Re-Engineering the Economic Processes

This paper has been included in the publication
“Ideas towards a new international financial architecture?”

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Perhaps the least-coherent aspect of Keynes’s ‘habitual modes of thought and expression’ in macro-economics is the all-pervasive and ill-considered use of the expression ‘money’.  This paper starts from first macro-economic principles, and uses process re-engineering techniques in an attempt to define a more coherent paradigm for the concepts currently ‘enclosed’ by that expression. This paper argues that there are two radically-distinct concepts currently ‘enclosed’ by the single expression ‘money’ – wealth and currency- , and that, if we wish to facilitate integrity of thought and expression, we must reserve two radically-distinct expressions for those two radically-distinct concepts, and we must consider those two radically-distinct concepts in isolation before considering policy options (potentially to try to link them).  Finally, this paper argues that the central banking system already in effect acts as implicit guarantor for every Non-Equity Owed-Wealth liability of every financial institution and state (‘money’ and non-‘money’ without distinction), and that that role should be made explicit.  The central banking system (including the global and state banks and regulators from the IMF downwards) should act as borrower/lender of first/default recourse for banks and states (i.e. rather than borrower/lender of last recourse as currently).  This would eliminate (the need for) lower-level inter-bank Owed-Wealth, and would eliminate bank liquidity as a macro-economic factor.  In order to moderate the risk implicit in such a facility (i.e. the risk currently already carried by the central banking system), the central banking system should itself commission all valuation and auditing standards and processes conservatively on behalf of creditors (rather than allowing politicians, bankers, corporate executives, and financial professionals free reign in their own self-serving interests).  Again, in doing so, they should follow the precautionary principle in regulating financial innovation.  Indeed, the vast majority of financial innovation (including the securitisation of Owed-Wealth such as with GB Gilts, US Treasuries, and other state, commercial and mortgage-backed securities) should be outlawed in favour of simple inflation-linked current-accounting.

Tim Knight, Principle Consultant of T J Knight and Associates Limited (Consulting Process Engineers).

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12 responses

  • David Chester says:

    Money is not wealth. It is a medium for transferring the right to acquire wealth, when the money is used in exchange for goods (of both consumer or durable capital kinds) or for useful sites of land and rights to other natural resources (like frequency ranges in the electromagnetic spectrum) having value. Money also is used for exchange other purposes (services) that strictly are not wealth related. Until the basic nature of our macroeconomics parameters is properly defined, we cannot expect to achieve better understanding about how the system works.

    • Tim Knight says:

      I certainly agree with you that ‘Until the basic nature of our macroeconomics parameters is properly defined, we cannot expect to achieve better understanding about how the system works’. Indeed, I intended my paper as an attempt to define the basic nature of our macroeconomics parameters.

      However, I believe that you yourself are surely guilty of a failure to define ‘the basic nature of your own macroeconomic parameters’.

      Unfortunately, there is no generally-accepted macro-economic definition of the meaning of the expression ‘money’ or of the expression ‘wealth’. You do not ‘own’ the meaning of either expression. I do not ‘own’ the meaning of either expression. No-one ‘owns’ the meaning of either expression. I therefore struggle even to ‘engage with’ the meaning of your first sentence ‘Money is not wealth’. You might as well have written ‘wibble is not wobble’ (no offence intended).

      That is why I took great pains in my paper to (try to) define what I intended the reader to understand by each of my terms before using it. Indeed, I define my ‘complete’ macro-economic paradigm without using the expression ‘money’ precisely because no-one knows what the expression means. I define ‘wealth’ to be anything which can appear in a balance sheet as an asset or liability (‘money’ or non-‘money’ without distinction).

      I do later try to ‘position’ some of the conventional uses of the expression ‘money’ in relation to my own ‘complete’ macro-economic paradigm, and reach the conclusion that the distinction between ‘wealth’ deemed to be ‘money’ and ‘wealth’ deemed to be ‘not-money’ is a purely-administrative distinction.

      So, either provide a definition for the expression ‘money’ and then justify that definition, or stop using the expression.

  • pasbaxo says:

    Whereas money is often loaded with debt as initial borrowing act f.i. to producers, it is only a wealth factor but also as debt factor usually termed as assets plus liabilities. The currency is bound to a restricted volatility. Outlended -borrowed money appears often in first instance as first default recourse , but later as last impossible recourse leaving the rest debt finally as inrelievable , as consequence of the debtloaded starting point and the inevitable debt creating production process.

