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.

Extract: On Poverty

Hayek also points out that there is also no substantial prevention of the competitive knowledge discovery process if governments create schemes for subsistence welfare. Even 17th and 18th century Britain – the first country to undergo the huge changes in the relative value of knowledge that accompanies industrial growth – had what was known as the Poor Law, which provided for subsistence initially for the landless laborers no longer needed due to rises in agricultural productivity. Indeed, even if systemic poverty is eliminated, fallibility ensures that from time to time, those who are successful may suffer sudden misfortune and lose all their wealth, and perhaps some abilities. 

In such cases, the government could provide for a minimum subsistence if the electorate so wished, without causing any destruction of the underlying knowledge discovery and wealth creation process. Hayek cautions that though he government may give financial assistance through some kind of negative income tax that established a minimum income level, but they should not seek to create monopolistic bureaucracies to deliver it. They should instead allow competitive private players to deliver the basic services to the recipients of basic welfare and let the welfare recipients choose the providers they want. This could be done, for instance, by issuing food stamps, clothing stamps, shelter stamps, and healthcare stamps that could be used to purchase food, clothing, shelter, and heath insurance from competitive private players. A monopolistic bureaucracy that provides the services rather than the targeted subsidy is sure to distort the knowledge discovery process by crowding out the competitive process. Hayek also agreed that in wealthy countries the level of welfare might also be deemed to be higher than a level of basic physical subsistence. 
To take the concept of basic welfare further, it is also conceivable that basic financial assistance to the indigent can be structured as an at-risk loan. Those that work themselves back to a degree of self-sustenance can repay their loans as a percentage of their earnings until it is fully paid back, but those who do not manage to do so would not pay it back as long as their income remained below what was defined as subsistence in that nation. Once we study the nature of banking and bank credit, it will become clear how any country, including poor or developing countries, might use this technique, which we will discuss again in the chapter on Development Economics.

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