Democratic Currency
As an economics major, I have often heard it pronounced (largely correctly) that the great thing about money and the free market is that money is an extremely nimble decision-making process; money provides a way to measure how much value people can gain from something being created, or some service being done, and it also measures how much effort will be required to do so. This allows for things to be done when it creates more value for everybody than it destroys, and prevents things from destroying more value than they create. Money also allows for one person to be paid money for a large, complex service, and then for that same person to redirect parts of that money to induce other people to do smaller parts of the bigger task, allowing for coordination of large, complex tasks. This view is largely correct, and an important fact that among the general population is often missed.
But there is a slight magic trick going on here: When we say “valuable”, we haven’t defined valuable to who? As it happens, money does not measure value uniformly over all people; it measures what is valuable to those who already have a large supply of money. Now, in some sense, this is a feature, not a bug, since by rewarding primarily those who have earned money, we induce people to engage in complex chains of flow of value, as I have described above. However, currently, this is taken to an extreme: People who don’t have money can get “locked out” of the system, having their needs and desires not accommodated, even though they put in their best effort to contribute to the system, while the people who already have a large amount of money are best able to increase the proportion of value they command, in large part by investing in good projects that increase the capacity of what humanity can accomplish. It’s good that rich people can improve our abilities, the problem is that poor people are prevented from taking part in that dance to the fullest extent—I wonder how many brilliant minds are made unable to contribute their best contributions due to a lack of starting capital? How many Elon Musks, Bill Gates, or Warren Buffetts have been prevented from working their magic due to not having those first few dollars that they could eventually turned into many (helping humanity prosper along the way)?
The solution that seems obviously correct to me is have a currency (I imagine a digital currency) that has some amount of “source” in the people. In the case of USD, the source of the currency is the federal bank, which then gives the money to banks that loan money to the federal government; in the case of Bitcoin, the source of the currency is the miners who do the calculations required for the currency to function as it is designed to. In the case of a “democratic currency”, the major source of the currency will be in the people as a whole, with a certain fixed percentage of the value represented by the currency (that is, the market cap), being credited, on regular intervals (for example, every day), to every single person known to the currency. The currency could either have a fixed amount of the currency (as is the case of Bitcoin, where there will never exist more than a fixed amount of BTC), or the total supply of currency can constantly be increasing, as is the case with USD. Of course, to fix the total amount of currency at a constant cap, but have a constant source, that implies that the currency itself must constantly be “decaying”, that is, what is 1 unit of currency will only be 0.99 units of currency at a later date; In practice, this would not be practically different from the current situation of the American dollar, which is designed to inflate at a steady rate (based on the ideas of a man named Keynes), except instead of the value of what is called “one dollar” constantly decreasing, the value of a given nominal unit will be constant, with people’s accounts of the currency themselves being where the value disappears.
There is one important variable that can vary here, which is the percentage of the value represented by the currency per time which gets redistributed, which I will call alpha. Alpha could be 1 percent per day, or 1 percent per year, or 1 percent per millenium. In the extreme cases, if alpha is 0 percent per year, then we just have regular currency, and if alpha is infinity percent per day, then we get a weird degenerate thing that I think is impossible to use in any meaningful way. I expect that if alpha was 1 percent per day, that would be very high, and very few people will willingly engage in it, with a half-life of around a month or two. Unless there is some domain where fast circulation of value makes sense, I don’t expect such a high value to be useful. A more reasonable value perhaps would be around 1 percent per month, with a half-life on the order of four or five years. Such a currency one still wouldn’t want to use as a vehicle for long-term investment, but no “democratic currency” would ever be designed with long-term store of value in mind. But on such a time scale, people can easily conduct transactions and create value, while also ensuring a steady flow of measure coming from the people as a whole, not just those who already have the most value present in the system.
Edit 14 Feb ’21: I should note that this isn’t really an original idea. Freigeld and UBI, in particular, are ideas that I have been familiar with long before writing this post, and were influences in writing this
- 's comment on Yoda Timers 2 by (19 Jan 2021 5:40 UTC; 3 points)
- A Democratic Currency by (EA Forum; 19 Jan 2021 5:33 UTC; 2 points)
- 's comment on MikkW’s Shortform by (15 Feb 2021 16:46 UTC; 1 point)
- 's comment on Your Cheerful Price by (14 Feb 2021 19:45 UTC; 0 points)
- Even Inflationary Currencies Should Have Fixed Total Supply by (10 Mar 2021 5:41 UTC; 0 points)
One project which implements something like this is ‘Circles’. I remember it was on hold several years ago but seems to be running now—link
Thanks for the link! Looks promising. My username there is also MikkW.
