Private currency to generate funds for effective altruism
In the last few years we have seen two interesting revolutionary ideas on how to change the monetary system. The first is Bitcoin: the most well-known peer-to-peer currency. It has been wildly debated recently and I won’t go into the detail of allegations of use in criminal activities etc (for one thing, I don’t know much about it). My interest is rather in the money creation part. The people who run the Bitcoin software are rewarded for their work with new Bitcoins—a process called mining. Now the pace at which new Bitcoins are mined is limited, which means that Bitcoin creation is a zero-sum game: the more one miner contributes to the Bitcoin software, the less Bitcoins other miners get. Unsurprisingly, this has led to an arms race: miners spend nearly as much on running the software as they get back in form of new Bitcoins.
The second idea is the Chicago Plan, which was debated already in the 30′s, after the great crash of 1929, but which recently was resurrected by Michael Kumhof (senior economist at IMF, of all places). The central idea of the Chicago Plan is to abolish fractional reserve banking—the system by which private banks in effect create money out of thin air. Instead of lending out most of the depositors’ money, banks would effectively have to let them stay in the bank.
Instead money would be created by the central bank/government, a process that would generate a massive seignorage for the government. According to Kumhof, it would also have other beneficial effects, such as killing off the “boom-and-bust”-cycles which he thinks fractional reserve banking are mostly responsible for, and diminishing the wasteful parts of the financial sector.
Kumhof ideas’ have not been well received. Overall, it is remarkable how little reform there has been of the financial and monetary system given that the world had a major financial meltdown 2008 (and was close to an even greater one, in my understanding). Governments won’t challenge the financial system radically in the near future, that’s for sure.
Instead radical reforms can only come from private hands. Let us now compare the two ideas. In the Bitcoin system money is created by private hands, but in wasteful ways, which effectively means that there is very little seignorage. Under the Chicago plan, money is created by the government in much more efficient ways, which leads to a large seignorage. Now my idea is to take the best part of both of these ideas: let a private player—more exactly, an altruistic organization such as CEA—produce the money centrally, Chicago plan-like, and let the seignorage be used for altruistic purposes. (Of course, there would be some costs of running the system, but if the system was sufficiently large, these would be negligible in relation to the seignorage.)
If the altruistic organization that did this had a sufficiently good reputation, chances are greater that people would trust the system. Of course, it would try to stop the currency from being used to launder money, drug trade etc.
Generally, people would be suspicious of private currencies where the central authority collected a seignorage, but if this seignorage was used for charitable and other altruistic purposes (and people really trusted that that would be the case), this would, I hope, be less of a problem.
What do you think? I’d be happy to get comments from people who know more about the Bitcoin system, since I don’t really know it (though I find it interesting). Perhaps there is some info concerning Bitcoins that tells against this proposal; if so, I’d be interested in that.
Why is there a stronger case for an altruistic organization to market a currency than for it to sell, say, cars, software, or apples? In nearly any sector of the economy you could identify waste and profit opportunities that a non-profit could potentially exploit.
Good question. Indeed I do think non-profits could engage in other sectors of the economy. They would have greater chances of success in some areas than in others though. To evaluate their chances of success, let’s note that their advantage is that people trust them more than for-profit players and that they to some extent like that their surplus goes to charity. Now I think that these advantages will carry relatively little weight for car buyers—they will want the best car. When it comes to currencies the situation is different, though: people are afraid to be scammed and don’t want to be associated with money-laundering etc. Hence reputable charities have a major advantage here over for-profit players and Bitcoin-style currencies.
I don’t agree that non-profits are more trusted, especially in financial matters, and especially compared to firms such as Goldman Sachs. To the extent there is profit to be made with a private currency, a non-profit would have almost no chance when competing with a Goldman Sachs or PayPal.
The advantage of non-profits is that people have a warm and fuzzing feeling about them, but this probably wouldn’t much help a non-profit when marketing a private currency.
There is a long history of banks offering private currencies. You could check to see if non-profits were ever in this business.
I don’t think the government would allow Goldman Sachs to create a for-profit private currency. In fact, I am a little bit surprised that they’ve accepted Bitcoins to the extent they have. It might very well be that there will eventually be a total crackdown on private currencies. But I think that in general governments would view private currencies created by charitable organizations more benevolently.
How to get the whole thing rolling is a hard but perhaps not unsurmountable problem. The problem is of course that a currency that no one else uses is not very useful. On the other hand, if lots of other people use a currency then it’s very useful. So currencies have a winner take all structure.
