Outgrowing Adam Smith

Radical Change

In the next few decades, there will need to be a radical change in the way our economies work.  Some visionary economists have described how we need to change the structure of our economy to limit global warming, respect global limits and reduce poverty.

Mission Economy

Marianne Mazzucato ¹ describes the need for a Mission economy, using the Apollo programme which took a man to the moon in 1969 as an example.  In Mazzucato’s view, government should be a “value-creator” driven by public purpose.  It should create the markets to deliver solutions instead of just “fixing” markets. The Apollo programme created the markets for the products needed for space travel and governments created the markets for Covid Vaccines ² .

“I call this different way of doing things a “mission-oriented” economy.  It means choosing directions for the economy and then putting the problems that need solving to get there at the centre of how we design our economic system.”  ³

The Doughnut Economy

Kate Raworth ⁴ describes the problems in the shape of a doughnut.  The outside ring of the doughnut represents the planetary limits that we should not exceed.  The inner ring of the doughnut describes the social foundations that everyone needs.  Raworth describes seven ways to think like a 21^st century economist, replacing the stilted formal approaches of conventional economics with viewpoints that better represent the 21^st century world.   The monetary economy is an embedded part of a wider living entity, including society, and nature, powered by the sun.  We need to incorporate a view of human nature as complex social beings, not just monetary calculators.  We must distribute by design, rather than imagining that the wealth produced by some people will be distributed to everyone through generosity and taxes. 

New monetary and Economic Systems

Developing the new monetary systems and the future economics needed for the next century will involve a much larger element of studying government strategy and control.  This would form a major element in future economics courses – unlike current economics which regards government interference as almost anathema.  Governments should also support diverse forms of new community initiatives as alternatives to profit-driven “free” enterprise.

Some insights can be gained from the insights of numerous green economists including  James Robertson, E.F. Schumacher, Kenneth Boulding, Nicholas Georgescu-Roegen, Hazel Henderson and Richard Douthwaite, who

“ broadens the perspectives of economics beyond the concerns of the rational economic man and seeks to include the perspectives of those who are marginalised within the present economic structure -primarily women and the poor of the world- as well as taking seriously the needs of the planet itself. “ ⁵

One form of government control which is already widely used is government regulation of land use.  There is a strong case for adding  some form of land use taxation ⁶ (ref)

The importance of money creation

Methods of controlling credit, lending and money creation are less well understood.  Recognising how money creation influences the entire direction of the economy, we need to give government more influence over money creation in order to develop an economy with more strategic direction to face today’s challenges. At the same time, the preponderance of money created through commercial lending needs to be reduced.

There is considerable scope for gradual changes altering the way the existing monetary system works.  Changes will need to be gradual. Money relies on confidence.  Once confidence wanes, then the value of a particular monetary instrument can vanish remarkably quickly. The sort of drastic changes envisaged by, for example, sovereign money or full reserve banking ⁷ are probably impractical as well as being unnecessary.

Specialist Banks

Specialist banks, such as national or local development banks, or banks for specific purposes can influence money creation and distribution without disturbing the existing conventions. These banks have a remit to lend for specific purposes, so they provide a comparatively uncontroversial way of providing money for specific purposes ⁸.

Alternative Currencies

A more radical route to providing alternative sources of money is promoting local currencies, or specialist currencies.  This is an area where there is considerable innovation and experimentation.  There are difficulties but this provides one route to promoting specific types of economic activity, like waste collection ⁹.(Lietaer & Dunne 2013)

ref to digital money

State Money Creation

The most obvious way to create additional money, is for the state to create it. By abandoning outdated monetary dogma, the state can create more money by typing numbers into the central bank’s computers.  

“Central banks and governments together can create nominal demand in whatever quantity they choose by creating and spending fiat money. Doing so is considered taboo –  a dangerous path towards inflation perdition. but there is no technical reason money finance should produce excessive inflation and by excluding this option we have caused unnecessary economic harm.”           (Turner 2016:214)

Governments have been required not to create money because of a fear that they would overuse this privilege.  But preventing nation states from creating money has not prevented financial crises.  Indeed, the most common cause of financial crises is that private credit created by banks has been poorly controlled.  Reinhart & Rogoff (2009:271) report that financial liberalisation often precedes crises.

Adam Smith accepted that state money creation could be helpful.  He mentions the printing of paper money by the State of Philadelphia with qualified approval.  He wrote that the success depended on:

 “The demand for some other instrument of commerce…..secondly on the good credit of the government…….Thirdly upon the moderation with which it was used”  (Smith 1999:410)

Pennsylvania’s paper notes were successful because they were issued in moderation, unlike some other early American colonies, who issued too much paper money with disastrous results.  Galbraith (1975:63) notes that the prejudice of 19^th century scholars meant that the problems caused by over-issuing paper money got far more publicity than the benefits of a moderate issue.  Government money creation has been advocated by several eminent economists as part of proposals for Full Reserve Banking  (Friedman 1948).