Declaration of Interdependence by a Community

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The following is a Declaration of Interdependence that could be made by every community of, say between 5000 and 25,000 people. Since there are over 4 million people in New Zealand, it could be made by hundreds of different communities.

We as a community believe we have rights and responsibilities.

We find ourselves tired of growing inequality where the wealth of 62 individuals is now equal to the wealth of the bottom half of the the planet’s population. We are frustrated by the growing power of the corporates and the super wealthy. We are alarmed by decades of inaction on climate change because economics is fundamentally odds with the climate. We grieve for our steadily growing loss of sovereignty with so-called Free Trade Agreements like TPP ceding power to the corporates.

Recognising the power of nature to bat last and the social dangers posed by economic collapse or major climate events, we wholeheartedly believe it is time our economic system was at peace with the planet.

We, the people of …………, now desire to share the values of the land and gifts of Nature and of our inheritance with our whole community, for that is all we have within our power.

Given the power of the corporates to influence governments and therefore the relative futility of national action to bring our economic system in line with nature, we recognise that this fundamental change can only happen at the local level.

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We therefore agree among us to:
• Gradually own all our own land collectively so that no one will profit or lose from owning land. We will gradually bring more and more land into a Community Land Trust while compensating the owners fairly. We will thus take land out of the marketplace.
• Create a new currency, acceptable for our public revenue. This currency will be designed to circulate smoothly. It will not be created as interest-bearing debt because that creates more debt, but be spent into existence.
• Organise ourselves as a governance unit, electing our own people, making our own rules and being responsible for enforcing them. This includes keeping the value of the new currency stable. The rules will include rules for businesses using the currency and rules for imposing appropriate resource rents from water, minerals or any other part of the commons.
• Gather revenue from land and other resource rents and use it for public purposes including for regular distribution of a dividend for all our citizens resident here for a year or more.
• Collectively budget together at least twice a year.
• Create and maintain a register of citizens eligible for dividends.

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We further agree to:
• Co-operate with neighbouring communities to build and maintain such infrastructure as needed by a larger community and perform other governance functions that are better organised and financed on a larger scale.
• Co-operate with district and regional councils as above.
• Co-operate with central government as above.
• Co-operate with district, regional and central government for any revenue sharing in the new currency as we believe mutually beneficial.
• Co-operate with all other communities to keep the value of the new shared currency stable. We envisage a network of inflation control teams based in every community working together for this purpose.

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We do not agree that central government will impose their tax laws on trades in our currency or interfere with the formation or operation of our Community Land Trust. We do not agree to any interference from the Reserve Bank of NZ regarding the legitimacy of our new currency or the way we control its stability.

The Rise and Rise of Evonomics

It’s not often that a blog takes off at speed but http://evonomics.com is an exception to this.

Like us they want a new view of economics.

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Here’s what the About page says in part: “Today’s economic ideas will create the world we live in tomorrow.

Good economic thinking, widely shared, understood, and implemented in public policy, can make the world a far better place. We’re committed to helping that happen…..Evonomics was launched in October 2015 by founding editor Robert Kadar and co-founder Joe Brewer. Steve Roth, an early and active advisor and participant, serves as publisher. It seems to have a struck a nerve, rapidly attracting hundreds of thousands of page views a month. Evonomics has become an amplifier and soundboard for new economic thinking, expanding the reach of that thinking to a broad community of citizens, thinkers, influencers, and policymakers.”

It looks as though it comes out of Seattle. Not unsurprising, as Seattle seems to have much in common with Vermont.

Yes it is impressive and very professional. Blogs by Joe Stiglitz, David Sloan Wilson, Tom Streithorst,  Lyn Stout, George Blackford, Philip Kotler, John Perkins, Amna Silim, John Komlos, Steve Roth, Peter Barnes, George Monbiot, Paul Ormerod, Frances Coppola.

Advisors include Steve Keen, Sarah Van Gelder, Yanis Varoufakis, Robert Reich, Paul Krugman, Sally J Goerner, Francis Coppola, Robert Schiller. And these are only a few.
 
Apart from economists, advisors are pyschologists, journalists, evolutionary biologists, ecological economists, civic entrepreneurs, sociologists, scientists, lawyers, historians, authors and so on.
 

The layout of the front page is simple and it works. Only two items in the menu, graphics to die for, photos of bloggers and advisors on the right column and wherever you go you are invited to receive the newsletter, loud and clear. Simplicity is the hallmark. Simple title indicating it is the next evolution of economics. Facebook, twitter and search and one partner (there are blogs by David Sloan Wilson of the Evolution Institute). And there it all is.

Being a keen tweeter I have enjoyed scrutinising the pattern of their tweets and the people they follow.

