• Martin Schmalzried

Soft Revolution (part 2): rethinking universal income

Universal income has been debated more and more openly in mainstream politics, in Canada, France, Switzerland, and even managed to enter limited “pilot” testing in several countries like Finland.

While some limited studies have already pointed to some tangible benefits such as being more motivated to find work (given that finding work doesn’t mean losing the universal income as it does with unemployment benefits), we are still in the very early days of this idea.

One of the main obstacles of this idea is the issue of cost. During the French presidential campaign, the Socialist Party candidate Benoit Hamon, who supported the idea of a universal income, was heavily criticized for the “extra debt” that the French government would have to take to pay out such a Universal Income.

The second most widely cited criticism is that of laziness. If people have enough money to live on, falling from the sky, they will “sit around and do nothing”, eventually making the Universal Income unsustainable. Let’s quickly dismiss this criticism to move on to the most important one: how to make it work from an economic/financial perspective. The argument of laziness is at the roots of the ideological and fundamental difference between the right and the left’s perception of human nature. Right wing ideology views humans as inherently lazy, if given a chance to do nothing by providing them with some form of “free lunch” via the so called “nanny State”, they will sit around and do nothing, while profiteering from the benefits given to them. This is why people need to be threatened to death (no job, no pay, no access to food or shelter) in order to force them into taking up a job. Of course, this overlooks the fact that people on Universal Income or social benefits spend that money in the economy and allow for property owners to get their rents and businesses to sell their products and enjoy steady consumption patterns (avoiding a deflationary spiral in essence). So as long as the number of people on benefits, whichever those are, remains below a certain threshold, these people serve as a stabilizer, keeping a consumer driven economy afloat.

In contrast, the left wing ideology views humans as naturally active/curious. If given a chance to be free from wage slavery, people will naturally follow their passion and contribute to society/the economic system in whatever they enjoy doing and know how to do best, be it planting potatoes, painting or researching/innovating in science. And yes, some people inherently love planting potatoes.

Each ideology seeks to shape society and people to prove that their vision is correct: propaganda under capitalism erects a millionaire’s lifestyle, doing nothing while enjoying life’s pleasures, as a model. Winning the lottery, becoming rich in order to “do nothing” and simply “enjoy” is pushed into everyone’s head. In contrast, propaganda in most Communist regimes puts focus on work, it’s importance and value for society.

In the end, while humans can be both lazy and active, looking at children settles the debate: children are naturally programmed to be curious and active, to discover, to act, build, learn… They follow their passions tirelessly without any financial compensation. Try to make a 2 year old “sit down and do nothing”. Except for sticking your child in front of a tablet or the TV, 2 year olds are restless. They touch everything, explore everything, move around tirelessly, to learn and experiment. This “natural” drive and curiosity is beaten out of them via inadequate education, passive media activities like watching dumb TV shows and (right wing) capitalist propaganda putting emphasis on the ultimate goal in life: get rich to sit around and do nothing.

Now back to Universal Income and how to make it work from an economic/financial point of view. So far, most proponents of Universal Income simply see it as another version of a “transfer payment” via taxation from the rich to the poor. Although the rich would get part of their money back, since it’s a Universal Income, they would also benefit from it, but would pay higher taxes contributing to it under progressive taxation. Still, most Universal Income proponents make it work by insisting on the “savings” made from scrapping the complex social benefits like unemployment benefits, which requires government staffing to verify if people are indeed eligible, and takes a lot of paper pushing and administrative non-sense to sort of work…

Here, we will try to go back to question the very concept of Universal Income and how it should operate.

First, let us revisit the problem that some see with States exceeding their budgets by paying for social security nets, whichever form they take, especially in economic downturns (when they are needed most and when simultaneously State revenues plummet due to less income from taxation). We see all over the world politicians calling for making sure that the State doesn’t spend more than it earns and stubbornly applying so called “austerity” measures.

Keynesian economists would say: “simply print the money, jump start the economy with it by investing, creating jobs directly, and the extra economic activity will offset the effects of printing more money – like inflation”. In the real world, however, such policies have resulted, since the oil shocks, in so called “stagflation” (a combination of high unemployment – economic stagnation – coupled with inflation).

