What are, really, economic laws?

Many economic theorists tend to blame systemic policies for constraining the natural economic laws. However, in order to conceptualize and institute a system where economic laws will be able to operate freely, it is first necessary to understand these laws, and this is the very task of economic theorists. Also, theorists must supply policy makers with the economic and political instruments necessary, as well as indicate possible ways and means to achieve desired goals. Whenever goals fail to materialize, theorists are inclined to ascribe this to the policy makers’ inability to make proper use of the economic and political arsenal the theory provides them with. In addition, economic theorists usually purport that they are well-versed in economic laws, and that the system’s poor performance is due to politicians’ “wrong turns” and lack of consistency in following the opinion and advice of economic theorists.

But what will happen in case if economic theorists actually do not understand the truly-governing objective categories and laws of economy?

Then they will not only give policy makers wrong advice, but will not even have any valid criteria for evaluating the performance of the system and policy. This, in fact, is the reality in the world today.

Economic science is in crisis, because its system of categories and laws deduced from the premises its analysis rests on, is only adequate for an earlier stage of development of productive forces and relations, while the current stage of development (and particularly the pace of development) creates substantially different premises that can be theoretically articulated only by a new, revolutionary theoretical paradigm, that is, a new system of new categories and laws.

Surplus utility

The new paradigm should certainly be able to explain the existing reality, i.e. the deepest causes of the existing crisis, as well as to point out the ways to overcome it. I believe this new paradigm may be developed by first taking a look at the fundamental views of classic economists (usually deemed relevant primarily to the system of primitive barter economy):

“In a future society, in which class antagonism will have ceased, in which there will no longer be any classes, use will no longer be determined by the minimum time of production; but the time of production devoted to different articles will be determined by the degree of their social utility.”

(K. Marx: The Poverty of Philosophy).

“Various articles’ use value, weighed against each other and against quantities of labor necessary for their production, will ultimately determine economic planning.”

(F. Engels: Anti-Dühring).

If we presuppose that the mentioned fundaments of a new society could be realized within a particular (new) type of commodity production, then it is obvious that:

1. In such mode of production, there must exist, analogous to the category of abstract labor (as a measure of costs), a category (as an equivalent in the sphere of consumption) of abstract social utility (that would represent a measure of the quantitative aspect of use value).
2. Objective abstract labor and objective abstract utility (i.e. costs and utility in general) can be quantitatively compared (and expressed in money).

Thus, in such a society, money appears as a measure of objective abstract utility. Since costs and utility materialized in commodity can be quantitatively expressed (in money), market price would naturally take a level between the maximum possible price (equaling utility) and the minimum possible price (equaling costs). The difference between abstract utility and abstract labor I define as surplus utility. The level of the market price will determine how this surplus utility will be divided between buyers and sellers (into the consumer’s and manufacturer’s surplus).

According to the new paradigm, in every commodity are materialized three quantitatively different dimensions of value: cost, market price and utility. These can also be viewed on the global (national and international) level, and so:

• The total amount of invested labor I define as product of the culture.
• The sum total of the market prices – gross national product.
• The total abstract utility obtained - product of the civilization,

and

• The difference between the product of the civilization and the product of the culture - social (or national) surplus utility.

The traditional economic theory, which finds in the value of the goods, basically, only one quantitative dimension, is based, in fact, on the implicit and explicit assumption that these three dimensions are quantitatively equal. Thus, the traditional theory appears only as a borderline, special case of the new theory, i.e. the traditional theory is valid only for the case when the utility surplus equals zero (at least at the global level). In other words, economic theory does not know one of the fundamental economic laws of modern society, and it was inevitable that economic policy would ignore the legality of the existence of surplus utility, which then leads to a series of defects and irresolvable contradictions in the real economic life.

Deflation and Inflation

The usual manner of emission of money in the form of credit is consistent with the assumption of a uniquely determined value of gross social product, but in contradiction to the existence of social surplus utility.

Credit money really represents only the value of culture, i.e. invested labor, and if a society creates any amount of surplus utility (which corresponds not to invested labor, but to rationality of spending), there will lack a monetary equivalent for its realization, which will cause a deflation problem in the society (this being the deepest cause of economic crisis), proportional to the quantity of the actually created social surplus utility. Deflation problem hinders the realization of the material gross national product – leading to stock accumulation, stagnation, dormancy of capacities and unemployment – while inflation represents only an instrument for overcoming (i.e. attempt to fight against) this fundamental deflation problem.