Deirdre Kent

Auckland home owners are “richer” than last year by $64 billion

The average price for an  Auckland home is now just over $1 million. The media focuses, as they usually do, on how impossible it is nowadays for young people to buy a house, with a side mention of how difficult it is for nurses, service workers and teachers to buy a house, and how the Auckland problem is spilling over to the entire country. There has also been a great deal of publicity in the last six months about homelessness, with a marae in Auckland shaming the Government into action by opening its doors to the homeless for the winter.

But there is another big issue that is almost never mentioned – the lost potential public revenue from land rent. Land rent is what the occupier would pay to the public if the public owned the land. Many have explained that the rise in value of homes is really the accumulated land rent over that period. It is also called the capital gain or unearned windfall.

QV HOUSE PRICE INDEX AUG16

Recent figures from Quotable Values New Zealand allow us to work out the on-paper profit for our country’s homeowners and for Auckland’s homeowners. This of course is just on-paper, but because it represents their realisable assets it does allow homeowners to do other things e.g. borrow more for other purposes. This calculation acknowledges that the figures are the houses that are sold only. Houses sold in that period were more like one tenth of the housing stock. But if my neighbour’s house sells for $1million and ours is similar we know ours could sell for a similar price. Our house value is what a valuer would estimate or better still what the market would pay. Valuers value by looking at what did sell in the district and making comparisons. The bank recognises this as the value of our asset.

And the fact that I had a huge mortgage didn’t really make any difference. Supposing I only have $200k and buy a $900k house, selling it a year later for $1 million. I make a profit of $100k because my deposit of $200k was turned into $300k.

Let’s first take Auckland where the figures are the most dramatic. 

House prices rose nearly 16% last year. The average uplift in Auckland house prices in that period was $138,781.

Since land values are created by the community around them, by the governments and communities that serve that site, the uplift belongs to the public purse. Rise in property prices are virtually all attributable to the rise in land prices. Schools, hospitals, infrastructure are built by government, central and local, and the private land owner reaps the profit. Businesses arrive, clubs start. Without a community around it, land has little value. (Even agriculture requires transport infrastructure. Land for conservation is usually publicly owned). 

The total uplift for Auckland properties was 461,669 (the number of residential properties in Auckland Council) multiplied by $138,781, or $64 billion.

Sold Home For Sale Sign and House

Now supposing this uplift was publicly captured month by month in the form of a full land rent, as it should be. What would the council do with it?

1. They could give half to the government straight away, leaving $32 billion.

2. They could put aside about $20 billion for infrastructure building and upgrading including rapid transit, and debt relief, leaving $12 billion still to be shared.

3. Sharing the rents is important. So the $12 billion could be given out as a Citizens Dividend to every man, woman and child in Auckland. The population of Auckland is about 1.58 million, making about $7,600 per person. For a family of five that would be $38,000.

That should help a few homeless families!

New Zealand homeowners are $138 billion richer than last year 

There are at least 1,771,2000 residential homes in NZ (2013 census). The average uplift in NZ house prices was the difference between the Aug 2016 price and the August 2015 price, which as $78,196.

So multiplying these two, New Zealand homeowners on paper have assets worth about $138 billion more than last year. The tax take last year was $66.6 billion. So it is more than double the tax take. All this is privately captured when it really should be going to the state. In comparison to the $138 billion uplift for NZ, the GDP last year was about $170 billion.

However there are several political obstacles stopping us from applying these solutions in our current context:

• Aucklanders pay rates. However Auckland Council was introduced by legislation when amalgamation took place. This mandated that the rates were levied on capital values, thus requiring legislation for a change to rating system on land values. There is only miniscule awareness of this as a political issue.

• The viability these days of a centrally imposed land tax is not good, given the fact there are at least three bank lobbyists for every legislator and neoclassical economics is in full bloom. Nowadays the power of the landed and moneyed elite is so much greater in relation to the 99% than it has ever been.

• It has been legally impossible to impose land tax in NZ since 1992, though the PM seems not to know this because it was he that suggested putting a land tax on property bought by foreigners earlier in 2016. The idea died within a day or two. However this law could easily be reversed.

• No politician wanting to be re-elected would advocate a measure that was going to bring down house prices and leave homebuyers with negative equity. A 5-6% land tax would actually be for politicians and doing it gradually wouldn’t work either.

• Imposing a land value tax must go hand in hand with dropping of income tax so this has to be incorporated into the solution.

But all is not lost! The obstacles are not insuperable. Think about the untenable current situation of housing prices and its destructive consequences of widening the wealth gap. We have to start on other ground breaking solutions. Let’s be pioneering here.

A little history might give hope. New Zealand had a Liberal Government in the 1890s that imposed a land tax to break up big land holdings. Then it extended, but unfortunately it was at a higher rate per acre for large landholdings than for smaller ones, which was essentially unfair. This resulted in a new political party dominated by larger farmers. But land tax never reached more than 20% of the tax take, and income tax was gradually increased and extended. The same Liberal Government did however enact legislation to empower local government to hold a referendum where ratepayers could choose between land value rating systems and capital value. This was in place for 80 years and always resulted in the more equitable the public choosing land value rating systems. Cities like Wellington and Napier built on this rating system are compact.

