Notes on 'Shifting from Central Planning to a Decentralized Economy
- Original article here
- See also the introduction to "New Paradigm on Macroeconomics" by Richard Werner
- Also look at our study section.
According to Werner, economics has become dominated by the 'central bank narrative' which has 4 essential tenets. These are:
- That bankers can fine-tune the economy by lowering and raising interest rates
- That markets are in equilibrium due to price movements that equate demand and supply
- That banks are mere financial intermediaries
- That savings (or foreign investment) are the precondition for economic growth.
These tenets are not only factually wrong, they are deliberately deceptive. While the counter-narratives have been successfully combated by PR damage control for decades, "it is now becoming apparent and visible even to laymen that the central bank narrative has collapsed on all fronts."
Werner steps through each tenet, refuting them one by one, and states that these falsehoods are promoted to distract public attention from the true casual relations in the economy. Bankers are not disinterested financial intermediaries: they are the creators of the money supply (bank lending creates 97% of money supply). Distinct from the central bankers claim that markets are in equilibrium and determined by the price of money (or interest rates), actual markets are rationed, meaning that they are determined by quantities, not prices.
Rationed markets are governed by the short side principle, which says that power is on the side of whichever quantity of demand or supply is shorter (the short side). According to Werner, "the pretense of equilibrium not only keeps this real power dimension hidden. It also helps to deflect the public discourse onto the more politically convenient alleged role of 'prices' such as the price of money, the interest rate."
As such, the most important macroeconomic variable is not the price of money, but its quantity, or as Werner puts it: "What is larger- the demand for money or its supply?" Finally, because money is so useful i,e, there is no shortage of demand, the short side always falls on the supply of money and credit. By centralizing the creation of money, central banks have secured supreme economic power.
They wield this economic power by spreading the myth that money is somehow scarce, and that developing countries must borrow foreign money into order to grow, thus trapping these countries into debt: "The developing country debt is in fact a form of predatory lending to ensure the former colonies remain, in economic terms, in the hands of their masters." The money that is lent to these countries- and often reclaimed in the form of valuable resources like land and raw materials- has been printed "out of thin air." Werner: "banks create money out of nothing and thus reshape the economy in their image."
Central bankers of the First World have forced developing countries to adopt the economic principles of "deregulation, liberalization, and privatization" which has proven to be fraudulent, and actually intensifies the boom and bust cycle, making economic inequality more severe. As well as being enslaved by debt, a consequence of these policies is that developing countries then adopt the social disorder characteristic of the West.
According to Werner, there are 3 main kinds of credit creation, and only one of these has been proven to work. They are:
- Credit is produced for the sake of consumption. Because this increases the money supply without increasing the quantity of goods and services, this causes prices to rise (inflation).
- Credit creation is used for asset transactions, which causes asset inflation.
- Credit creation is used for productive investments, such as the creation of new goods and services. This is the only kind of money creation that does not lead to inflation, because the extra demand due to the money creation is met with higher supply.
This was demonstrated by Japan and Germany's post-war economies, which eliminated shareholders, maximised cartels, and created a model that benefited employers and the society at large. Werner calls this "managerial capitalism, or capitalism without capitalists". Werner notes the coincidence of this economic model with fascism, and warns that unless the economy is sufficiently decentralized, the abuse of power will certainly occur, writing "it is paramount that the power levers are decentralized and rendered accountable to local communities."
His solution: abandon the big banks and create local not-for-profit community banks, founded on the principles of "local automomy, self-determination, self-responsibility and self-administration" that were advocated by the cooperative movement 150 years previously. He quotes Lord Acton, "It is easier to find people fit to govern themselves that people fit to govern others."