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Thread: What do you think of "Freiwirtschaft" (Economic Theory)? Is it a plausible system or not?

  1. #1 What do you think of "Freiwirtschaft" (Economic Theory)? Is it a plausible system or not? 
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    As you may or may not know, Freiwirtschaft is an economic philosophy devised by German anarchist economist Silvio Gesell.

    Freiwirtschaft consists of three central aspects, usually summed up as The Three Fs:

    · Freigeld (free money)
    All money is issued for a limited period by constant value (neither inflation, nor deflation).
    Long-term saving requires investment in bonds or stocks.
    · Freiland (free land)
    All land is owned by public institutions and can only be rented, not purchased (see also Henry George).
    · Freihandel (Free Trade)

    Freiwirtschaft claims that current monetary systems are flawed. According to Adam Smith, prices convey information. For example, dropping prices on a product mean that there is less demand or more supply of that product. This leads to a buyer buying more, or a seller/producer starting to sell/produce something else, thereby reducing the supply of that product. As a reaction, assuming constant desirability, the price of the product rises again. So, the price, together with the market participants, builds up a feedback loop around a stable, "ideal" price. At this stable price, the market is ideal, no one pays too much or earns too little, and there are no tendencies from either party to change that price. The "wobbling" around that ideal price is called self-stabilizing.

    This is not the case in the financial markets, according to this theory. Without the continuous increase of the amount of money in circulation by the central bank, the demand would continuously drop, since the velocity of money circulation decreases. Dropping demand forces companies to lower their prices to make any money at all. When prices start dropping, potential customers put off their purchase as long as possible to get the lowest price, resulting in the demand decreasing even more. The feedback loop spirals down to a point where the company does not make any money at all. That, eventually, results in layoffs and even the bankruptcy of the company. Workers in other companies tend to be even more cautious in spending money, ultimately resulting in the breakdown of the economy.

    The key error of the current system, according to Gesell, is the ill-transported information in the price. Money is nothing but claim for goods and services, usable in the economies that accept money in exchange for the former. In a weak economy, money is worth less in goods. But instead of an inflation, the result is a deflation as described above, and less money can now buy the same goods. The market players do not realize that they are destroying the very economy that should ensure the value of the money. This feedback loop is self-destabilizing. According to the "Freiwirtschaft" theory, this is the reason for the cycle of crisis in world economy. theory, this is the reason for the cycle of crisis in world economy.


    This is all I found on the Internet about Freiwirtschaft (basically it's all from Wikipedia), so it seems like it's always been an overlooked political economy idea.

    While I don't quite agree with Gesell that the situation described above is always the case in our current system, his philosophy sounds very plausible (and more just than capitalism or socialism): first of all, ensuring that money will eventually lose its value would mean that every dollar received by economic agents would be pumped into the economy again - thereby impeding what Keynes called the "liquidity preference". Second, preventing the ownership of land would finally abolish the unjust distribution of the resources of our times (no person would inherit the means for survival - he/she would have to work for it). And lastly, ensuring free trade would permit the continual long-run economic development of capitalism.

    What do you think of it?
    What are its possible limitations?


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  3. #2  
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    I thought it was inflation that forced money to be circulated instead of hoarded. I also thought that fiat money, because it was an average of the aggregate value of all goods and services, was supposed to reflect changing real wealth values and deflation could be avoided by adjusting the money supply to match the goods and services available.
    (hmmm, wonder why that fails so wonderfully in the real world)

    The long run problem with capitalism isn't restrictions on free trade. The long run problem with capitalism is that eventually a few people end up owning almost everything and that leads to monopolism and economic stagnation.

    What you are talking about sounds like just another monetarist idea that economic problems can be cured by fiddling with the money supply while ignoring what is happening in the world of resource production.