Inflation, along with time asynchronization of incomes and expenditures, in fact represents a spontaneous mechanism for expression of surplus utility. It does so by providing a nominal balance (necessary to meet the dogma of economic science) and a real imbalance of social accounts (realized through rate of inflation and delay between income and expenditures), needed to realize at least a portion of the surplus utility, without which there is no real social progress.

The inflationary and deflationary problem can be overcome only through legalization of a monetary equivalent of the social surplus utility and inauguration of a new system of social accounts, because it is obvious that, being based on the economic theory that does not know the category of surplus utility, current systems of social accounts are valid only for the case when surplus utility equals zero, and economic systems are organized so that they can only function normally if there is no surplus utility.

It should be noted that abstract utility is a completely objective category (unrelated to the bourgeois theory of subjective utility) and just as the quantity of abstract labor is measured by length of working hours, so is abstract utility measured by length of exploitation time of a product (of course, within certain social standards of use).

If abstract labor and abstract utility were quantitatively (in money terms) equal, this would also mean that the length of the cycle of reproduction (i.e. the period after which a new production is to begin) is equal to the length of the cycle of re-consumption (i.e. the period after which a new consumption is to begin), and thus the frequency of supply and demand would also be equal. If, then, were to increase either the rationality of production (an increase in labor productivity would reduce the quantity of abstract labor invested in a commodity) or consumption (extending the use time would increase the substance of abstract utility stored in a commodity), there would appear a surplus utility. Frequency of supply would exceed frequency of demand and there would arise the problem of effectuation of this (over-) production that constitutes the material substrate of surplus utility.
This production can be effectuated only by emitting a monetary equivalent of surplus utility, which is non-credit cash money that must be allotted to the consumers who have real needs for these products. That way their needs are legitimized and money is promoted to a function of measure of abstract utility.

“According to the needs”

In the new society based on this new mode of commodity production (in which laws of value and surplus value are replaced by laws of abstract utility and surplus utility), total income must come from total amount of abstract utility (which, according to the suggested terminology, is product of civilization). This income consists of incomes generated by labor (i.e., incomes representing the product of culture) and incomes from social surplus utility, this representing the superstructure that needs not be financed by taxes that only burden the economy.

By eliminating a tax amount equivalent to social surplus utility, the contention between the business (base) and the non-business sphere (superstructure) is abolished. Nonproductive population (e.g. pensioners, children, pupils and the like), that grows with the growth of the surplus utility, gets its money (income) from the social surplus utility (a separate account of the central bank, according to the decision of the parliament), while the economy grows by selling them goods and appropriating this social surplus utility money, that then becomes the manufacturer’s surplus that adds to his cash accumulation for financing expanded self-reproduction. If exactly the required amount of money is emitted, prices cannot grow, while at the same time a new model of social accounts is established, where the total social income is, by the amount of the emitted non-credit money, greater than the labor value of the social product.

Therefore, legalization of income from social surplus utility that is divided “according to the needs” is shown to be a condition of normal reproduction of any economy and society that has reached a level and pace of development where surplus utility must exist.

If we legalize the monetary equivalent of the social surplus utility, we will provide the economy and society with the amount of money it needs (i.e. the key deflationary issue will be solved) and thus establish a condition sine qua non for the normal functioning of market mechanism.

Only then will particular system policies and socio-political decisions have an opportunity to show and prove their value, while economic policy will, equipped with a simple but adequate set of economic and political (monetary) instruments, effectively and without over-administration serve the realization of the desired goals: stable and fast development with full employment.

Stojan Nenadović, Serbia

stojan.nenadovic@gmail.com

“The principle creation of money through credit
has become so immanent to understanding of money
that any other possibility is taken a priori as unreal.”

(Dr. Srećko Urgin, “Roads to Non-credit Money Creation”, 1980.)

Theoretical nature of non-credit money

The roads to non-credit money creation have not been easy. As the above quote suggests, the reasons have been more of a subjective rather than objective nature.

Of course, to overcome the deeply rooted prejudice, cogent argumentation is essential. Theoretical basis of non-credit money has to be well founded. Even then, the orthodox theory may be slow to accept it. This, however, should not discourage supporters of non-credit money.