If money buys lobbying power, then we have to be more strategic and try different tactics. This might point to governance reform giving much more power to local authorities and to even smaller governance units. Given that the banks have a vested interest in profiting from the buying and selling of land and from the private ownership of natural resources and infrastructure, a host of local innovative actions may be the surprise option. And this would require huge resistance from local communities that are determined to share land values and preserve natural resource values.

Maybe the old system should be left alone to collapse and die, and the new paradigm system reinvented at local level. We need to ask how land trusts can connect with localised governance units whose revenue is derived land and resource rents. But where would the money come from to buy the land? Maybe we need to create a local currency designed to circulate at an optimal speed. Maybe when there is surplus locally it can be steered from the periphery to the centre of government.

Certainly clever, innovative thinking is called for and it should be all hands on deck for that task!

A currency for Christchurch taken seriously

John Campbell introduced the piece on RNZ’s Checkpoint with the remark, “A separate currency for Christchurch could be real. Is the city serious about it? Are they for real?”. He said he had done his own research and found the Bristol Pound in UK. And the Totnes Pound and the Brixton Pound.

Chair of the council’s Finance Committee Raf Manji explained there were 2,500 community currencies operating round the world, talked of his preference for the Bristol Pound because of its convertibility. Treasury and RBNZ need to be involved. Our plan is to launch it at the 2017 Social Enterprise World Forum. http://www.radionz.co.nz/national/programmes/checkpoint/audio/201795721/christchurch-could-soon-have-its-own-currency

Dairy debt dilemma needs solving

1436821666128At the end of 2014 we published a blog asking Why our are farmers farming for capital gain?

In it Andrew Gawith, then Director of Gareth Morgan Investments described the economics of farming in New Zealand as ‘speculative’ as the financial benefits are almost entirely dependent on capital gains. Other than dairy, income is puny and unreliable, he said. Now the focus goes plainly on dairy debt as the price the farmer receives is plummeting and the banks have been recklessly lending, knowing they are only lending on the promise of capital gain. And our country has no capital gains tax and no land tax, so it is a great place to pour investment money from China and other countries. The TPP, if ratified, will not allow our country to ban the sale of land to foreigners.

Gawith pointed out that in the twenty years between 1990 and 2010 the real after-tax return to farmers was something in the order of 7 percent to 8 percent a year,’ and that this was double the return of sharemarkets.

He said farming was the most popular business for banks to lend to. ‘While other areas of economic endeavour are starved of capital, banks have very nearly drowned farming with debt. The ease with which farmers can get capital has helped push up the price of land.’

So with farmers drowning in debt, they can’t withstand the drop in dairy prices from a high of over $8 per kilo milk solid to below $4 by March 2016.

Dairy debt was around $32 billion in 2013, up from $8 billion in 2003, which makes a quadrupling in a decade! And by March 2016 it is $37.8 million. Gawith said in 2010 that dairy debt represents two thirds of all outstanding farm debt. According to Federated Farmers in February 2016, one in ten dairy farmers were feeling pressure from their banks. During the time of growing stress the Minister of Agriculture kept urging banks to cooperate with dairy farmers. The price of dairy land averages $39,367 per hectare, and in Taranaki the average value is even higher. Dairy farmland in New Zealand is reported to be the dearest in the world.

Farming is very capital intensive, with only mining and utilities more so. According to an NZIER study, ‘Around three-quarters of value added in agriculture is from capital (land, plant and machinery). This is higher than the economy wide average of around 50%.”

Janette Walker, a rural debt mediator, told John Campbell on Monday 8 March that 85% of dairy farmers are not going to make a cent for the next two years and if land prices drop it will be a train wreck. Overseas land buyers are circling. Banks have lent too much for too long, based on capital gain. They completely missed the cashflow issue. Supply companies, vets, contractors and lawyers are watching closely as they are unsecured creditors.

Paul Glass of Devon Funds Management told a September conference that for every $3.90/kilo dairy farmers get in payout they have $19 debt/kilo on average. For years Glass had been concerned about the high level of debt carried by not only dairy farmers but also by Fonterra, our major dairy company.

Actions required

If dairy farming turns out to be the cause of our country’s Minsky moment, how can we avert a crisis? One Northland dairy farmer who was selling up told Checkpoint that government should let innovations emerge at local level, they were too dependent on outside advisors coming in.

Now the government could do what they did for central Christchurch land after the February 2011 earthquake to avoid a slump in land price – buy up land from distressed dairy farmers. But they shouldn’t borrow from a bank for the money. They could issue Treasury Notes; that has been done in other countries before in crises.