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    As Dan hunter mentions the production side of the equation is very important, but since you are interested on the money side you might be interested by this: (wikipedia)

    The Wörgl Experiment:
    Wörgl was the site of the "Miracle of Wörgl" during the
    Great Depression. It was started on July 31, 1932, with the issuing of "Certified Compensation Bills", a form of currency commonly known as Stamp Scrip, or Freigeld. This was an application of the monetary theories of the economistSilvio Gesell by the town's then-mayor, Michael Unterguggenberger.
    The experiment resulted in a growth in
    employment and meant that local government projects such as new houses, a reservoir, a ski jump and a bridge could all be completed, seeming to defy the depression in the rest of the country. Inflation and deflation are also reputed to have been non-existent for the duration of the experiment.[citation needed]
    Despite attracting great interest at the time, including from French Premier Edouard
    Daladier and the economist Irving Fisher,[3] the "experiment" was terminated by the Austrian National Bank on the September 1, 1933.[4][5]

    http://upload.wikimedia.org/wikipedia/commons/8/87/Freigeld1.jpg

    http://www.nederlandsemunten.nl/Virtuele_munten_verzameling/Anders/verzameling_Papier_5_schilling_Kirchbichl_bij_Worg l.htm



    As I often say, I think that Money is one of the Scourges of humanity inherited from before the dark ages (along with Hierarchy and Secrecy/control of Information), but Imo it can nonetheless prove to be useful until an alternative moneyless society(more democratic, without hierarchy, more transparent, etc) is designed and tested, and of the various versions of money the Worgl model appears to be one of the interesting ones imo.
    Last edited by icewendigo; February 24th, 2014 at 09:11 AM.
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    Quote Originally Posted by dan hunter View Post
    I thought it was inflation that forced money to be circulated instead of hoarded. I also thought that fiat money, because it was an average of the aggregate value of all goods and services, was supposed to reflect changing real wealth values and deflation could be avoided by adjusting the money supply to match the goods and services available.
    (hmmm, wonder why that fails so wonderfully in the real world)


    The long run problem with capitalism isn't restrictions on free trade. The long run problem with capitalism is that eventually a few people end up owning almost everything and that leads to monopolism and economic stagnation.

    What you are talking about sounds like just another monetarist idea that economic problems can be cured by fiddling with the money supply while ignoring what is happening in the world of resource production.
    Well, but if you could come up with a way to prevent money from being hoarded without generating inflation (which in itself is quite dangerous for an economy) then it would be desirable.

    As regards what you say about money supply being the quintessential tool to prevent deflation; it is true that's our best "remedy" for those situations. But let me remind you that many times when demand for goods decreases even if money supply is increased it won't be enough to stop deflation. Just something to take into account.
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    Quote Originally Posted by icewendigo View Post
    As Dan hunter mentions the production side of the equation is very important, but since you are interested on the money side you might be interested by this: (wikipedia)

    The Wörgl Experiment:
    Wörgl was the site of the "Miracle of Wörgl" during the
    Great Depression. It was started on July 31, 1932, with the issuing of "Certified Compensation Bills", a form of currency commonly known as Stamp Scrip, or Freigeld. This was an application of the monetary theories of the economistSilvio Gesell by the town's then-mayor, Michael Unterguggenberger.
    The experiment resulted in a growth in
    employment and meant that local government projects such as new houses, a reservoir, a ski jump and a bridge could all be completed, seeming to defy the depression in the rest of the country. Inflation and deflation are also reputed to have been non-existent for the duration of the experiment.[citation needed]
    Despite attracting great interest at the time, including from French Premier Edouard
    Daladier and the economist Irving Fisher,[3] the "experiment" was terminated by the Austrian National Bank on the September 1, 1933.[4][5]

    http://upload.wikimedia.org/wikipedia/commons/8/87/Freigeld1.jpg

    http://www.nederlandsemunten.nl/Virtuele_munten_verzameling/Anders/verzameling_Papier_5_schilling_Kirchbichl_bij_Worg l.htm