Theoretical basis of credit money seems clear: since money is a measure of value, and value is created by producing and selling commodities, it seems inevitable that money should indeed be created in the form of credit, as that way its “backing” in human labor is ensured. Credit implies the obligation to repay the debt, and, therefore, the obligation to produce and sell something in order to be able to return the credit. Production creates value, while credits create obligation to produce. In such a state of affairs, non-credit money would seem nothing else than a forgery, because, in its pure form, non-credit money implies an emission of money without any backing in labor (production).

Money and human labor

Now that we have presented credit and non-credit money as two entirely different modes of money creation, let us analyse, briefly, what are the real capabilities of these two modes of emmision. Are they really that exclusive of each other, as they may seem? First, there is the question, on the one hand, of the extent to which the credit money today really gets repayed, and, therefore, how substantial its backing in human labor is, and, on the other hand, whether and to what extent can non-credit money be used as a measure of human labor.

Commodity money, as for example gold, has its backing in labor already at the time of creation. Therefore, it enters into circulation as a definitive means of payment (metal non-credit money) and can only incidentally return to the starting point. Money as credit, however, after a certain time, i.e. at the time of repayment, inevitably returns to the starting point. There are two basic venues for emission of credit money:

1. Loan of the central bank to the state. This credit will be repayed by collected social revenue (taxes, contributions etc.)
2. Loan of the central bank to commecial banks that then lend it to businesses. Companies return this loan by selling their products.

In either case, in order to be repayed, credit must be incorporated in product prices (as either production cost or social income added to the cost), that is, it must have a backing in commodities, or more precisely, in human labor that produces commodities.

If the performance of an actual (real) credit system were to match the theoretically expected performance (described above), an important precondition would have to be the immutability of the measure of value, i.e. the general stability of prices, i.e. the stability of value of credit money.

Since, however, money continuously devalues; it is obvious that, depending on rate of inflation and repayment terms, in real quantities, one part of real credit never gets repayed; although in nominal quantities, credit gets repayed in full.

Possession of a certain amount of money gives one the capacity to appropriate, through purchase (i.e. alienation of money), a certain amount of commoditized labor, effectively giving one power over others’ labor. Contrarily, the obligation to repay the credit forces one to sell labor (either one’s own work or that which is contained in one’s production forces and commodities), effectively forcing one to subject one’s labor to the power of money, i.e. to the obligation of repaying the credit. In principle, in the system of credit money, at the time of emission, a balance between these two processes is ensured. Credit debt and money created are nominally equal.

In real terms, however, since money is immediately effectuated, spent (while it’s worth more), while the credit is repayed later (when the money is worth less), in circumstances of inflation caused by massive credit expansion, the real debt is lower than the real quantity of money emitted, which means that one part of the real emitted money is given away as a “gift” to debtors. In other words, the emitted nominal credit can engage a greater amount of labor than the amount of labor that would later need to be engaged in order to repay that same (nominal) credit. This “surplus” engaged labor is the labor that is engaged by real non-credit (though nominally credit) money. The result is the same as if a certain amount of non-credit money were emitted in the first place.

In the second part of the front-cited article (’Ekonomska politika’, no. 1529/1981, p.25, SFRJ), Dr. Srećko Urgin correctly notes that at the time of debt remission, there in fact occurs an emission of non-credit money. The same occurs with the reprogramming of short-term loans into long-term.

Restriction of credits leads to economic crisis

As we can see, there are several spontaneous and chaotic ways of creating non-credit money. If the economy still continually lacks money, it may simply mean that more non-credit money is needed. In the modern credit economy, the inflation of credit money is a spontaneously generated mechanism for emission of non-credit money. Inability to supress inflation by restrictive credit policy without provoking severe economic crisis, leads to the conclusion that the emission of non-credit money is a necessary requirement for economic development and employment growth. If this is true, the expectation that an organized, theoretically grounded emission of non-credit money would represent the best “remedy” against the inflation of credit money – is justified.

This completes the answer to the first part of the question posed at the beginning of the previous section. In circumstances of inflation (that has become the sine qua non condition for keeping the economic mechanism in motion), in real amounts, credit is not returned in full, and therefore does not have full backing in labor at the time of its emission. Part of nominal credits, therefore, in real amounts, appears as a “gift”, that is, non-credit money.

