nothing, or,

The permission to loan into existence, money representing wealth which has not yet been created. In doing so, they are effectively mortgaging the borrowers’ productivity, while risking nothing of their own.

The individuals lending on Prosper are not allowed, by any stretch of the imagination, to create pure debt obligations without forsaking anything of their own, they issue real loans, not fiat credit, which is backed by real assets accrued by previous productivity.

Gresham’s Law states that bad money drives out good money. Federal Reserve Notes are the bad money, and they are backed by the full force and violence of the government. Ultimately, the only thing that can destroy the banking cartel’s monetary monopoly is sound money.

Maybe this is a minor issue, but I think he’s overlooked the biggest part of the problem, and in doing so, he’s saying that the emperor’s clothes are out-of-style. I’m saying that the emperor has no clothes.

Kolb makes his end-goal pretty clear, saying that he wants to create “BitTorrent, for the people,” and that such a system needs to be “Off the radar, empowered to take the risk and the profit that they decide they should take.” If he is not already familiar with agorist/counter-economic philosophies, then it’s certainly something he should investigate. His goals, and the system he wants to assist in implementing, seem to be perfectly aligned with agorist ideas of economic independence, eliminating reliance on the monopoly of the State, and personal liberties..

I’m not trying to slam him for misunderstanding the nature of just how badly broken the system really is. Technical issues of economics aside, Kolb is right: people need to be free. People need to be free to lend to one another, borrow from one another, trade with one another. They need to be allowed to fulfill their own goals, without being robbed blind by a government, or a banking cartel, or both. People need to be free.

Would Digital Money Kill the State?

November 6th, 2008

I’ve involved myself in a little debate at Anarch.me over the past few days, regarding the viability of digital currency, specifically as it would pertain to an anarchist/agorist’s end-goal of dissolving the State. The message thread is Agora on the Internet: Would Digital Money Kill the State?

The gist of the discussion is that somehow, someone could create an independent digital currency that would eventually erode the State’s monopoly on money. I certainly would like to entertain the idea, and I’m not opposed to it in theory, but IMO, the bulk of the discussion there has consisted of bad economics so excuse me for playing the devil’s advocate. The crux of my replies has been “the market can [not] simply will-to-exist something ‘almost as good’ as specie. Whatever the market creates is going to have to be a money-substitute, backed entirely by some commodity or another.”

I have also characterized (perhaps mis-characterized) this idea as a quasi-fiat money, since it seems pretty much arbitrary to me. As such, I see it like counterfeiting; a counterfeiter need only persuade people that the bills he printed in his basement are actually passable. Jonathan counters thusly:

The digital currency is not fiat, as I have explained. Fixed currency cannot be fiat; this defies the law of non-contradiction.

Yes, it is. You either don’t understand what is “fiat”, or you don’t understand what is “non-contradiction”. All that’s required for me to produce more gold is that I outlay the expenses for mining and extraction and assume the risk that I might not find any. Likewise, I should be able to spend money and hire programmers who can create for me, more digital money. I’m not sure that I understand a distinction between what is essentially an intellectual property barrier to produce more “money” and a state-imposed legal barrier.

This is essentially why people can’t just “create” money. Governments recognize this, and accordingly grant a monopoly privilege on note issuance. Private citizens are not lawfully permitted to “increase the money supply,” because everyone would do it, therefore the value of the currencies collapses. Money simply can’t originate through volition or good intentions. Money, in its purest form represents deferred consumption, which according to Say’s Law has its roots in previous production.

Neither does fiat originate from the spontaneous order of a market. Gold’s historic position as a medium of exchange did not come into being because someone (or some group) was successfully able to market Gold, that is, to actively persuade people that gold was a better medium than silver or rhodium or cigarettes. Gold’s rise to the top of the monetary food chain was a more-or-less natural one.

If we aim to use this digital “currency” as a warehouse receipt of sorts, the underlying commodity is the actual currency being used, with either paper or digital claims to that commodity. I’ve got no serious problems with this, except then your digital accounting units would not be fixed in quantity, but would reflect the actual physical stock. The digital claims would document the ownership and facilitate the exchange of a physical commodity without actually having to take delivery.

But, I don’t think this is what Jonathan is suggesting, when he says:

A single-unit digital currency is even more scarce, yet it is much more convenient than the storage and transport of unwieldy metals.

My principal objection to this digital currency argument (and contrary to your assertion, this is the third time I’ve brought it up) is that it attempts to bypass Mises’ regression theorem.

This theorem, and Menger’s comments on the origin of money, are probably the most important (and often neglected) ideas in monetary theory. For a good to evolve into “money” as a general medium of exchange. Bob Murphy comments on Mises’ regression theorem:

We can trace the purchasing power of money back through time, until we reach the point at which people first emerged from a state of barter. And at that point, the purchasing power of the money commodity can be explained in just the same way that the exchange value of any commodity is explained. People valued gold for its own sake before it became a money, and thus a satisfactory theory of the current market value of gold must trace back its development until the point when gold was not a medium of exchange

The market will never (or very rarely) be satisfied with a single unit of anything which people find valuable, so others will aim to produce that thing. And they will. Sound money needs to be an economic good, and a digital currency with zero marginal cost is unequivocally not an economic good.