I can think of two groups that you would try to market this for. The first is altruists and charity organizations, which would have an interest in using the currency if they knew that that benefited another charity they trusted. The second is the people who are interested in Bitcoins for whatever libertarian or other reasons (minus the criminals).
I am not quite sure what are you suggesting.
Money is a complicated thing, but it seems you’re thinking about a non-profit issuing, basically, banknotes. Note that banknotes are essentially IOUs, pieces of paper with a promise to exchange them for a certain amount of value.
Anyone can issue their own IOUs. Most large retail corporations do (they are called gift cards). The problem is, of course, to persuade other people that your IOUs are good. You can see how government would have an advantage here :-)
Why would anyone take these banknotes issued by a non-profit and use them as money?
One interesting point this implies is that it shows a viable (as far as it looks) way to
embed one change to society within it with standard legal means (though complementary or alternate currencies might be heavily regulated)
show a benefit to society at large (via EAs optimized spendings)
imply that the change could grow to encompass all of society (if the approach is sufficiently successful)
This is the same approach the GPL intentionally uses to spread and grow.
Thanks, interesting point. Could you expand on the last sentence? I suppose you refer to http://en.wikipedia.org/wiki/GNU_General_Public_License ? How do they use this approach to spread and grow, and how are their idea similar to this?
The idea behind GPL is free software. The idea that good software should be available for everyone. The blessing of the digital age that you could copy things without a price. That everyone shoud benefit from it. I won’t go further into what free means here. But just giving software away doesn’t achieve this. Other people/comps will just use it and protect it with whatever means they have. The old principle of the competition of the strongest (marketeer).
To counter the existing legal means of exploiting ‘unprotected’ software the GPL does two things that are entwined: It uses an existing valid legal construct—the licensing model—to ensure that the software may not be exploited and stays free. And the second point—GPLs viral nature—causes it to grow and spread.
Actually there are more embedding means applied by the FSF. Companies may sign over software to the FSF (or other cheritable trust) for a nominal price that is the donation and the company can therefore tax-deduct it. A win-win situation for both but an additional means to add free software to the pool making it grow more.
One question I have seldom seen answered by social utopia models is how to get to the utopia from here and now. And the solution I see for this is a growing embedding of the utopia in the current society.
I have seldom seen this applied (except as above) but I immediately recognized it in your post.
Assuming your utopia—or rather the fragment of utopia related to a better currency—is an efficient digital currency feeding back efficient common wellfare. Then you have essentially shown how to embed this in a growing way:
Use a legal construct—a cheritable trust—to ensure a legally bound entity is handing out the ‘currency’
Use another legal construct—an alternate currency—to ensure legal convertability.
Use social expectations and customs—donation and the trustee community—to propagate the construct.
You didn’t name precise rules for the statutes of the trust, but I’m sure these could be drafted by a dedicated lawyer easily.
I think there is much to be learned from this with respect to hacking society—esp. with advanced technology.
We see tentative tries with direct democracy and free-nets to bring in the boon of technology for all. But many fail in doing it in an embedding way thus causing friction and counterforce instead of synergy.
EDIT. Fixed typos,
Thanks for your explanation of GPL and for your very illuminative post. The embedding idea is very good. It contrasts against the ordinary model which is overthrow of the existing model by political means.
The question of the statutes of the trust is also interesting—I didn’t think of that. I suppose that could be a means of ensuring users they won’t get ripped off.
The whole feel of the program would be quite different from Bitcoin. It should not be a shady underground currency but rather work very much in line with the current political system, collaborating, and making use of, its legal system. Together with its altruistic purposes, this will make it harder for politicians to outlaw it.
The last paragraph was suggestive but I didn’t quite get it; if you could expand on that that would be great.
Basically, you already got it: Just using technology and having a good purpose in mind doesn’t ensure that your goal is achieved.
Bitcoin is an example: It uses technology and has the idea of a ‘free’ currency, but it fails (or at least risks failure) by not embedding it suitably into society. This makes it prone to counterforce e.g., marketing/forbidding/taxing/externally regulating it—because that is not anticipated and handled. Or if it is expected, the confrontation is chosen. And it causes friction because everybody has to apply their own reasoning how to use it—and each one likely in a different way working in opposite directions. For bitcoin, this shows in the zero-sum race for hardware.
Yeah, I’ve been independently thinking about that for some time lately. Basically, the cryptocurrency the units of which are created when someone donates valuable items to charity, as opposed to the psychopathic, antisocial process of creating medium of exchange by wasting electricity (which could have been used to create valuables for third world).