Let this be a standing offer that anybody who wants me to do something for them, I will be happy to do it in return for circles [assuming that the system ends up working well. Edit: which it currently isn’t]
I’d be interested in doing an exchange of this sort! I’m here. I do tedious data entry work. What kinda somethings are you thinking?
Your proposal is equivalent to a basic income funded by printing money. Where would this money derive its intrinsic value from?
Old commodity currencies were backed by gold or silver. Modern fiat currencies derive their intrinsic value from a tax system. (For example, a the US government demands taxes in dollars.)
Currency derives its “intrinsic value” from being able to buy things you want (and its currency-like properties from lots of people feeling the same way). If I dropped you off on a deserted island with a ton of gold, it would be practically useless to you because there would be nobody to exchange it with.
So I guess your question becomes “How would you convince people to buy and sell goods for UBI-coin?”
A currency’s exchange value is pegged by a gold reserve, a silver reserve, the tax system or something similar. Convincing people to buy goods with UBI-coin is trivial because the default value of an invented currency is zero. My question thus becomes how does MikkW incentivize people to sell goods and services in exchange for UBI-coin?
Pegging to a commodity is not different from convincing people to sell things in exchange for the currency, though. If I start a new currency pegged to gold, what I’m doing is saying “I promise to sell you gold for this currency.” This promise is never of infinite strength, and so it can be evaluated with the same logic as the promise my supermarket makes to sell me milk in exchange for dollars.
If the promises of the supermarket are strong, there is no need for you to promise that you’ll sell me gold for dollars.
So, how could I get my supermarket to accept UBI-coin, in addition to dollars? Well, what if I promised to pay them some dollars to do this as a promotional thing, and also promised that I would be going to other local businesses and giving them the same deal, so that the decision-makers of the supermarket would be able to spend their UBI-coin on local goods and services? If people took this deal, this would allow for UBI-coin to function as a currency without a need for me to make a “central” promise that I would sell gold for UBI-coin.
One idea, inspired by Scott Alexander’s fictional, “sorta perfect” society Raikoth: In Raikoth, the wealthiest denizens often flaunt their wealth using symbolic beads (which all denizens use to signal different attributes), some of which have a distinctive design that indicates that the wearer has (voluntarily) donated at least a certain amount to the central government that year. Inspired by this, there could be IRL symbolic beads that indicate how much wealth a person has kept in the currency in the past year (adjusted of course for how long they’ve had the currency, so they can’t just buy a lot, hold on to it for a day, then sell it again), using distinctive, tasteful trademarks to prevent counterfeiting
To pay the every person a meaningful basic income, the average person has to lose that amount of value due to inflation by holding the currency and letting it be inflated away.
Who would want to be the person to hold this currency and lose massive value? For a new currency, it’s especially problematic that the costs likely will go to the power users of the currency while lurkers get value for free which heavily desincentivies becoming a power user.
Modern governments raise most of their revenue by raising taxes and not by printing money. A huge reason for that is the danger of hyperinflation. If you want to restribute money you can do that via raised tax money and pay an UBI, you haven’t made a case why raising money via printing money is better then taxes.
An important feature of governments is that they have the ability to uniquely identify their citizens and thus can give out benefits that go to every citizen equally. For an UBI ability to uniquely identify citizens is important to prevent citizens from signing up multiple accounts and getting more money.
Holding cash woud indeed be a bad strategy… just like it is now. Your options would be to spend it for something you consume, spend it for something you keep for later, spend it for means of production, or lend it (if you can thus make more money than you lose by the currency decay). Just like it is now.
The value of the “alpha” parameter would determine whether the inflation is hyper or not.
Today, whether I hold cash or have my money at the bank doesn’t make much difference.
No, inflation is not controlled. You can get into a situation where nobody wants to hold cash and everybody prefers to change their cash into other things and then there’s in hyper inflation.
The danger for hyper inflation is why central banks generally want fight all inflation as it sets incentives for hyper inflation that is hard to control once it starts.
Average in this case is mean not median and saying “average person” is misleading, because there are going to be very few people who actually lose exactly the amount of their ubi to inflation. The accurate statement is that “people on average will lose...” but even that neglects the central justification for ubi, which is the marginal value of nominal $. Taking $1 from the richest person and giving it to the poorest is a net gain is total utility (or it’s not, but please be explicit if when arguing that point). It’s then just a question of where the line should be.
These days, when people try to think about alternative currencies, they often automatically think about cryptocurrencies. But before that, other ideas were invented and tried; some of them similar to what you want.
I am pretty sure the idea of automatically decaying currency is there somewhere. Actually, the governments would probably make something like that mandatory, to discourage people from using the alternative currency too much, and protect the position of the official money as something that (allegedly) decays more slowly. Because governments typically want to keep the monopoly on currency, but some of them are willing to allow alternatives, as long as those are somehow “crippled”. (Technically, food stamps are already an “alternative currency”.)