  • David Harold Chester says:

    Tim Knight, If what you say is true and that today there is no generally accepted definition of certain macroeconomics terms, well its about time that these definitions were in place! May I suggest that a suitable set of such definitions which exceed 40 in number, may be found in my recent book “Consequential Macroeconomics–Rationalizing About How Our Social System Works”. A brief description follows:

    The preface “Motive” presents the analogy of the blind men trying to describe an elephant. A review of how theoretical macroeconomics has been treated in the past shows that for students there is much confusion, due to the many different aspects of the subject not being properly explained nor connected in a systematic manner. This motive is used to show that a holistic approach and analysis are needed in order to better understand of what our social system of macroeconomics consists and particularly about how it functions.

    The introduction has a complaint that in the past, the subject of theoretical macroeconomics has been badly treated–in an incomplete and unscientific manner. The basic model for representing the general social system of a country has never been properly developed, due to the failure to seriously state and explain the initial assumptions (which were presumed instead). Consequently, the results obtained from the over-simplified models of the past are unsatisfactory and sometimes they even conflict with common sense. When the alternative of computer-modeling is used, the results become complex and difficult to follow. They are unsuitable for students to appreciate, interpret and understand the essence of what is involved—that is about how our society functions, in part and as a whole.

    The aim of this book is to correct this situation and to provide a logical and compact, but sufficiently complete, theoretical presentation about of what our macroeconomics system comprises and how it actually works. The attitude taken here is about viewing the system from sufficient a distance, so as to envisage it as a whole as well as its components. From this perspective it aims to provide an improved and better perception and understanding of the complete macroeconomics structure. It also introduces some original aspects of analysis into the subsequent methodology.

    The work is presented in 6 parts: “Getting Started”, “The Model”, “Analysis”, “Decisions”, “Money” and “Consequences”. In order to help with the continuity, specific details of certain aspects are presented in 7 appendices at the end.

    We start from scratch. After a review of the overall problem of complexity in representing our entire social system, a series of assumptions and early considerations are provided, along with the many necessary definitions. From this standing, there is built up a base model that is logical in its development and which is virtually complete, whilst not being any more complicated than is absolutely necessary—in order to provide for the subsequent analysis, in a formal scientific manner. This model is both necessary and sufficient to cover what our social system does.

    This model contains 6 entities: Landlords, Government, House-Holders, Producers, Capitalists and Finance Institutions (banks). They are connected by 19 double flows, consisting of the money which opposes the various kinds of goods, services and valuable legal documents, etc., that are uniquely provided by each entity. The model is expressed in three ways, by a diagram, by a set of algebraic identity-equations and by using W. Leontief’s “input/output” matrix. (The latter is subsequently used in the analysis and the development stages of this work.) The various entities, as parts of the model, are described and used for explanation about the circulation of money, goods, etc. This leads an examination of the matters of the general equilibrium and stability of the system.

    Short-term disturbances to the steady-state condition result in the need for decision-making, which is carefully described in necessary detail and later illustrated by four simplified numerical (hand-calculated) examples, three being about changed taxation and the associated short-term dynamics. The decision-making depends on the properties of the 6 entities. These properties are subsequently introduced and explained, to complete the analyses of this aspect of the whole system. This model is capable of simulating the progress of the complete system towards a new state of equilibrium after small changes have been introduced.

    Theories about the development of money and banking are given, as well as the use of interest on borrowing. This leads to a discussion about the functions of governmental control over longer periods of time. There follows a development about the possible factors affecting the limitations to growth of the general system.

    The last chapter of the book concludes with a long summary/review about what is implied and what we have learned, which takes into account the particular perspectives used in this work. The significance of topological properties of the system are noted. Past confusion between the macro- and micro- aspects of economics are described and clarified with the aim of their future avoidance. This viewpoint provides a better and somewhat original understanding about what theoretical macroeconomics really is all about. The old concept that Macro- is scaled up Micro- is dismissed and a whole new science is born! Matters missed out are noted.