Exactly! Nice to hear that you have had similar ideas. I was disappointed to see this post downvoted.
The big question is how to get people to start to use it but I don’t think it would be impossible. A charity with a good name could possibly do it. Perhaps the Gates foundation or others could be persuaded into supporting it.
People did end up buying dogecoin, after all. Was dogecoin what started you thinking about it?
And as far as trust goes, one could have a network imposed limit on the coin creation rate, the coin creation requiring a secret key which can be revoked and replaced when stolen. The absolute worst case where all the money get misused is still not as bad as burning electricity. I say we should start a website about the idea and approach, say, GiveWell.
No, I wasn’t aware of dogecoin, am reading about it now. How is it different from Bitcoins? Specifically, who benefits from the money-creation process? Is there any waste?
Regarding trust: yes, that’s one idea. The only problem is that one might want to adjust the coin creation rate in accordance with the increase in use of the currency. Otherwise, the value of the currency might increase rapidly (if the currency became more frequently used), which won’t help the poor but rather the existing owners of the currency.
See also Gunnar’s interesting ideas about using the legal system to regulate the money creation process. That would, as I write, go some way towards solving the trust issue.
An alternative idea is to try to bind the currency to the dollar, or that it’s “central bank”/regulators tried to keep it as close as possible to the dollar. To implement these policies, the central bank would have to mint new money at the same pace that the usage of the money is increased.
I’m all for the website idea!
Dogecoin is just a bitcoin clone, not any better than original except it has a cute dog as a logo, and is basically just a joke. AFAIK, it’s currently world’s third by capitalization.
I think that some expected deflation may be necessary to get people to use it initially. And if value increases rapidly, that makes it profitable to donate. No doubt a lot of it will end up making some of existing owners virtually rich, but the goal here is not to avoid that, but to direct some percentage towards the poor. edit: and note that the poor are helped irrespective of whenever the whole thing is a bubble or not.
I messaged you in private, would be easier to continue discussion by email.
No, burning electricity is just “wasting” a resource. Someone stupidly (or maliciously) misusing money can do a lot more damage.
The guy who’s wasting electricity also gets money that they then can (and will) misuse.
Evidence? I would argue that someone who spends money selfishly can do a lot less damage then someone trying to spend it for “the common good” who doesn’t quite know what he’s doing.
The guy burning electricity can also spend money for “the common good”.
The problem is, how do you publicly demonstrate that the charity is in fact doing good things?
Also linking your currency to a centralized charity makes it much easier to shut down.
The lack of seignorage comes from the lack of monopoly power. In the absence of a monopoly on creating money, the market will drive the cost of creating money and the value of the money to near equality. This has nothing to do with anything inherently wasteful about bitcoin.
But given that money is a unit of account—a measuring stick for the real economy, that is a very bad thing. - if the real cost of money creation equals the value of money then that is a lot of resources poured into a metaphorical hole in the ground. Ultimately it consumes a stock of resources equal to the net worth of your entire formal economy to no purpose whatsoever. There have been worse ideas, but it is a remarkably short list.
This means that the only actor who can do any real net good with the power of money creation is the government. - Kumhofs idea might be a better system than what we are currently doing, private currencies—of any type—logically cannot be.
And before anyone brings it up - a private actor with a monopoly on currency creation is not very private. That level of power defacto makes you the government.
Hehe. Well you could call such an actor the government—I don’t want to quibble on words since I don’t like verbal disputes—but there would certainly be many things that differentiated it from a normal government.
Note that getting currency monopoly would give you two sorts of seignorage. Firstly, you would get seignorage on the way there. People would buy your currency using other currencies, which would give you enormous incomes. At the same time, conventional currencies would lose value, which would mean holders of these currencies would lose immensely. Secondly, once you have monopoly power, printing new money in order to get some small amount of inflation a year (which is seen as desirable according to conventional economic theory) will give you 3,5 % of GDP in seignorage a year according to Kumhof (if I remember correctly).
So certainly this would give you huge incomes, and power. Still, you would not have monopoly on power which is the traditional definition of government, etc.
You would, ultimately, not get paid in other currencies (Monopoly! so other currencies have no value) but in real assets and labor. IE, the issuer would end up owning.. most of the economy in question. The only way that does not get shut down hard is if the currency issuer is de facto the government, regardless of whether they recognize that.