There is something else a government could do and that is QE for the People. Give out new money (Treasury Notes) in the form of a Citizens Dividend. This is on condition that any debt must be paid off first.

Or the banks could become shareholders in the businesses they lend to until it is clear which way the business will go.

Given the importance of private debt before a crisis, whatever action taken should not add to overall private debt.You need to reduce the debt level without reducing aggregate demand at the same time. 

But none of this is likely to happen. Pigs might fly. If government will not act and get together with banks and farmers, and the most valuable farm land is in danger of being bought up by overseas buyers, then it is up to local government to do something big.

The first option is that they distribute a Citizens Dividend. To prepare for this all local authorities, and all agencies of local authorities like Community Boards should by now be compiling a list of their citizens, just as Alaska and British Columbia do. Alaska does it to share in the bounties of oil revenue, BC does it to share out the proceeds of their carbon tax. In the case of Alaska, they give the dividend to all citizens who have lived there for a year. They need to buy up the land of distressed dairy farmers with a new currency issued on a par with the national currency. The difference is that it needs to be designed differently as well. If we can’t get to this stage in one leap, then let’s stop there. The next locally created currency will have to take this next leap. Or a Maori incorporation that includes dairy farms could issue a new currency after persuading local businesses to accept it.

They need to buy up the land of distressed dairy farmers with a new currency issued on a par with the national currency. The difference is that the currency needs to be designed differently as well to include a circulation incentive. If we can’t get all the way to this stage in one leap, then let’s stop there. The next locally created currency will have to take this next important step. Or a Maori incorporation that includes dairy farms could issue a new currency after persuading local businesses to accept it.

Whatever happens we must find a way to keep our precious dairy land in our country’s ownership. It either has to be owned by government, local government or by a Maori entity, be it an iwi or an incorporation. Whichever body does it, their new income will be derived from land rent. At that stage a lifetime lease contract must be arranged to ensure security of guardianship.

The public must thenkeep a close watch the on public bodies because they will find themselves under political pressure to reduce land rents and effectively hand out free lunches. (this happened in Canberra and government leasehold land rents have been progressively reduced in New Zealand). To ensure this doesn’t happen, it is important to give the new currency special benefits to ensure it circulates without deadweight taxes – trades in it should have no income tax or GST. The currency should be designed as a means of exchange only and for this, it is important to build in an incentive for it to circulate quickly.

But this is a whole new matter. It will require some staunchness on the part of local government when accosted by national government. However, considering it now attracts a full land rent, which is fairly high, it is only fair that the new currency must have tax advantages over the national currency to compensate.

Did banks apply for a patent to use money?

new-nz-moneySo is money part of the commons?

Money is a clever human invention designed to be a medium of exchange. Everyone agrees to accept money because they know that other people trust it too. Unfortunately many centuries ago, governments started to accept bank credit as money. And when they accepted bank money for taxes, they either consciously or unconsciously gave banks a patent banks didn’t apply for or pay for. Nor did they check whether the invention was a working model. If they had done so they would never have granted the patent.

So we somehow allowed money to be lent into circulation with interest, causing a competitive system and a scarcity mentality where some amount of bankruptcy is inevitable. What’s more the patent had no termination date.

Banks continue this privilege of creating the country’s money supply (in the case of New Zealand it is at least 98.5% of our total money supply). So we gave banks the monopoly on money creation, didn’t tell the people and didn’t charge the banks a bean.

How land barons, industrialists and bankers corrupted economics

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The so-called discipline of economics has been systematically corrupted in two major ways: first to get rid of the word ‘land’ from the very language of economics and second to downplay, omit or misrepresent any discussion of the words ‘credit’, ‘banking’ and ‘money’. They shamelessly describe banks as intermediaries when they know this is a minor function and that bank’s major function is money creation.  Fortunately the story behind the flagrant omission of land as a factor of production has now emerged, while the money story remains for some enterprising researcher in the future, (though various DVDs and stories hint in that direction).

The Corruption of Economics by Mason Gaffney and Fred Harrison, while free online, is hardly known; as of December 2015 only three New Zealand university libraries and the Auckland Public Library held copies. Yet in it is a very important story.

Fred Harrison describes the phenomenon of Henry George, the San Francisco journalist who took the world by storm with his book Progress and Poverty in 1879, in which he argues that the benefits of land ownership must be shared by all and that a single tax is needed to fund government –  a land tax. The factors of production are land, capital and labour. Untax labour and tax land was the cry. Poverty could be beaten. Social justice was possible!

Of Henry George influential economic historian John Kenneth Galbraith writes,

In his time and even into the 1920s and 1930s Henry George was the most widely read of American economic writers both at home and in Europe. He was, indeed, one of the most widely read of Americans. Progress and Poverty… in various editions and reprintings… had a circulation in the millions.