Is starting capital really a bottleneck for entrepreneurs? Don’t you just get money from investors?
Elon Musk and Bill Gates only needed a laptop to start their business. Or, from Warren Buffet’s biography: “In 1945, as a high school sophomore, Buffett and a friend spent $25 to purchase a used pinball machine, which they placed in the local barber shop. Within months, they owned several machines in three different barber shops across Omaha. They sold the business later in the year for $1,200 to a war veteran. … In high school, he invested in a business owned by his father and bought a 40-acre farm worked by a tenant farmer. He bought the land when he was 14 years old with $1,200 of his savings. By the time he finished college, Buffett had accumulated $9,800 in savings”.
The options between inflationary and non-inflationary options would be that a central authority print +25% new money and gives it away to eveyrone equally or that the central authority takes 20% of everybodys money and deals it out equally to everybody. This seems very similar to a flat tax arrangement. A lot of countries have even more aggreessively progressive taxation ie rich people cash in at more than 20% and poor people can end up getting more than the average. I don’t know whether it being targeted to total wealth or at income is significant.
One could think of the arrangement also that everybody gets 1 stock of the “country” and then dividends are paid out per stock. Probably the main difference would be that stock are free to be transfered in deals while “citizenship stocks” would be inalienable. Otherwise some person migth end up holding multiple stocks like 3 (or say 2/3rds more for a total of 5⁄3 what everybody else has). Even if it would cost any finite amount of “current market power” “in the long run” it would be worth it.
I think the existence of centralised actor that is more clearly motived by public rather than private concern makes oriinary arrangements work. If all the actors have only private concerns it is unclear tome why I would want anybody else to have money. That is a alpha 0 money needs to be politically unfeasible in order for rich people to succum to any higher alpha. If part of the public concern is establishing and maintaining private property rigths then the tradeoff of paying the upkeep of maintaining the system makes sense.
I think this is equivalent to a UBI, where the amount of the UBI is pegged to the amount of money in circulation. You have certainly identified my big issue with capitalism—that it measures value by what the already rich value. And I think I like this way of scaling a UBI better than just a fixed dollar amount or even pegging it to the value of a fixed basket of goods (inflation). This would actually address long-term wealth inequality, and provide some incentive for the rich to spend down their wealth.
Edited to remove some kind of unintentional formatting issue with using dollar signs
One wonders how exchange rates would work with “traditional” currencies? There is little incentive to buy Democratic Dollars (‘DDs’ for short) with US dollars (just ‘dollars’, hereafter), for example, since the dollar is more durable over time. But buying dollars with DDs is probably a very good move. This imbalance should make the latter transaction all but prohibitively expensive. But if the exchange rates are uncoupled from buying power like that, one could simply spend their monthly allowance on (e.g.) gold and sell it later for dollars. Would we have to disallow direct exchange between the two systems? If so, what consequence proceeds from doing the gold thing anyway in order to hoard value derived from the DDs?
Perhaps the DD would only have buying power in certain sectors? I don’t really see how that would prevent the exploit, though. It would only make it more complex.
I’m sure I would expect (e.g.) supermarkets to accept DD, but their profit margins are razor thin as it is. Having a percentage of that money decay every interval would be actively destructive to many companies unless there was a way to lock in value somehow.
I admit I haven’t given it a huge amount of thought at this point, but I can’t yet see how this system as presented wouldn’t become something like a token that could maybe be used to place small bets between private parties, but which had no value in the goods economy.
The idea is intriguing, though. I’d be very interested for my first impression to be wrong on this one!
I think Charlie Steiner’s observation in a different thread on this post is accurate: the main question is how do you make sure people sell goods in return for DDs? Or to extend my usage of the language of “sources”, how do we make the “sinks” (people who are willing to receive DDs in return for something) balance the sources (people who get the DDs in the first place)- while USD has the tax system as a standing sink, I find it interesting that Bitcoin has no sinks- but much of why people buy BTC is because they expect it to still have value in the future, which is not the case with USD or DDs; but there are also people who buy BTC because there is some transaction they want to make where BTC is the currency they want to use… but indeed, BTC isn’t actually that good of a currency to use for purchasing goods, many other cryptos do a much better job of that.
Probably the best way to create sinks for DDs is to get multiple (perhaps local) stores to all agree to sell goods in return for DDs, with common mutual knowledge of such. Either paying them extra USD to do so, or making them want to by convincing them that it is moral to do so, can make sense.
People who buy BTC not only expect it to still have value in the future but usually expect it to have higher value in the future.