So how would any State be able to finance a Universal Income, save on a very “limited” scale (the equivalent of 400-500€ in developed economies) and without the intended effects/benefits, or only in “good” economic times, which defies the purpose?

We needed to go back to the debate about State expenditure and it’s relation to inflation in order to present the proposal for an alternative Universal Income.

The claim that printing more money into an economy results in inflation is only true in two cases:

  • if the current amount of money in circulation is already at an equilibrium, that is, the amount of money and the velocity of money (speed at which money changes hands) is adequate for the transactions being carried out in a certain market (usually, the central banks use the interest rates to control how much money is in circulation);

  • if some economic actors engage in outright sabotage of the money printing by raising prices in expectation of inflation before it even kicks in via market mechanisms (of course, who can blame them, anticipation is a natural economic behaviour, but still quite unethical since it often causes self-fulfilling prophecies which may be disconnected from reality).

So money and its value responds to the exact same offer and demand principles. If too much money is chasing too few goods, you have inflation (which is what could happen if governments print money or borrow money to finance a Universal Income).

An alternative Universal Income

Let’s start from basics: the GDP. The value of everything produced inside a country is matched by an equivalent amount of money. For instance, a company produces cars, and it pays other companies for raw materials, salaries to workers/executives, dividends to shareholders and perhaps keeps part of the profits. On the one side you have the produced goods and their value should match all the money paid to workers/executives/shareholders etc.

One of the main problems of money is that it can be put to many different uses: people can save it instead of spending it, they can also purchase goods from abroad which then creates a trade deficit. A Universal Income in the form of a national currency would have the same problem: it could be put to many different uses instead of the original intent, that is, to ensure people have access to the basic necessities of life (food, shelter…)

So instead of paying out the Universal Income in an official national currency, States should create a blockchain based cryptocurrency which would be a parallel currency to the national currency, could only be used inside the borders of the State, would be created automatically by an algorithm each month, and would self-destruct after a certain time frame (a year) or after a transaction.

Let us examine this proposal more carefully:

  • The main idea of such a system would be to “disconnect” part of the production inside a country from the market economy and create a parallel market which could run without the need for banks or government backed fiat currencies.

  • This alternative currency would work along the same lines as a “local currency” such as the Swiss Wier or the Brighton’s Roundel. It can only be used inside a defined space and has no value outside of that space (a city/country…)

  • It would also draw heavily from the experience of time-based currencies: exchanging 1 hour of your time for 1 hour of someone else’s time.

  • The government which would put in place such a system would have to setup a semi-decentralized blockchain cryptocurrency. The government would remain in control of the creation and termination of individual accounts of this cryptocurrency, but other features of the cryptocurrency would be controlled both by the government and by the recipients of these accounts.

  • Each month, all people who have such an account would receive a certain amount of cryptocurrency whose value would match 1:1 that of the national currency in place.

  • People would be able to “pay” with this currency in any store or for any service inside the country, but as soon as they have paid, that money is destroyed. In the event the money is not used after a set period of time (for instance, after a year), the money is also destroyed.

  • Such a system would thus create a “minimum” functioning economy even in case of a severe financial crisis since people would be able to exchange goods/services each month via the automatic replenishing of their accounts.

  • In order to take into account the strain such a system puts on businesses which, in order to produce a good or offer a service first need to invest/pay using the national currency, the government would put in place a tax exemption which would offset the amount of “official” currency spent which will not be replenished due to purchases with the self-destructing cryptocurrency. For instance, a baker bakes a cake but he had to buy the wheat from abroad using Euro currency and used an oven bought abroad as well. If someone comes into his store and pays with the self destructing cryptocurrency, then the baker had an outflow of money in Euro and no inflow. So the government would put in place a tax break to offset the cost of buying the wheat and the cost of capital (the oven’s use). As for the cost of labour, the baker was already compensated since he as well is entitled to receive each month a certain value of cryptocurrency.