Unlike many writers, Henry George didn’t stop there. He took his message of hope everywhere he could travel – across America and to England, New Zealand, Australia, Scotland and Ireland.  He turned political. Seven years after his book came out in remote California, in 1886 he narrowly missed out on being elected Mayor of New York, outpolling Teddy Roosevelt.  During the 1890s George, Henry George was the third most famous American, after Mark Twain and Thomas Edison. Ten years after Progress and Poverty he was influencing a radical wing of the British Liberal Party. He was read by semi-literate workers from Birmingham, Alabama to Liverpool, England. His Single Tax was understood by peasants in the remotest crofts of Scotland and Ireland.

Gaffney’s section of the book outlines how certain rich land barons, industrialists and bankers funded influential universities in America and proceeded to change the direction of their economics departments. He names names at every turn, wading through presidents and funders of many prestigious universities. In particular, Gaffney, an economist himself, names the economists bought  to discredit Henry George’s theories, their debates with George and their papers written over many decades.

‘George’s ideas were carried worldwide by such towering figures as Lloyd George in England, Leo Tolstoy and Alexander Kerensky in Russia, Sun Yat-sen in China, hundreds of local and state and a few power national politicians in both Canada and the USA, Billy Hughes in Australia, Rolland O’Regan in New Zealand, Chaim Weizmann in Palestine, Francisco Madero in Mexico, and many others in Denmark, South Africa and around the world. In England Lloyd George’s budget speech of 1909 reads in part as though written by Henry George himself. Some of Winston Churchill’s speeches were written by Georgist ghosts.’

When he died there were 100,000 at his funeral.

The wealthy and influential just couldn’t let the dangerous ideas spread. Their privileged position was gravely threatened. Henry George must be stopped. But the strategy had to be subtle. What better route than by using their money to influence the supposed fount of all knowledge, the universities? That would then indoctrinate journalists and the general public. Nice one!

The story explains how, for their wealthy paymasters, academics corrupted the language to subsume land under capital as a factor of production. They redefined rent, and created a jargon to confuse public debate. Harrison says, ‘For a century they have taken people down blind alleys with abstract models and algebraic equations. Economics became detached from the real world in the course of the twentieth century.’

Yes, the wealthy paid money to buy scholars to pervert the science.

Gaffney’s rich, whimsical language is a joy to read. He writes to Harrison,

‘Systematic, universal brainwashing is the crime, tendentious mental conditioning calculated to mislead students, to impoverish their mental ability, to bend their minds to the service of a system that funnels power and wealth to a parasitic minority.’

He painstakingly describes the funding of various American universities by such figures as JP Morgan and John D Rockefeller who choose the President who obligingly appoints suitable head economists to key academic positions. Gaffney trawls through the writings of key figures in neoclassical economics over many decades, quoting numerous pieces attacking Henry George and his Single Tax proposal. Several neoclassical economists actually debated George in person. These early neoclassical economists were J B Clark, Philip Wicksteed, Alfred Marshall, ERA Seligman and Francis A Walker, who each contributed something to ‘addle, baffle, boggle and dazzle the laity’.  J B Clark, for instance, has a bibliography that quotes at least 24 works directed against George over a span of 28 years.

Banker JP Morgan funnelled his wealth through Seth Low to Columbia University in New York, and John D Rockefeller did the same in Chicago. Ezra Cornell, who Gaffney says once held one million acres of land, creator of the Western Union Monopoly, founded Cornell University in Ithaca, New York State. Leland Stanford of Southern Pacific Railroad (really a land company), funded Stanford University. Johns Hopkins University in Baltimore, Maryland was endowed by Johns Hopkins, millionaire merchant and investor.

Each of these benefactors appointed their own president. Hopkins appointed Daniel Gilman as President. Out of that university came eleven Presidents of the American Economics Association. Gilman had a natural hatred of Henry George as he had been hounded out of Berkeley by the crusading young journalist when he uncovered ‘Gilman’s improper diversion of the Morrill Act funds.’

In his chapter entitled The Chicago School Poison, Gaffney writes:

John D Rockefeller funded Chicago spectacularly in 1892, and started raiding other campuses by raising salaries. Rockefeller picked the first President, William Rainey Harper. Harper picked the first economist, J Laurence Laughlin, from Andrew Dickson White’s Cornell (he liked Laughlin’s rigid conservative and anti-populist views. Harper drove out Veblen in 1906, then died, leaving Laughlin in charge of economics until he retired in 1916. He passed the torch to J. M. Clark, the son and collaborator of J.B.Clark. Frank Knight came to Chicago in 1917 from Laughlin’s Cornell. The apostolic succession is very clear from Rockefeller to Harper to Laughlin to Clark to Knight. …Chicago to this day is still the lengthened shadow of John D Rockefeller.