    Due to a need for continuity, 7 appendices are included. These are:

    A] Definitions of the system;
    B] Definitions of the various functions;
    C] Use of a matrix for extending the basic model;
    D] Details of 4 numerical examples;
    E] Restrictions in the progress of a macro-economy;
    F] Lists of circuits for finding multipliers; and
    G] Theory of land values.

  • pasbaxo says:

    “the concept of currency is only of administrative relevance, it is irrelevant to macro-economics”.
    IMF trying to create a stable currency value system would underlign this conception, but a developer of
    a new monetary system could considerate the value of one cent in a currency as starting point to
    a means of financing debts by liquidities. On a total Central Bank Household of 500 large milliard one currency cent would be valuated on 5 large milliard. Devaluating the currency outside normal movements with 2 cents would deliver 10 large milliard , of course to be multiplied electronically in stead of taking private possession from banks. The extra devaluation of 2 cents could be replaced to original value by trading via London Stock Exchange, as agreed by IMF participants. This would deliver a devaluation of 2 cents in 365 days = 0,005 cent. Even if not replaced a small annual % could deliver enough liquidities to relieve external debts .

  • pasbaxo says:

    N.B. commentary pasbaxo 20 may, correction :
    first sentence; ‘íts only a wealth factor’ must be : its only a debt factor

  • pasbaxo says:

    Ch.3.3: “The distinction between nominal owned wealth and securitized owed wealth and equity owed wealth is micro-economic and irrelevant in a macro-economic paradigm.”
    Here the value of hard worth is lost, whereas cash value of the nominal owned wealth is considered as
    irrelevant as discriminant criterium between ownership and debt (owed ), the latter performed by
    debts in securities and equities. Macro-economic models should of course distinguish between costs and profits, debts and capital. If this distiction is lost, debts are still not payed and the claims are still alive, unless debts are defined as inrelievable. Than debts are still not to be defined as wealth.
    Emissions of unbacked obligations could function as wealth collector if permitted by monetary sytem incl. Central Bank. Wealth could be collected then by emitting not-payed pieces of paper, to be sold to
    clients , gathering f.i. 10% per year during 5 years , not enjoying a lottery. With the other half wealth could be gathered by speculation, to be reached as more than 150%, the overvalue to be applied as debt relievance , 50% to rent outpayance and 100% to last ressort. The number of clients is of course questionable, whereas a debtor (ower) could not pay out the lottery.
    Macro-economically considered the owed amounts could have delivered products and services, leaving
    the debts as black shadow to GDP., creating uprising prices. Still not as macro-economic variables ?

  • Peter Shaw says:

    Tim Knight –
    I’m convinced that the “process” approach is the way forward in macroeconomics, so welcome your exposition where othodox economists may discover it. It immediately provides large-scale structure in which to make logical groupings (and separations), while highlighting any current ambiguities or misconceptions. I’ve not (yet, in the blogosphere) discovered a macroeconomist prepared to set aside all microeconomic entities until analysis discloses their proper place and macroeconomic function. This approach also naturally avoids fallacies-of-composition. The advantages you list (Introduction.2) could well include “effective process-control”.

    “Re-engineering” I take to mean re-assembly of (almost) all the original components, but under the new rule. Perhaps your only really “radical” proposal is changing orthodox perceptions to the “top-down” view. It may be there are no complicated processes; only unhelpful points of view.

    I’m also familiar with processes. Your method concerns quantities and their transaction, where mine considers continuous flows (conserved and not). My analysis is far less developed than yours, but sufficiently to compare some notes. I have correspondences (as should be), and one disagreement.

    I find several conserved flows – your “Owed-Wealth-Rotation Transactions” – “…not macro-economically significant”.
    “Production/Consumption Transactions are the only Transactions which change the Net-Wealth of an economic agent, and in aggregate.” (3.2.1 note 4) – agreed.
    My flow-diagrams indicate that currency-conversion for two economies is trivial, for three possible, but rapidly intractable for more than four.
    Your discussion (4.2.6 end) of currency-conversion rates I think poses an important (and maybe hard) question.
    “Macro-economic policy should be executed exclusively through fiscal policy” (4.2.6 end). So, three distinct approaches (yours, mine, and Modern Monetary Theory – MMT) concur that fiscal management is a key control.

