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Tuesday, April 14, 2020

Extract: Development Economics

Hyperinflation in agro-money

As we discussed earlier, agrarian and developing economies face a different challenge from those that spent centuries transitioning from agrarian to industrial and then to service economies. In agrarian economies, very often grain itself is one of the currencies in circulation. In rural India, for instance, a poor villager may have no income sources, but might still be able to grow some grain and barter some grain for some cooking oil, salt, and vegetables.

But when technologies have made the supply of food-grain suddenly much larger that it was before, the value of the grain as a currency correspondingly depreciates. For the agrarian villager, it is the equivalent of hyperinflation in the prices of goods he was accustomed to buying using grain that he grew. So far, India and other similar countries have maintained controls over food import and have artificially controlled food-grain prices. But such moves have had the inevitable side effects on productivity,
essentially providing an incentive for people dependent on agriculture to remain dependent on agriculture rather than learning some new skill.

Needless to say, in the absence of some scheme of solving the meta-knowledge problem, it is not clear whether they would have been able to learn new skills even if the government had not interfered with market forces. There may well have been mass starvation or violent rebellion had the government controls been removed and the meta-knowledge problem left unresolved.

Securitized first aid

So rather that focus on whether the past government responses to rapid changes in the relative value of knowledge were appropriate, we might instead try to anticipate the knowledge problem and the welfare problem and formulate ways in which we might discover paths toward a more productive future. In the first place, a structure such as Knowledge Backed Securities would need to be created and tested.

But since it is unlikely that all people are likely to be able to be retrained and employed immediately, there is also some cause to call for a negative income tax such as the 17th century Poor Law in England, as Hayek suggested. But since poor countries cannot afford such extensive expenses, an alternative strategy would be to provide such minimum income guarantees as loans, and to provide them via training schools that provide retraining so that all people receiving such assistance are also receiving new
skills training so that the need for assistance will disappear over time.

Such welfare loans can be created by any government no matter what resources it has, since this is credit money that is being created. The burden is taken by the currency rather than the fiscal budget. Such handouts would also have the effect of stimulating local demand, and creating an opportunity for entrepreneurs to supply that demand in a way consistent with the desires of each local community. The only thing to be careful of is that all loans should be securitized and traded publicly so that the market will demand disclosure of data and ensure spontaneous monitoring of training school performance.

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