    As I often say, I think that Money is one of the Scourges of humanity inherited from before the dark ages (along with Hierarchy and Secrecy/control of Information), but Imo it can nonetheless prove to be useful until an alternative moneyless society(more democratic, without hierarchy, more transparent, etc) is designed and tested, and of the various versions of money the Worgl model appears to be one of the interesting ones imo.
    Thanks for this information! So it's been tried before. Nice to know it was a success. I still have some questions about it though: who was in charge of printing this currency? How did it do when trading with other economies? After thinking about it for a while, I've realized that maybe the first F can't coexist with the third F. I mean, if this economy engages in free trade, it's going to pile up foreign reserves right?. And this foreign currency (unlike our system's periodic currency) will be a store of value. Hence, the economic agents of this system will have a way to store the value of their money: buying foreign currency. The only way this can be prevented is if the State prohibited the purchase of foreign money (in which case a black market would come to life) and/or stopped engaging in free trade (in which case the third F would not apply).

    It seems wonderful that the experiment worked out, but it lasted less than a year. So I wonder what would've happened if it had had to continue for longer...
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  7. #6  
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    Quote Originally Posted by Matt24 View Post
    As regards what you say about money supply being the quintessential tool to prevent deflation; it is true that's our best "remedy" for those situations. But let me remind you that many times when demand for goods decreases even if money supply is increased it won't be enough to stop deflation. Just something to take into account.
    Deflation is only a big bugaboo because it decreases the value of cash in relation to the value of goods as an asset.
    (I am trying to think of a way to express this better because I am not getting the idea I want to present across properly)
    The lower costs of goods should cause increased consumption which would increase employment which should increase cash flows and restore balance..
    Obviously anybody who only holds cash as wealth and relies on interest instead of production for their income is not going to favour anything that weakens their position.

    I liked Icewendigo's link. I was unaware that the idea had been tried. It seems to resemble trading tokens used in some barter systems but I am not sure yet how to interpret it.

    Edit: if you search for "benefits of deflation" or "advantages of deflation" you should find better explanations than I can give you on this.
    but basically deflation takes from the rich and gives to the poor.
    Last edited by dan hunter; February 24th, 2014 at 12:05 PM.
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    Quote Originally Posted by dan hunter View Post
    Quote Originally Posted by Matt24 View Post
    As regards what you say about money supply being the quintessential tool to prevent deflation; it is true that's our best "remedy" for those situations. But let me remind you that many times when demand for goods decreases even if money supply is increased it won't be enough to stop deflation. Just something to take into account.
    Deflation is only a big bugaboo because it decreases the value of cash in relation to the value of goods as an asset.
    (I am trying to think of a way to express this better because I am not getting the idea I want to present across properly)
    The lower costs of goods should cause increased consumption which would increase employment which should increase cash flows and restore balance..
    Obviously anybody who only holds cash as wealth and relies on interest instead of production for their income is not going to favour anything that weakens their position.

    I liked Icewendigo's link. I was unaware that the idea had been tried. It seems to resemble trading tokens used in some barter systems but I am not sure yet how to interpret it.

    Edit: if you search for "benefits of deflation" or "advantages of deflation" you should find better explanations than I can give you on this.
    but basically deflation takes from the rich and gives to the poor.
    Hmm, I kind of differ in those two points. For one thing, deflation is not just a bugaboo. It's not like because goods cost less consumption will immediately go up. The case in point is the Great Depression. A deflationary phenomenon was generated (never mind the causes, let's not get into that discussion) which only started to fade in 1933. Japan was also in a deflationary mess in the 90s. IMO deflation can be almost as problematic as inflation.

    And the other thing is that I don't believe deflation takes from the rich. I mean, they are the ones who tend to have the big credit accounts at the banks. I think that rather than "taking from the rich" deflation actually messes up businesses because they happen to sell their product at a lower price than they should've in normal conditions. Which in turn also affects the working class in the form of high unemployment.
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    Nice to know it was a success. I still have some questions about it though: who was in charge of printing this currency? How did it do when trading with other economies?
    It doesn't even need to be "currency". We heard an example on radio of a group of people in Washington setting up one of those childminding clubs. All the participants started out with vouchers entitling them to a certain number of hours of baby-sitting/ childminding. It worked very well for a while. Then the whole thing seemed to be declining, so the coordinating committee reviewed the activities and the distribution of vouchers. What they found was that a portion of the membership was just not using their vouchers which meant that there was a huge reduction in the number of "tradable" hours of childminding. At this point, you should bear in mind that these were professionals many of whom were engaged in academic or policy employment and a couple of them were economists.