In terms of numbers, and intensity of feeling generated, Knight probably produced more neoclassical economists than anyone in history. He made no secret of his firm opposition to Henry George and ideas that might comfort Georgists. His enduring interest and his viewpoint are clear from the title “Fallacies in the Single Tax” (1953)

Who would have thought nowadays that Henry George had to be neutralised? After all, he wrote his books and did his public speaking and touring from 1870 to 1897.

It was in these five Universities that neoclassical economics developed to the stage where it has almost completely taken over from classical economics, and it was out of these universities that the American Association of Economists was founded in 1885 by Ely, Walker, Edwin Seligman and others. He notes they did not welcome ‘reformers’.

In addition, Richard Ely retired after a long career a John Hopkins University, to establish what he called The Institute for Research in Land and Public Utilities whose purpose was ‘to investigate all problems connected with land taxation’. Contributors included utilities, railways, building and loan associations, land companies, lumbermen, farmers, bankers, lawyers and insurance men.

At least two of these academics were wealthy – E R A Seligman of Columbia came from a wealthy banking family. Richard Ely, who was known as the ‘Dean of American economists,’ was a well-connected land speculator, making a small fortune in Wisconsin real estate. He spent his life rationalising land speculation.

To give you another taste of Gaffney (take a big breath): ‘To most modern readers, probably George seems too minor a figure to have warranted such an extreme reaction. This impression is a measure of the neo-classicals’ success; it is what they sought to make of him. It took a generation, but by 1930 they had succeeded in reducing him in the public mind. In the process of succeeding, however, they emasculated the discipline, impoverished economic thought, muddled the minds of countless students, rationalised free-riding by landowners, took dignity from labour, rationalised chronic unemployment, hobbled us with today’s counterproductive tax tangle, marginalised the obvious alternative system of public finance, shattered our sense of community, subverted a rising economic democracy for the benefit of rent-takers and led us into becoming an increasingly nasty and dangerously divided plutocracy.’

Let’s turn a blind eye to money too

The omission of the words credit, banking and money or the downright distortion of facts in university teaching was also no accident. The publishing in 1906 of Silvio Gesell’s book The Natural Economic Order sparked a decades-long movement. Gesell has been described by Irving Fisher as a ‘strangely neglected prophet’. John Maynard Keynes wrote, ‘I believe that the future will learn more from the spirit of Gesell than from that of Marx.’

For centuries American politicians and British politicians had been treating money creation as a political issue.Thomas Jefferson and Abraham Lincoln are two who knew that banks create money. But after the arrival of neoclassical economics in the late nineteenth century, things started to change. To please the banks who profit from land ownership, mention of the words ‘money’, ‘credit’ and ‘banking’ was also omitted, especially after the widespread influence of both Major CH Douglas from the 1920s and Silvio Gesell’s advocacy of a decaying currency. It was a bit worrying for banks that the Social Credit Party in New Zealand won 12% of the vote in 1953. So a Royal Commission on Banking and Credit was set up. In 1956 it found that banks were ‘banks of issue as well as banks of deposit’. However, thanks to their spin doctors, politicians their  managed to misrepresent the findings well enough for the public to believe the Commission had ruled the opposite. Who knows what mischief went on behind the scenes? Universities fell into line. Academic teaching on money creation was reduced to a brazenly inaccurate paragraph or two, misleading generations of students. But money is really created by private banks as interest-bearing debt. This writes in a growth imperative, ensuring we depend on exponentially growing debt and continue to monetise and privatise the commons.

If universities are a vehicle for spreading misinformation about how money is created we can more easily understand the simple and chilling statement of Mayer Amschel Rothschild , “Let me issue and control a nation’s money and I care not who writes the laws.”

Predicting the Global Financial Crisis

The corruption of economics in universities is no trivial matter. Economic crises are serious matter involving loss of homes, savings and jobs and economists need the right tools to predict them so they can deal with them. Tragically only a handful of economists predicted the Global Financial Crisis  of 2007-8 and the Queen of England was known to ask, ‘Why didn’t anyone see this coming?’ Professor Steve Keen in his book Debunking Economics spends a chapter summarising the work of a Dutch economist, Dr Dirk Bezemer. After laying down certain criteria for selection, he concludes there were only 12 (two published together). He named Dean Baker, Wynne Godley, Fred Harrison (UK), Michael Hudson, Eric Janszen, Steve Keen (Australia), Jakob Madsen & Jens Kjaer Sørensen (Denmark), Kurt Richebächer, Nouriel Roubini, Peter Schiff and Robert Shiller. Subsequently Bezemer had the list at three dozen, but out of a total profession of at least 20,000 it is a very dismal record. If any other profession (e.g medicine) was so wrong in something that affected millions they would be sued. The universities who train economists should hang their heads in shame.

