On Philosophy

December 21, 2006

Another Economic System

Filed under: General Philosophy — Peter @ 5:06 am

I enjoy pointing out capitalism’s flaws on a regular basis, probably because most people seem to unquestioningly accept it as the way things should be done. People tend to respond in two ways, either they think that I am advocating communism or that we just have to live with capitalism, as it is the best economic system possible. I will attempt to put both of these responses to rest by outlining an economic system that is neither capitalism nor communism. Although I wouldn’t argue for the system I present here, since I haven’t worked out all the details, it is possible that it is superior to capitalism, and it certainly isn’t communism.

Let’s start with the idea of simply taking our current system and paying everyone (even those already employed) enough to live on (with a few luxuries). Although it would be nice it wouldn’t work. In response to such payments there would be massive inflation, meaning that we would have to continually increase the payments if we were to maintain them as enough to live on, which would in turn result in more inflation. This would result in either never-ending inflation, or, if wages were held constant, it would increase until almost everyone was making roughly the same amount of money (whether they were working or simply living on the handout), at which point there would be no incentive to work.

To correct for this problem the prices of goods must be fixed in some way. Now we could simply rule that the prices for existing products couldn’t be altered, but this would leave us with no way to price new products (and problems if people’s preferences changed). We might assume some kind of committee could do it, but there are too many products and the committee would be bad at pricing them even if they didn’t become massively corrupt (which I would expect). The solution is to keep markets in place, but, instead of allowing companies to adjust their prices, have the prices controlled by some kind of algorithm. The computer system would attempt to maintain a balance between the demand for competing products, raising the prices of products that are demanded more and lowering the competing items. This is what companies naturally do on their own, but because it is a computer that is setting prices in response to demand we can program it to keep the total cost of living at roughly the same amount. New products would have to be introduced in trial areas in order for the system to gather data before they could be released to everyone.

Obviously these changes would drastically impact industry, and I suspect that paying people fixed wages would become impossible; instead employees could receive a share of the profits (with different employees having different sized shares, naturally). Essentially this would be making all employees stockholders and then paying them through dividends, which is not as radical an idea as it might sound. Foreign trade would also be a potential problem. Products sold by foreign companies would have to have their prices fixed in the same way that local companies do, which would discourage some foreign trade. Local companies could sell at any price they wished outside the nation however. What makes foreign trade tricky is considering what would happen in the case of a trade imbalance, which I haven’t calculated yet. Feel free to tell me if you work it out first.

But the big question is where the government will get the money to pay everyone. Obviously if the government printed new money this would result in massive inflation, resulting in the system collapsing (side note: inflation obviously wouldn’t manifest as increased prices. Instead people would all have more money, meaning that they could buy more things. This would probably result in shortages, and thus money would have less buying power, as not all items could be purchased at all times. And this in turn would discourage people from working, since their paychecks mean less). One way to reduce this cost is not to pay absolutely everyone. Obviously people who are working don’t need the money as much as those who aren’t, but it should be equally obvious that we couldn’t simply not pay those who are working, as this would encourage people to only work at high paying jobs. Instead we could gradually reduce the amount that we are paying people, based on how much they are earning, say a reduction of one dollar for every two they earn. In essence this would be a 50% income tax on the first 2 x N dollars everyone makes, where N is the amount we pay everyone (a 25% income tax on the first 4 x N dollars would also work). The government would also have to heavily tax the profits from sales, probably somewhere in the range of 20% to 50% of the item’s price. Finally banks would have to be nationalized, meaning that the government would be the only bank. Together these measures would ensure that the government had enough money to pay everyone. (Everyone either saves money or spends it. If they save the money it goes to the government. If they spend it the government gets some fraction of it, the rest going to someone else, who must either save it or spend it. Eventually most the money ends up in the hands of the government, excluding loose cash.) Obviously the government (like most modern banks) would keep some reserves on hand to cover those who want to withdraw money, but if too many people wanted to withdraw money at the same time then the government would have to print money, causing inflation (this is one of the few ways that inflation can occur in this system).