    I too was driven to invent names. My “money” is a working-fluid, so more restricted than yours. However, I have two sorts. My “transient money” is a member of your “owed-wealth”.
    My “persistent money” (roughly M0) needs some discussion. You classify it as “owed-wealth” (3.5 1b), perhaps from its administration, but I think it has properties of your “owned-wealth”. It appears distinct from other transacted “money” for four reasons:
    > Its origin and destination are uniquely the money-issuer;
    > The “debt” has no due date or repayment schedule;
    > There is no intention (or possibility) of complete settlement (tax* at 100%, no exemptions?);
    > “Persistent money” in the issuer’s hand uniquely has no value; a logical break (a MMT view which I accept).
    From this perspective, inclusion of M0 in the national debt is inconsistent.
    This reassignment would need reinstatement of terms “issuing” (3.6.18) and “creating” (3.6.20).

    You argue (,2) that the money-issuer is free only to issue the “right” amount. Does your scheme include a metric for reliable, prompt estimation of the excess/deficiency? This is outside your original scope, but bears on the potential control benefits. If you can’t measure it, you have no control.

    (3.0.5) “…the net propensity to buy/employ for production/consumption…is pro-cyclical and destabilising.” Here, my grasp is tentative. If (big if) the growth in question increases “owned-wealth” it will draw on finite resources, so can’t be immediate. Meanwhile, general taxation acts as a powerful automatic stabiliser by destroying “persistent money” (if not compromised). This would suggest the logical entity is the combination of the activity with its taxation – which can be stable. If you accept my “persistent money” as “owned-wealth”, you have the simple scenario of “owned-wealth” growth mitigated by its controlled destruction. Which suggests that differential taxation may also be determined by the “process”.

    * “Tax” is another of those words. My working definition is: Any money transfer (direct or not) to the money-issuer except payments for specific goods and services. Thus: I pay for electricity, but am taxed for electrification.

  • pasbaxo says:

    Key control on M0 could also be executed by placing it in deposito against a rent percentage, by which the amount is moving upwards and downwards. Establishment of method from issued money to account money as owned mony could be reached by voted consensus to a new article of monetary system.
    Tax as legitimator not per se necessary.

  • pasbaxo says:

    The owed wealth system was the initially recognized cause to the financial crisis.
    As long as the production system lives by means of financing by loans and the service system by
    means of financing by taxes, continuing deficiencies appeared to be inevitable. A free liquidities furnishing system could be created under a central governed hat, f.i. IMF, by means of a Financing Power Parity rate system on base of rebalancing measures applied to governments budgets accounts amounts and depositos and securities accounts amounts to be rebalanced in rankorder in comparance with other participants of IMF , to conclude to central delivered refinancing permissions by means of free liquidities in consensual measure . This system could eliminate the loan & taxsystem totally but not necessarily total: consensual free liquidities measures could be applied to production, (governments’) service , securities exchange and deposito outpayance obligations as partial subsidies to comly deficiencies under central international consensual rebalancing conditions. If no consensus could be reached centrally, independent monetary unions systems with own free liquidities furnishment , if wanted on base of self chosen rebalancing rates ,should be tolerated, under condition of import restriction to a maximum of export rate to prevent parasytical relations.

    • Tim Knight says:

      Dear pasbaxo,

      I’m afraid I do not understand any of your contributions. This is perhaps a languge difficulty.

  • David Harold Chester says:

    Having reviewed the paper on re-engineering the economic process I see:

    a) it is not the whole economic process which is shown here, let alone re-engineered.
    b) the definitions dealing with money and wealth make the subject far more complicated than is necessary.
    Although it is convenient to use money and its concepts, the same principles of a barter economy apply to all economies (even with money included). Before money existed, the barter economies included promises to supply, which allowed production to occur before the means for returning trade was ready.
    c) by not assuming that money (including currency ) is wealth, the amount of complication in the re-engineering is reduced and so one has ability to look into and better understand the other aspects of the Big Picture, which unfortrunately have been omitted here.
    Specifically the combination of the Smithian 3 factors of production apply to more of this Picture. (Actually there are 6 role-playing entities in a full MacroEconomics Social System (or MESS). They are: Landlords, Householders, Producers, Capitalists, Banks and the Government. Each has one or more unique properties, which causes us appreciate that without proper inclusion of them all, we fail to see the wood for the trees.)