Under Kumhof’s scheme, the income substitutes for taxation, so that the percentage of the economy run by the government isn’t changed, and should in the long run go down some if I apprehend the system correctly. (No national debt, so no commandeering of resources to pay for that.) It also makes the finance sector of the economy much smaller.
Yes when you have monopoly you can’t get paid in other currencies, that is correct. However, it would not end up owning most of the economy, since the point of the plan is to give away the money for charitable purposes (which might not only include money to the poor of course but also other things the effective altruist movement find important).
I don’t think that you’d have to be the government for this to work. You’d have to strike a deal with the government, that is true, but you would not have to be the government. You’d be very powerful, that is true, but there have been other organizations which have been very powerful without actually being the government—e.g. labour unions in some countries. Of course, they have had lot of contact with the government—sometimes friendly, like under social democratic governments, sometimes hostile, like under Thatcher.
The power of such “states in the state” is of course upheld by the legal system. Social democratic governments tend to write laws that support the union power, whereas conservative governments write laws that undermine them. See Gunnar’s post on how this system would be upheld by the legal system too.
So in order for this system to be accepted, you need political support, for which you in turn, in a democracy, need electoral support. This does not, however, mean that you should form a political party for this cause. Instead I think that a better idea would be to work it out on your own, and let the parties come to you, as it were. That way the distinction between the NGO that takes care of this system and the government would be upheld.
No, actually, bitcoins created early in the process were created cheaply since their value wasn’t as high back then.
And what do we usually call a system that produces no actual products, but transfers wealth to participants in proportion to how early they joined and how many people are recruited into it?
I agree that there would be very little seignorage in any market-based system to create money. An important question is, though, what concrete mechanism it is that drives up the cost of creating money in a given market-based money creation system. I gather that in the Bitcoin system, it is the fact that people spend huge amounts on hardware that hosts the Bitcoin software. This is, if I understand correctly, wasteful to some extent.
Another market-based system which wouldn’t be wasteful in that sense is one along the following lines. Call the new currency X-coin. Say that new X-coins are created now and then (either by a central authority or according to a pre-set process). Every time a new X-coin is created, people may bid for it in dollars. Now since each time a new X-coin is produced, the value of all other X-coins is somewhat diluted. Therefore, the dollars that the purchasers of new X-coins spent get distributed to existing X-coin owners (in proportion to the number of X-coins they own).
That would be a market-based system that wouldn’t be wasteful. Note that it depends on the existence of another currency, dollars, and wouldn’t work if the X-coin system got world monopoly (or perhaps not even if it became relatively large).
Scenario A: There start out being 100 X-coins. A new X-coin is created. This coin is purchased, and the price distributed equally among the holders of the previous X-coins.
Scenario B: There start out being 100 X-coins. Each X-coin is declared to be equal to 1.01 X’-coin. Someone then bids for the right to buy all those .01 X’-coins.
What’s the difference between these two scenarios?
In either case, whoever starts out owning 1 X-coin owns 1% of the total currency. Not just 1% of the present currency, but 1% of the entire net present of the expected value of the currency. An X-coin issue doesn’t increase the market capitalization of the coins, it just acts like a partial split.
Not completely, it has the side effect of making it even harder to double spend bitcoins.
If there is a surplus that is being transformed into deadweight loss, that is a waste, although one can view it is not being inherent to bitcoin in particular. It seems to me that, at least to first approximation, we should expect the seignorage to equal the market value of the currency, the market value to equal the net present value of the expected future value, and the future value to equal the surplus value generated by the currency. Which would suggest that it is a wash; resources are being spent in the present to create a currency that will create surplus value in the future. But then perhaps there is surplus value that isn’t captured by the holders of the currency, which makes the currency a net benefit for society. Or maybe there are costs that make it a net loss. I’m not confident in my economic understanding enough to be sure what the overall effect is.
The value created by the currency is the gains from the trades the currency makes possible.
But given that money is a unit of account—a measuring stick for the real economy, that is a very bad thing. - if the real cost of money creation equals the value of money then that is a lot of resources poured into a metaphorical hole in the ground—over time—this makes private currency strictly inferior to a monopoly fiat currency. There have been worse ideas, but it is a remarkably short list.
This means that the only actor who can do any real net good with the power of money creation is the government. - Kumhofs idea might be a better system than what we are currently doing, private currencies—of any type—logically cannot be.
And before anyone brings it up - a private actor with a monopoly on currency creation is not very private. That level of power defacto makes you the government.