Now no system is perfect. One of the flaws of this system is that it is hard to determine how items such as land should be priced. Another flaw is that even an automated system for pricing items might be fooled (for example the company could pay people to buy its products in the test areas, fooling the computer into thinking that demand was higher, and resulting in an artificially high price). A third problem is that it still encourages certain activities that don’t create wealth (such as advertising), a problem faced by any system in which markets are used to determine prices.



  1. I do not completely follow why you say that a guaranteed minimum income would result in massive inflation. As a matter of fact, I have not seen the inflation problem as a common argument against guaranteed minimum income.

    I do believe an economy where the basic needs (food, shelter, clothes) are guaranteed and individual merit (through work or other achievements) provides the extra luxuries (car, TV, phone) could be a quite humane system. However, there is no proof whatsoever that people like luxuries enough to keep on working. If a majority stops working, there will eventually not be enough food/shelter/clothes for everybody, and thus not enough to guarantee the basic needs.

    Comment by mandarine — December 21, 2006 @ 7:00 am

  2. I don’t see how this is different than any other command economy. It’s not full communism, obviously, since you aren’t paying all people the same, but no one has ever even attempted full communism either, so that’s moot anyway.

    Also, like Mandarine, I question the assumption that it’s impossible to pay people a minimum wage without causing inflation. What if you just gave out food stamps and an $X/mo housing voucher to everyone? Since those things would have to be spent on food/housing, it probably wouldn’t cause general inflation, just specific inflation in that area.

    Comment by Carl — December 21, 2006 @ 10:43 am

  3. We can see view the price of items as being determined by a demand curve, where the supply of money represents income and the demand for money represents how companies want to charge for their products. By giving people more money we increase the supply of money, which causes prices to rise. This is inflation, since then people must be paid more in order to have the same purchasing power, repeating the cycle. And you can’t inflate just one area (although that would still be bad, as you wuld have to spend all of your earnings on the hyper-inflated goods), at least not under any economic models I am familiar with. Finally the government would still need to print money to do fund this, causing inflation. If they got money by raising taxes they would have to raise taxes to the point where people are all paid roughly the same, negating the motivation to work.

    If not enough people are working one could always lower the amount being paid, which would stimulate some people to get jobs. But I would expect that in such a system most people would take part time jobs, effectively reducing the workweek but without laws.

    And why are “command” economies necessarily bad? The argument against command economies is that prices are not set by markets, which is not the case here.

    Comment by Peter — December 22, 2006 @ 12:27 am

  4. OK, I get your point about how giving more money would create inflation. But in our western societies, everybody has more or less already enough to live. Therefore providing everybody with the proper amount would simply be a redistribution of welfare money or of the lower portion of wages (this is essentially the principle of guaranteed minimum income: it replaces welfare, unemployment checks and minimum wages policies with very little bureaucratic complexity, while essentially being a different way to distribute the same amount of money). If it is the same overall amount, then there is no inflation.

    If not enough people are working in order to guarantee enough to live for everyone, then it means the system fails (I mean the guaranteed minimum income system, not yours) because you cannot guarantee everyone’s basic needs anymore.

    I believe another argument against ‘command’ or ‘planned’ economies is bureaucratic weight: when the state has to decide each and every price, production, distribution, then it is bound to arouse a lot of frustration in citizens. However, I argue that market economies with fierce competition also generate an awful lot of wasted effort in the form of competition gone too far: the cost of advertising is one such example of this waste; and job insecurity resulting from a volatile market: these are hidden costs to economy and society as a whole, which probably are of the same order of magnitude than misadjustments, corruption and mistakes in a planned economy (but I have no figures to back this up).

    Comment by mandarine — December 22, 2006 @ 8:29 pm

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