Jonathan eventually follows up with five objections to specie in an attempt to validate the “single-unit” digital currency envisioned in the thread.

1) Specie, being a physical item, is not available easily for use online. One could trade digital currency that represents a given amount of specie, but not the specie itself. This is also inherently insecure, as I will explain in item four.

That’s kind of what I’m getting at: whatever digital medium develops, it is going to have to be backed by something tangible and real. I have twice (and this is the third time) I’ve objected to the argument in principle by referring either to Menger’s work on the origins of money as a general medium of exchange, or Mises’ regression theorem, or both. My objections on these grounds have been ignored.

2) Specie is not convenient and accessible. It is in the hands of a few elite at the moment (not only inaccessible, but also dangerous). Specie happens to be very heavy, and therefore requires expensive shipping, which also requires protection and insurance from bandits. If it is all stored in one place and digital currency merely represents a portion of gold in a given place, this is a huge security threat as well.

The fact that States may currently control much of the world’s supply of gold is a valid objection. The fact that it is heavy, however, is not. Until and unless delivery is requested, there is no reason to ship the product, transference of title/ownership claims is and has been sufficient in the past. Furthermore, there is no reason that it would all need to be stored in a single place and the ability for any individual to cash out his digital claims to specie and hold them in his own right, is an additional safeguard.

3) It has no clear advantage over digitally traded fiat that would attract laymen. Perhaps it is more stable, and could make us all freer, but these are not things the laymen think about when deciding upon what currency to use – they do not consider ideals, because they have very few (if any) genuine convictions of their own, and they certainly won’t sacrifice extra effort or money towards ideals they don’t have. The average person would rather slide a credit or debit card across a scanner, or type a password into PayPal rather than deal with ownership of a physical item – directly or indirectly (either way is still less convenient).

Again, there is no reason to assume that the bulk of transactions would make use of actual delivery of physical specie. Ownership could certainly be transferred by electronic means. With this in mind, an arbitrarily defined digital currency has no clear advantage over anything else. Its ability to “attract” people is inconsequential, since people are essentially motivated by incentives. If the incentive exists to use some form of payment over another then that currency will gain favor. Currency doesn’t need a PR/Marketing campaign.

4) Specie is extremely insecure.

It is largely in the hands of the statist elite. Thus, basing an Agorist currency off of specie would only benefit these same elites, thus undermining the Agorist movement as a whole.

Because it is in the hands of the elite, basing an Agorist currency off of specie would subject the currency to manipulation because the elites are able to tamper with the price of specie already (and do, extensively).

Being a physical item, whether specie is represented digitally or specie is the currency itself, the value is concentrated in obtainable physical items – making it easier for this currency to be stolen, whether by petty thieves or the State.

Because it is a physical item, it is easier for the State to shut down. It is much easier for the State to find out who has gold and for what purpose (as the gold must first be purchased through the white market, as the people that hold it are – largely – statist elites and states themselves), and it can seize gold much more easily and kill all of the Agorists that were possessing it.

Unlike a fixed digital currency (especially a one unit currency), it is much more difficult for the market to ascertain how much of a specie there really is and where/with whom, so it is therefore much more susceptible to inflation (by sudden introduction of previously unknown supply) and is also, again, subject to manipulation.

5) Because valuable specie is largely in the hands of the few, it is thus subject to arbitrary manipulation, thus undermining its subjection to market forces.

Repeating the same objections over and over again doesn’t make them any more valid.

Specie’s value can only be manipulated by those willing to reckon the sales and purchases of goods and services in fiat. If you operate in a grey- or black-market (assuming the risks inherent therein) you can circumvent most of the manipulation. Specie would quite probably be valued differently on this black market than it would be in otherwise “legal” transactions.

I choose not to respond to the conspiracy-theory “they’ll kill us all” objections. This is a “27 Ninjas” argument. If this is really the case, then it doesn’t matter what you do.

The weakest objection by far is the comment about inflation. Inflation is never the result of productivity. The introduction of more commodity (e.g., gold) in the economy suggests that real productivity has increased, that real trade-offs of risk and reward were made. This is not inflation.

Stop thinking of “money” as a be-all, end-all! Commodity money is an economic good, therefore the production of commodity money signifies the production of real wealth, therefore inflation (which destroys wealth) is not occurring.

Defeating Statism can’t begin with money. Money in its purest form is based on production and exchange. Money, in its purest form bends to Says law, and unlike fiat money, real money is the reward for productivity and a savings for the future.