  • Providing tax breaks to businesses participating in this scheme is essential. One argument in opposition to this system is that businesses or anyone selling a good/service would not be willing to participate since they stand nothing to gain: they part with a good/service in exchange for... nothing since the cryptocurrency used to "pay" for it self-destructs. Why would anyone in their right mind accept to participate? The first reason is societal/ethical: the belief and trust that one way or another, the wheels will turn and one day, the person selling the goods/services will be on the receiving end. For instance, a baker will sell each day a small pastry to a hair dresser, making it look like he's giving away all his stuff "for free", but then at the end of the month, when the baker gets his haircut, he also gets to enjoy that service "for free". Remember, this system's aim is not to accumulate money, but to provide a system of payment which is resilient to macro-economic shocks and avoid having to resort to barter in case of a major financial collapse. The second argument, stemming from the first one, is that the baker does indeed get paid "in advance" for his goods/services since he too is credited with this virtual currency each month. The third argument underlines the fact that this system is not that different from taxation and redistribution: if a baker is taxed 50% on his/her profits, it is virtually the same as surrendering part of his/her production/work "for free", to the State, which then goes on to either use it for public expenditures (providing some form of service in return like roads, public education...) or transferring that money to the poor which then will return to the baker to buy pastries, and part of the revenue from that sale will be taxed again... and so the loop goes. Again, the baker may find it unfair to be taxed at this high rate and give money to the State for services he/she doesn't perceive he/she needs (for instance, not owning a car, he/she may care less about the state of the roads, or not having children, of public education), but there is a tacit agreement that one way or another, this money will come back to him/her: for instance, if he/she suffers from a sudden health illness and receives State funded support via single payer healthcare.

  • The government has to remain in control of account creation in order to help enforce the acceptance of the cryptocurrency. If a business or any individual refuses to sell a good or service in exchange for the cryptocurrency, he/she will have his/her account temporarily or permanently closed (depending on the level and repetition of the offense). Indeed, governments cannot force anyone to sell anything, but for this system to work, you have to get rid of freeloaders, that is, people who are happy to receive and spend the cryptocurrency without selling anything in exchange for cryptocurrency). The success/failure of such a system depends, as with local currencies, on the uptake by people/businesses.

  • Some people have nothing to sell specifically: for instance, people working for an NGO, lobbyists or government bureaucrats. They would thus receive a certain amount of cryptocurrency each month without arguably offering anything tangible in return or at least, nothing anyone can directly “pay” for via a cryptocurrency (as opposed to a baker, a doctor or any other person offering a good or a service). These people can be taxed a bit more on their official currency revenue to restore some balance: if 10% of a baker’s sales are in cryptocurrency, then 10% of his working time has been allocated towards providing a “minimum service”; sure, he will receive an equivalent amount of cryptocurrency himself to compensate for that, but someone allocating 0% of his time in exchange for cryptocurrency and still getting the same amount is at an advantage compared to the baker.

  • Such a system relies on the fact that inside a given economy, people will always produce at least the amount of goods equivalent to the total value of cryptocurrency being created each month. Thus even if no one was employed and paid in the national currency, people would still “work” in one way or another to produce the most “basic” goods/services to be able to exchange via the cryptocurrency without spurring an inflation. It is a form of trust in society, providing them with a currency which has only two of the attributes of money (a means of exchange and a unit of accounting) but not a store of value, thus allowing them to “trade” whatever they are producing without having to resort to barter: again, “minimalist” economy, only catering to basic needs.

  • The amount of cryptocurrency paid out would be agreed upon by a co-decision between the government and the people. The government would have the power to initiate proposals and the people would vote directly via their cryptocurrency account to approve/disapprove the proposal. If more cryptocurrency is being created, the equivalent amount of “official” currency (for instance the dollar or the euro) has to leave the market (except if it is matched by an increased level of production/productivity) precisely to avoid inflation. But moving to higher levels of cryptocurrency payments means “socializing” bigger parts of an economy.

The benefits of using a self-destructive currency which replenishes itself are many: it forces people to spend them, which encourages economic activity; it is “socialist” and egalitarian in the most extreme ways since every person gets the same amount of “fresh” money each month and no one can hoard or accumulate it; it creates a parallel market to that of a “free market economy” with a government backed currency, creating a “fallback” in case of economic problems and ensuring goods/services can still be traded at minimum even if major official financial institutions fail. Most interestingly, it provides a certain degree of macro-economic certainty: since the cryptocurrency is perishable, it will, in all likelihood, be spent entirely, which means that economic transactions can be much more easily predicted.