Hyman Minsky claimed that in prosperous times, when corporate cash flow rises beyond what is needed to pay off debt, a speculative euphoria develops, and soon thereafter debts exceed what borrowers can pay off from their incoming revenues, which in turn produces a financial crisis. He said we moved from a hedging stage where risk is low to a speculative stage and finally to a Ponzi stage. A key indicator was the growth of private debt as a fraction of GDP. The “Bezemer 12” quoted above had in common that they were concerned with the distinction between the financial economy (making money from money) and the real economy. Keen wrote in 2009, “Unfortunately after the crisis everything being done by policy makers around the world is instead trying to restart private borrowing.” Sadly Wikipedia notes that while Minsky’s theories have enjoyed some popularity, they have had little influence in mainstream economics or in central bank policy.

These same people are among those now warning of a very much larger international financial collapse, as debt deflation takes hold and ongoing globalisation locks the global economy ever more tightly together. Economics is too important to be left to mistaught economists. The absence of good, reality-based economic theory in education leaves millions of environmental and social activists – along with the compassionate right – to flounder about helplessly trying to solve growing inequality and the climate crisis.

Challenging the universities
Tackling the veracity of university teaching in economics is no job for a quitter. In 2013 a retired engineer started on a mission when he read the Bank of England paper on money creation. Peter Morgan wrote to the Vice-Chancellor of Auckland University, Professor Ananish Chaudhuri:

‘The textbook used by the University of Auckland for its macroeconomics courses is Principles of Macroeconomics in New Zealand, by N. Gregory Mankiw, Debasis Bandyopadhyay and Paul Wooding. It contains several statements that are unequivocally fallacious. By way of example – by no means the only one in the textbook – the following is an example:

“Financial intermediaries are financial institutions through which savers can indirectly provide funds to borrowers.”’

He went on to quote from both the Royal Commission on Banking and Credit in New Zealand in 1956, but mostly from the Bank of England papers e.g. Banks are not intermediaries of loanable funds – and why this matters by Zoltan Jakab and Michael Kumhof

Back came his answer:-

“Dear Mr Morgan:

Thank you for your recent letter to the Vice Chancellor which has now been sent on to me via the Dean of the Business School.

First of all, thank you for taking the time to write.

I begin by noting that the questions you have raised go to the heart of the debate raging around the world. There is no question that in the aftermath of the GFC, the state of macroeconomics globally is in a flux with possibly more questions than answers. As you must be well aware leading scholars as well as policy makers are currently engaged in a robust debate world-wide particularly as Greece and Germany enter into a stare-down which may result in the break-up of the European currency union.

Having said that let me make a few points:

First, the textbook at issue is the most popular textbook world-wide including most leading institutions of higher learning. Greg Mankiw is a leading scholar, a professor at Harvard (which I believe also teaches from this text) and was Chairman of George W. Bush’s Council of Economic Advisors. I expect that he is well aware of the state of the art in terms of both the theory and policy-making. There are local editions of this book written by leading scholars in those countries. The Australian edition was done by Joshua Gans of Melbourne and Stephen King (till recently Dean at Monash Business School). Their role is to provide a local perspective and local data but the major intellectual force is provided by Mankiw. It is important to understand that the scholarship in this area is still very much evolving and therefore a plausible counter-argument is that no matter which text-book we choose to use, it will suffer from some flaws and deficiencies.

Second, while authors do their best to keep up with evolving knowledge nevertheless it takes time to update textbook content, at least partly because it takes time to understand and absorb the lessons of history. As I noted above the state of macroeconomics is in a flux and new research needs to be integrated into future editions.

Third, I would disagree that the book contains fundamental errors. I think this may have more to do with differences in assumptions and philosophies rather than violations of some universally held truths. We and indeed all scholars welcome robust debate on such differences. They are part and parcel of the academic discourse. As the VC has already pointed out, at the end of the day, this is also an issue of academic freedom. I have absolutely no reservations about the use of this textbook in our degree program.”

So having acknowledged that economists have spent a fruitless seven years scratching their heads about what caused the GFC, or the crisis in Greece, the Head of Department, Professor Chaudhuri puts this major issue aside and declares the book valuable. He justifies using a textbook with fundamental inaccuracies by saying other universities are doing it too! In a subsequent letter he confesses that he is not an expert in monetary policy. They often do that –claim they are not a macroeconomist. This is rather like the head of a medical school saying he is not an expert in medicine or the head of an architecture school saying he is not an expert in building design. The sheer nerve of senior economists to think that they don’t need to come to grips with monetary policy when the world is awash with debt would be incomprehensible if one didn’t know their very jobs depend on their pulling the party line. Money is at the heart of economic life.