    How did they solve the problem? Easy. They just made a new issue of vouchers - to everyone. And the whole system restarted itself and kept going. This was used as an illustration for how local, regional or other "specific" economies can be revitalised just by giving poor people more money.

    but basically deflation takes from the rich and gives to the poor.
    That's according to theory.

    But there's a very good reason why no national bank, no treasury or other financial ministry anywhere in the world includes any % deflation in its range of targets for inflation. The ranges for targeted or controlled inflation are always expressed as 1% to 3%, 0-1%, 2-4%. Whether it's permanent or temporary makes no difference. It's one thing to talk about deflationary expectations or outcomes. It's another thing entirely to let or to drive an economy into active deflation.

    Deflation is the paradigm case of a lose-lose process or transaction. The poor usually/always lose out depending on circumstances, deflation is one circumstance where the rich lose out as well.
    "Courage is what it takes to stand up and speak; courage is also what it takes to sit down and listen." Winston Churchill
    "nature is like a game of Jenga; you never know which brick you pull out will cause the whole stack to collapse" Lucy Cooke
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    Quote Originally Posted by adelady View Post
    It doesn't even need to be "currency". We heard an example on radio of a group of people in Washington setting up one of those childminding clubs. All the participants started out with vouchers entitling them to a certain number of hours of baby-sitting/ childminding. It worked very well for a while. Then the whole thing seemed to be declining, so the coordinating committee reviewed the activities and the distribution of vouchers. What they found was that a portion of the membership was just not using their vouchers which meant that there was a huge reduction in the number of "tradable" hours of childminding. At this point, you should bear in mind that these were professionals many of whom were engaged in academic or policy employment and a couple of them were economists.

    How did they solve the problem? Easy. They just made a new issue of vouchers - to everyone. And the whole system restarted itself and kept going. This was used as an illustration for how local, regional or other "specific" economies can be revitalised just by giving poor people more money.
    Wow, that's a great story! Just googled it and I came across an article by Paul Krugman about it. It seems like the babysitting analogy is not only a good demonstration of how important it is to control the supply of money (or vouchers) but also a system comparable to an advanced economy - with its successes and its problems. Krugman uses the babysitting metaphor to explain Japan's liquidity trap in the 90s.

    It's a worthy read. Here's the link if you're interested: Baby-Sitting the Economy
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    Quote Originally Posted by Matt24 View Post

    Hmm, I kind of differ in those two points. For one thing, deflation is not just a bugaboo. It's not like because goods cost less consumption will immediately go up. The case in point is the Great Depression. A deflationary phenomenon was generated (never mind the causes, let's not get into that discussion) which only started to fade in 1933. Japan was also in a deflationary mess in the 90s. IMO deflation can be almost as problematic as inflation.

    And the other thing is that I don't believe deflation takes from the rich. I mean, they are the ones who tend to have the big credit accounts at the banks. I think that rather than "taking from the rich" deflation actually messes up businesses because they happen to sell their product at a lower price than they should've in normal conditions. Which in turn also affects the working class in the form of high unemployment.
    Like I mentioned, I was having a moment where I didn't quite know how to say it.

    Maybe I should have said that deflation robs bankers while inflation robs the people that borrow from them.
    But their are some problems with saying it like that too.

    Deflation messes with economies by destroying the power of interest to increase wealth. Nobody wants to lend money if the money is going to be worth less when it is paid back.
    Whenever the interest rates are below the rate of inflation you are in such a position.
    The result is that even if large piles of cash are in the banks they lose less value sitting there than they do out on loan.

    This in turn means less investment money available for borrowers to use growing their buinesses and slower economic growth.
    Last edited by dan hunter; February 25th, 2014 at 11:17 AM.
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