In the end, if you analyse this proposition closely, it works almost exactly the way our current economic system works except an algorithm serves as the bank lending out money, and the self-destruction of the money through purchases or in time ensures that the money is "repaid". Our current economic system has lending at the heart of it. If you imagine an economy with no money in circulation, and you have a fisherman and a baker, they would need to resort to barter to exchange goods. But a bank can lend money to the fisherman to buy a new boat and to the baker to buy a new oven, both will increase their productivity, sell fish/bread to each other and with the money they made, pay off their debt and get a new loan to invest in even better equipment and so forth. In essence, our system relies on a continuous roll-over of credit which forces all borrowers to increase their productivity to pay off the loans thereby creating added-value and economic growth. Adding an automatically paid-out Universal Basic Income that self-destructs is exactly the same system: it's like lending a certain amount of money to the baker and the fishermen to be able to buy each other's goods but without the need to repay anyone since the money self-destructs upon payment and it also doesn't force any creation of added-value since there is no debt residue from interest rates. Lending and the traditional economic system we have would stay, but simply speaking, there would be less demand for loans since part of the transactions inside the economy can occur without the necessity of loans. The "bet" is that even though there are no "debt collectors" and there is no pressure on individuals to create enough wealth to repay for the loan they received, that each individual will voluntarily contribute to society at least the equivalent of the crypo-currency he/she receives each month, in his/her lifetime. For instance, you could have a farmer who works each day to produce food and thereby contributes to society each month what he/she receives in crypto-currency, but you could also have a researcher who works on nuclear fusion and only gets results after several decades. He/she does not contribute anything until there is a breakthrough, but this is the bet of such a crypto-currency, similar to that of a single payer healthcare: the more people participate, the more "stable" and predictable it is: humans, on a global scale, will always contribute, overall and in the long term, the equivalent to the crypto-currency value that is paid to them each month.

Some aspects of this system remain obscure: could such a cryptocurrency be used for things like rent? If so, how would the owner be compensated since the cryptocurrency payment would be destroyed? Could you also pay for utilities like electricity, gas, water? How would those companies make ends meet? Perhaps certain key sectors should be nationalized and become a “public service” (as it is the case in many countries) in which case this would be possible, but how would you avert the problems of efficiency without competition? Should we create another such self-destructive cryptocurrency specifically for business to business (B2B) transactions so that businesses can purchase the raw materials they need without resorting to official currencies, thereby minimizing the loss from having to sell goods/services against a self-destructive virtual currency (for instance, granting a baker a special crypto-currency which he can use to buy wheat, buy a new oven)? Could individuals use this cryptocurrency to take out a loan directly: agree to receive less cryptocurrency payments for a certain amount of time to purchase more expensive goods like a car or a home? Should we aim for an “all purpose” Universal Income or a more “targeted” Universal Income on the model of food stamps for instance: creating a cryptocurrency that replenishes itself, but is only valid as payment for very specific goods like food and create a specific currency to cover the various “basic needs” (a cryptocurrency for energy, for health services…)?

Still, there could be intermediary steps or alternatives to such a radical system. You could, instead of having an instantaneous destructive crypto-currency, make it gradual. For instance, after each transaction, the value of whatever was paid is halved (similar to a sales tax). So if you buy a bread for 2$, the baker gets only 1$ of your crypto-currency. The money available also diminishes over time according to a set algorithm, for instance, halving its amount each 6 months gradually (for instance, diminishing by 0,001 units every second) This could solve some of the limitations exposed above, where bakers would be left with a net outflow of cash for purchasing their raw materials and get nothing in return. It goes without saying that the planned decay resets after the transaction. So the 1$ the baker receives would have a 6 months validity before halving itself to 0.5$.

The ultimate aim of such a Universal Income is two-fold: first, to relieve people from the fear and pressure of losing a job, providing them with a minimum amount of “currency” to meet their most basic needs and second, to encourage people to allocate their working time to something they are truly passionate about.

While no system is perfect, I believe this proposal takes us further down an economically viable and financially sustainable Universal Income, since it takes the form of a cryptocurrency which is outside of the current financial framework and thus falls outside of the traditional debates about affordability. The only question is how much of the economy should be “socialized” in such a way and how much should remain “available” for the “free market” and official government backed currencies.

In the next article, I will explore how classical and liberal economic theories such as the mechanisms of offer and demand can help left wing politics and policies.

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