Perhaps we can get some clarity from Steve Keen here. In a 2014 blog, he explains the three options open to universities after the 2014 Bank of England paper that refuted the loanable funds model. ‘Now if I believed in the tooth fairy, I would hope this emphatic denunciation of the textbook model would cause macroeconomics lecturers to drastically revise their lectures for next week. But I’m too long in the tooth to have such a delusion. They’ll ignore it instead. Their dominant “tactic” – if I can call it that – will be ignorance itself: most economics lecturers won’t even know that the bank’s paper exists, and they will continue to teach from whatever textbook bible they’ve chosen to inflict upon their students. A secondary one will be to know of it, but ignore it, as they’ve ignored countless critiques of mainstream economics before. The third arrow in the quill, if they are challenged by students about it (hint hint!), will be to argue that the textbook story is a “useful parable” for beginning students, and a more realistic version is introduced in more advanced courses.’

He seriously doubts if the paper will cause senior economists to change their current position and explains that until you know that banks can create and cancel money, you will never be able to understand how demand rises and falls. ‘All the parables of conventional economics fly out the window once you know this. The level of economic activity now depends on the lending decisions of banks (and the repayment decisions of borrowers). If banks lend more rapidly, or if borrowers repay more slowly, there will be a boom; if the reverse, there will be a slump. If new loans simply make up for old ones being repaid, then there is no effect, but if new loans exceed repayment then aggregate demand will increase.’


The urgency of getting this right

If universities are failing us by misleading our young people, journalists and politicians, think how critical it is to reverse this. Naomi Klein says that the climate crisis came along at the just the wrong time – when neoclassical economics was at its zenith. No wonder there was a reluctance to do anything meaningful as it simply clashed with the dominant economic paradigm. She says, ‘Economics is at war with the planet’. According to many experts there is only a small window to reverse climate change, until 2017.

There is a long way to go to reverse public thinking. Neoclassical (or neoliberal) economics has a death like grip on us. In over a century the doctrine has succeeded in further privatising the commons, dismantling the state,  deregulating everything that moves and fooling the public over land and money. The economic theory that ignores the role of money and debt can’t possibly make sense of the economy in which we live. It should be jettisoned.

While the collapse of the global economy will be terribly painful and chaotic, it will certainly reduce carbon emissions dramatically. But as long as the economy holds up we need to get on our bikes and work. Whatever happens, no future economy should have the flaws we have now. It is time to get cracking, or as the sheep farmers of the South Island of New Zealand say – rattle our dags.  We can do it.

Do universities lead advances in economics?

During depressions great thinking is done, sometimes in universities, but more often not. Henry George, a journalist, wrote Progress and Poverty in response to abject poverty in San Francisco (1879 book), Silvio Gesell, a German businessman, wrote after an Argentinian depression of the 1880 and 1890s and John Maynard Keynes wrote after the Great Depression of the 1930s. As we descend into worldwide debt deflation today’s searchers now must urgently find and implement a new economic model. And that will involve a huge shift in thinking.

Keynes suggestions were widely adopted after the Great Depression. In 1933-4 Gesell’s currency was put into practice in a small town in Austria with spectacular results. People came from all over Europe to witness the ‘miracle of Wørgl’.  But it lasted a mere fifteen months, cut short by the influence of big banks over the Austrian government at the time, who made the ‘work certificates’ illegal. So despite considerable influence for three decades for his important thinking on currency design (a currency must only act as a medium of exchange and must rot like potatoes and rust like iron), Gesell is now all but forgotten. As central bankers grope helplessly for tools to stimulate the economy at the same time as controlling inflation, Gesell presents answers.

Gaffney’s description of how land barons, industrialists and bankers perverted university’s teaching, which in turn leads to  wrong government policy, is reminiscent of the story of the history of banking. Banks have been a powerful influence on governments ever since governments allowed banks to create credit that could be used to pay taxes. This may have happened in Europe centuries ago after the goldsmiths.

To add to our troubles universities, under the influence of neoclassical economists, have all but stopped teaching economic history so no one can study Gesell or George.

The tie-up between universities and neoclassical economists also influences the relationship of politicians to bankers. Nomi Prins in her landmark book All the Presidents Bankers sheds light on the symbiotic relationship of a century of American presidents with the top bankers of the country, and how elite bankers can even dictate foreign policy. The dust cover of her book says she ‘ushers us into the intimate world of exclusive clubs, vacation spots, and Ivy League universities that binds presidents and financiers. She unravels the multi-generational blood, intermarriage, and protege relationships that have confined national influence to a privileged cluster of people. These families and individuals recycle their power through elected office and private channels in Washington, DC.’

Bankers admit they create money

Of course the bankers themselves know better than the universities who prefer to be complicit in keeping the secret. Graham Towers, Governor of the Bank of Canada and Lord Josiah Stamp of the Bank of England have been quoted regularly in the monetary reform literature. Even in New Zealand in 1955 we had H W White, Chairman of the Associated Banks telling the Royal Commission on Banking and Credit:

“The banks do create money. They have been doing it for a long time, but they didn’t realise it, and they did not admit it.”