New Sherwood

Binary economics: the solution to the global financial crisis?

Because I have a degree in economics I have learned to distrust the entire field of economics, and to treat new economic theories with extreme caution. However, what these people call “binary economics” sounds remarkably similar to Catholic distributism, or at least tends in that direction:

“In its economics aspect, binary economics is a market economics whose markets work for everybody. Furthermore, it upholds private property but private property (and the associated income) for everybody. A summary might be – a justice which creates efficiency and an efficiency which creates justice. An alternative summary is – the use of central bank-issued interest-free loans, administered by the banking system, for the development and spreading of various forms of productive (and the associated consuming) capacity thereby creating a balance of supply and demand (as required by Say’s Theorem) and forwarding social and economic justice.”

“Binary economics is fundamentally different from all forms of conventional economics (be they expressions of right-wing, centrist or left-wing theory). Thus, unlike most mainstream economics, binary economics accommodates belief in God, unicity and ethics. It directly addresses the main environmental issues; does not assume that humans only follow their own immediate short term self interest; ends economic colonialism; appeals to people of faith and of good faith; and does not assume that humans (as distinguished from capital instruments) do all, or nearly all, of the physical creation of wealth.”

Interesting. Here’s what they propose as a solution to the global financial crisis (do read the entire article for context):

“The solution can be summarised as the issue of national bank-issued interest-free loans (administered by the banking system) for the development and spreading of productive (and the associated purchasing) capacity to all individuals in the population. All environmental capital projects, all governmental capital projects, micro-credit, small business, student loans and the private sector if wide ownership is involved are covered by the solution.

At the same time as the national bank loans are issued, the banking system must be curtailed in its present ability to create money out of nothing and lend it for any purpose except the development and spreading of productive capacity. The curtailment can be done by a rise to 100% banking reserves.

At the core of the solution is the use of interest-free loans issued by the central bank for the purpose of productive capacity. Such loans cannot be inflationary, indeed, they are counter-inflationary ─ when the loans are repaid, they are cancelled leaving behind in the economy productive, income-generating capital assets. Thus productive assets always back the currency.

Crucially, the loans originate with the central bank. By originating the money with the central bank (rather than the banking system) society’s ownership of the money supply is established and so the money can be interest-free and focused on the purposes of productive capacity and the real economy so as to achieve a Say’s Theorem balance of supply and demand while, at the same time, forwarding social and economic justice.

Thus it is proposed that a country’s central bank should create interest-free loans. On repayment, the loans (like the principal of normal bank loans) are cancelled leaving the capital projects in existence. The money for repayment of loans is collected and repaid as it is at present except that the capital projects would cost, roughly, half, even a quarter or less of what they cost today.”

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April 1, 2008 - Posted by | Uncategorized

4 Comments »

  1. article is very good ,and suggestion is also good ,but i think the impact of global financial crisis or us recession would be worsen on the world’s development ,and udcs would be affected badly ,country like india brazil

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    Comment by rishu | April 1, 2008 | Reply

  2. At the core of the solution is the use of interest-free loans issued by the central bank for the purpose of productive capacity. Such loans cannot be inflationary, indeed, they are counter-inflationary ─ when the loans are repaid, they are cancelled leaving behind in the economy productive, income-generating capital assets. Thus productive assets always back the currency.

    In can be very difficult to figure out what is and isn’t productive, though. This proposal seems to assume that ‘productive capacity’ is a known thing into which money can be channeled, just by deciding to do so, and that avoiding channeling money into unproductive things is straightforward. That is far from clear. It is possible to buy all sorts of unproductive tractors, or factories, or farmland, or software packages, or whatever.

    Of course there are all sorts of things money should not be channeled into, on moral and cultural grounds. But if we set that aside and look at only morally acceptable options we are still stuck with the fact that what is and isn’t productive is a complex and radically context-dependent determination.

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    Comment by Zippy | April 8, 2008 | Reply

  3. “This proposal seems to assume that ‘productive capacity’ is a known thing into which money can be channeled, just by deciding to do so, and that avoiding channeling money into unproductive things is straightforward. That is far from clear. It is possible to buy all sorts of unproductive tractors, or factories, or farmland, or software packages, or whatever.”

    That’s obviously the crux of the difficulty – that, and the problem of knowing whether the person taking the loan will be a competent and productive steward. However, I don’t think it needs to be any more “difficult” than our present system. Presumably, people will still need to apply for their loans and meet certain qualifications. A certain percentage of them will be turned down. There will also be a percentage of “bad” loans, and there will need to be some kind of mechanism to compensate for these.

    It would not be a perfect system by any stretch, but it would eliminate usury – not an insignificant point – and should end up more justly (I did not say “efficiently”) allocating resources and stabilizing the currency.

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    Comment by Jeff Culbreath | April 11, 2008 | Reply

  4. However, I don’t think it needs to be any more “difficult” than our present system.

    Providing zero-cost capital based on a bureaucratic process will eliminate usury and won’t be any more difficult than the present system? Color me sceptical.

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    Comment by Zippy | April 13, 2008 | Reply


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