We are now coming closer to answer the second part of the question. If the chaotically created non-credit money (as described above) can serve as a measure of human labor, the same can obviously be achieved, probably more effectively, by conscious and organized emission of non-credit money.

Let us suppose, therefore, that a certain amount of non-credit money is purposly emitted. Regardless of whom exactly is this money first allotted to, these primary porters of income from non-credit money are given power over others’ labor, i.e. ability to purchase goods and services. Thereby this primary non-credit money enters into circulation. Depending on the rate of its circulation, it will employ greater or smaller amount of labor. The total product created by that money in a given period of time, according to the well-known Marx’s formula, will be equal to the product of the quantity of that money and the average number of turnovers of that money in that period. Although at the time of creation it did not have any backing in human labor (i.e. the money is created before any labor was performed), the non-credit money played a useful social role – it engaged human labor and led to an increase of production. If the quantity of non-credit money emitted corresponds to the needs of the economy, it cannot initiate any inflationary or deflationary impulses.

With this mode of emission, there will appear one phenomenon that requires a deeper theoretical explanation. Although the orthodox theory holds that on the global (national) level, total income does not exceed total expenditures; in the system of non-credit money, the total money income will, by the quantity of primary emission of non-credit money, exceed the sum total of the money expenditures. Namely, the total money income will equal the sum of incomes from labor and incomes from emission of non-credit money. The question is where do these nominal incomes, bestowed on the porters of primary emission of non-credit money, actually come from, since they obviously do not come from labor (i.e. labor values of gross social product).

What is surplus utility?

In my previous article “What are really economic laws” (published in “Ekonomska politika”, no. 1499/1980, pp. 27, SFRJ), I set the hypothesis of the existence of a category of surplus utility, and that non-credit money should just be the monetary equivalent of that surplus. Namely, in that article a new paradigm is developed, in which money is foremostly observed in its function of legitimizing and legalizing human needs, and so it serves (as a means of purchasing) as a measure of quantity of use value (or objective utility, as a quantitative expression of use value), that people can, owing to possession of money, appropriate.

In a rational society, total income, expressing (measuring) the total realized objective utility (termed the product of civilization) should be greater than the sum of incomes that come from invested labor, that is, from labor value of social product (termed the product of culture), by an amount I defined as social surplus utility. Social surplus utility realized in a given period equals in exact nominal amount the quantity of emitted primary non-credit money in that period.

If the source of non-credit money is in surplus utility, this already hints at where the primary emission of non-credit money should be directed. Some supporters of non-credit money (for example, Dr. Milutin Ćirović and Dr. Srećko Urgin) believe it should be the sector of production. However, if one accepts the thesis about the existence of surplus utility and about non-credit money as an expression of that surplus, then it is inevitable to conclude that the primary emission of non-credit money must be allotted to the non-productive population. By spending this “unearned” income (that does not originate in labor, but rather in surplus utility, i.e. in increase of economic rationality), the beneficiaries of income from the emission of non-credit money will supply the economy with the necessary amount of cash, removing the cause of indebtedness of economy. On the other hand, since a part of the economy would be financed directly from the emission of non-credit money, a portion of taxes that have served for financing the non-productive sector would be abolished.

Thus, by allocating the emission of non-credit money in the sector of end consumers (particularly those who have been a burden to the production sector), we ensure that the production sector is both provided with non-credit money and fiscally relieved at the same time. Room for accumulation and financing of expanded self-reproduction would be significantly expanded, thereby strengthening the society’s material base. In addition, conditions would be established for faster development of public services (health, education, science, etc.) that would not burden the economy.

Productive and non-productive sphere (base and superstructure) would no longer be mutually contested, but would rather, through the mechanism of emission of non-credit money, assist each other in development.

The proposed mechanism of non-credit money emission provides the foundation for managing one extremely simplified, but absolutely effective monetary policy. If exactly the necessary quantity of non-credit money is emitted, we can be sure that no subsequent intervention would be required. In the system of credit money, on the contrary, subsequent interventions are inevitable, because the system is constantly faced with money shortage and illiquidity that are forcing the organs of monetary policy to repeatedly resort to additional credit emission (or stimulation thereof). The deflation problem, which is a characteristic of credit economy, is actually caused by shortage of non-credit money, which cannot be overcome even by endless expansion of credit money. Still, this infinite expansion serves an important function – it devalues money and thus creates conditions for spontaneous and chaotic creation of non-credit money.