To the several objections against the current state of affairs, in which the States hold a great deal of gold, yes, this is somewhat of a problem. But if people can ween themselves generally from the State in the first place, their productivity could certainly effect greater change, and reduce the supply of gold in State coffers to a level no longer credibly manipulable, and the black market will eventually consume the white market.

Entrepreneurs, the Firm, and the Knowledge Problem

October 15th, 2008

Standard treatment of entrepreneurship as it relates to so-called absentee ownership/capitalists, is that these people (the capitalists) provide a valuable service in the allocation of goods and services across a market. For example, the Rothbardian treatment is that an entrepreneur’s success stems from prior success as a result of superior business acumen; the market weeds out those prospective entrepreneurs who are not as able to allocate scarce resources, as their counterparts. Salerno notes that entrepreneurial profit arises when others make mistakes in their allocations. Therefore loss is a purely personal responsibility, and profit is fleeting; the result of error on behalf of one’s competitors¹. It follows, that willingness to bear risk, moving into the uncertain future in hopes of profit, sets entrepreneurs apart from the general, risk-averse population.

This treatment is oft-criticized by many left-libertarians, left-anarchists, etc. One objection which I fielded several years hence, was the notion that the Firm suffers from the classic Hayekian Knowledge Problem: the corporation is a centrally-planned quasi-economy.

At that time, I could not answer to the objection, but mustered instead, something along the lines of, “Well, they’re entrepreneurs, and they have to pass a market-test. A centrally planned economy does not have to pass a market test.”

Some might object that most firms don’t really have to pass a market test², either. In the current economy, the prior success, on which the foundations of capitalist wealth are built is more often than not the result of some government meddling and therefore, object the left-libertarians, imagining any large business the magnitude of those with which we’ve become familiar, in a free market, is laughable. Atomistic competition in a free market doesn’t tolerate the profits required for absentee ownership.

This simplification of Rothbard’s treatment appears to suffer from a regression problem: from whence comes the prior success, the profits of which permit one to be an effective entrepreneur?

What has happened, is that our definition has silently changed: we’ve gone from Entrepreneur as Risk-Bearer, to entrepreneur as rent seeker resulting form a haphazard equivocation of two very different economic states: the current state, and the free market. Without making value judgments, if we are talking about the current state, then the objection (at least in terms of economic theory) doesn’t hold water. If we are discussing in context of a free market, we need only demonstrate that the normal profits accruing to entrepreneurial success could permit investment in new ventures, and therefore that the so-called “absentee” owner, is not so much an abomination of free market principles³ as he is often made out to be.

In addition to a willingness to bear risk, the prototypical entrepreneur must also have a longer time preferencethan others. Time preference is the rationale by which one agrees to defer consumption in the present for a greater consumption at some time in the future. So, the entrepreneur earns normal profits on his investments, which he invests in accordance with his time preference. A successful entrepreneur will still direct production and provide the valuable functions of allocating resources across an economy, and directing investment to its most valuable opportunity.

It should go without saying, that these analyses are predicated on sound money and free-markets. In a free market, entrepreneurial loans will be real loans, representing the accumulated savings and deferred consumption, not fiat paper promises backed by fraud and violence. If these conditions do not hold, we can throw the preceding paragraphs out the window.

In a rather convoluted and roundabout manner, we can return to the initial objection against the firm, which as the legend goes, suffers to some extent, from the Hayekian Knowledge Problem. This objection is valid as an argument contra any state-capitalist apologist, but suffers from a similar equivocation error as the objection to Rothbard, above. If we are discussing organization and production in the context of a free market, the basis of this objection (that the Corporation does not face the market test) is null.

Profits and losses would no longer be subsidized in a free market, so we can expect profits to be smaller (representative of opportunity costs), and hence more difficult to accrue in the ginormous amounts required to develop firms the sizes of which we see at present (cf., “economies of scale” that we learn about in school are essentially a fiction).

Since the fictional economies of scale are counterbalanced by very real diseconomies of scale,
firms in a free market would stand in stark contrast to megalithic entities, the profits of which often dwarf the entire domestic production of the smaller nation states in the world. Indeed, the organizational structure of the market as a whole would tend to be much flatter than at present, and the smaller, more agile firms comprising it would be far less susceptible to the Knowledge Problem.

Notes

1. This simple but sometimes counter-intuitive proposal can be illustrated thusly: if all entrepreneurs accurately predict demand, and satisfy their customers, the resultant competition for customers drives profit down to the hypothetical opportunity cost.

2 Corporations are able to borrow at preferential rates, receive different tax-status than individuals (i.e., they can write-off their expenses!) and are often shielded from liability, etc.

3. Some suggest that so-called passive income (e.g., from entrepreneurship) is an abomination. Setting aside the debate over how such things might arise, IMO, absentee “ownership” ceases to exist in-fact, and entrepreneurship would instead be directed by conditional loans. Investor/entrepreneurs would have a valid claim against the production which they assisted by financing.