Emission of non-credit money abolishes many existing balances in the social accounts (incomes and expenditures) and replaces them by lawful proportions. Traditional theory will initially have a hard time to accept the new system of social accounts. However, that system has already been spontaneously established. For example, emission of non-credit money (that is, income from the social surplus utility for the needs of non-production sphere), is today masked in budget deficit. The dogmatic policy of deficit suppression only aggravates the condition of both economy and social services.

Finally, although nominally in balance, budget can never really be in balance, as long as expenditures (i.e. emission of credit money for the needs of state) precede incomes (that repay the state’s credit) while there is a certain percentage of inflation. It is obvious that real state expenses (causing emission of money) are greater than real incomes (that withdraw money), which means that there really exists a net emission of non-credit money even though the budget in balance (nominal).

The theory of surplus utility and non-credit money asks one to look at truth in the eyes. It calls for the study of the movements of real rather than nominal quantities. Such research reveals that the new system of money emission has really been but long present, while the old one lasts only in appearances, i.e. nominal quantities. Yet everyone repeatedly vows to achieve (before some hypothetical date that always is postponed) a budget balance. Fortunately, “natural” economic laws will not allow us to. No one today can establish an actual budget balance, without putting a full stop to their own economic development. Spontaneously and chaotically, the emission of non-credit money has already taken hold and has proven its vitality.

Stojan Nenadović

stojan.nenadovic@gmail.com

In stagnant society, with no changes in economic rationality, the value of national product (PQ), which represents offer, is equal to demand, which is the product of quantity of money in circulation (M) and velocity of money circulation (V):

PQ = MV

Quantity of money in circulation (M) is equal to:

(P = price level = const.;  Q = quantity of products)

In a dynamic society, where economic rationality increases, there exist an increase in production (dQ) and offer (PO+PdQ) and a decrease in velocity of money circulation (-dV) and demand (MV+MdV), and that requires an additional quantity of money in circulation (dM), in order to preserve the equilibrium of offer and demand:

Required additional quantity of circulation money (dM) is computed by defining coefficient k:

Coefficient  k  represents the rate of increase of  quantity of money in circulation which is needed to obtain an increased production in the circumstances of  retarded velocity of money circulation.

Additional quantity of money in circulation (dM), being a percentage of quantity of money in circulation (kM), must be emitted as non-credit money, i.e. gift , in the form of pensions and children allowances.

Using a portion of this money, the amount being, an increase in production is obtained and this portion ends up as producers profit, while the amount of

, compensates the retarding in velocity of money circulation, and this portion represents consumers surplus, i.e. consumer profit.

The sum of incomes in a society is composed of incomes which are built into expenses, i.e. costs and incomes obtained from the additional quantity of money in circulation, which are then as non-credit money granted to the society, as surplus of utility obtained from the increase in economic rationality.

Sum of costs in a society (NC) is: new national product – profit:

Sum of incomes (NI) is: new national product + consumer surplus:

Today, money is put into circulation in the form of credits.

In credit money system, due to retarding of velocity of money in circulation, a shortage of money is a result, and this shortage causes crises of hyper-production or non-sufficient consumption.

As of mid 20-th century this problem is solved by an endless expansion of credit money and inflation. In the circumstances of credit money inflation at the same time we have a nominal equilibrium of social accounts, which satisfies the dogmas of traditional economic science, and real imbalance (in which the sum of incomes is greater than the sum of costs), which proves the theory of existence of surplus of utility and of non-credit money, because it is really a non-credit money that is emitted, in the form of credits, at least partially.

By establishing a system of emission of non-credit money, the equivalence of nominal and real values is realized, an endless price stability is secured without inflation and deflation, as well as maximum profits and satisfaction of needs of non-productive part of population from non-credit money emission (i.e. without burdening the production). This is a necessary condition of normal reproduction of a society where economic rationality increases. World order should be based upon this foundation.

Milton Friedman has empirically determined that velocity of money  circulation is constantly in retarding, but he has not noticed that the cause to this lies in the increase in rationality of consumption. He proposed that monetary policy should be restricted to pouring money into circulation at a constant annual rate, but he did not notice that this money should be non-credit money.