Defined Equilibrium as Defined Product Quality

There is a practical dimension for the potential of defined equilibrium: People would gain economic freedom to define products they regularly use, which are also linked to place and time. In other words, there would be more opportunities to take part in the construction of product which is part of our everyday lives. Non tradable sector product is heavily represented by the basic scarcities of time and place, hence lower income levels could greatly benefit from personal management in these areas.

Without such options, non tradable sectors impose numerous quality requirements on product with time and place connections - especially building construction and services. However, governments are poorly positioned to generate affordable non tradable sector product, in part since quality requirements for luxury product create additional governmental revenue. What's more, when governments seek to impose regulations on non tradable sectors, sometimes the only way to do so is to grant additional favours to the private interests involved.

Ultimately, more decentralization is needed, to prevent these unfortunate incentives from reducing the economic access of even more low income groups. Locally defined equilibrium settings could allow citizens to determine the extent of quality requirements they can reasonably afford. It helps to ask: Which quality gains are obviously real and possibly deemed necessary? How difficult is it, to separate these categories from what are perceived as luxuries?

Fortunately, tradable sectors have been answering such questions with extensive market choices for a long time. Indeed: In recent centuries, alongside the beautiful and exclusive, we have countless examples of inclusive and accessible no frills production. While there are of course notable exceptions, much of this tradable sector product proves capable of fulfilling the required task with minimal fuss and expense. Why has it been so difficult to gain similar options in our non tradable sectors?

Defined equilibrium settings could provide such opportunities, by bringing aggregate non tradable sector costs more in line with the (monetary) wealth potential of tradable sector revenues. These decentralized communities and areas would function in certain respects like opportunity zones, except they would provide new economic opportunities for those willing to invest with personal time commitments. This is an altogether different approach, from the opportunity zones open to investors who are primarily concerned about monetary results. By allowing time units to assume economic value, there would be considerably more breathing space, for society to fulfill its most important tasks and challenges.

Local participants would be able to contribute to non tradable sector innovation, if they can regain sufficient legal production rights in defined equilibrium settings. These locally zoned permissions would once again make it possible for individuals without college degrees, to become part of decision making processes for housing, infrastructure and time based services needs.

Nevertheless, local citizens would have plenty of prior assistance in their efforts to construct simpler functionality in services and the physical building components of their environments. Hierarchical organization remains quite rational in earlier stages of manufacturing components, for instance. These are complex processes which require precise and standardized procedures to function as intended. However, citizens need a stronger say in production management, once physical resources are configured for the "final" product forms that support living and working arrangements.

By far one of the most important aspects of defined equilibrium, would be simplified legal settings which everyone can understand. Legal complexities are problematic enough in any circumstance, but they particularly get in the way of productive lives for those with small wages. When are extensive regulations and legalities actually necessary? In the book Life Without Lawyers, Phillip K. Howard considers this issue:

Two great intellectual currents came together over the past century to bring America to this state of hyper-legalism. The first, which grew naturally out of the Industrial Revolution, is the idea of organizing to do things. Frederick Winslow Taylor, the father of scientific management, preached the idea of creating systems in order to increase productivity. Organization is undeniable essential for complex products. Henry Ford's assembly lines proved that...Today we assume unquestioningly that any activity will be more effective if we detail in advance how to get the job done.

Instead of greater effectiveness, the non tradable sector hierarchical result has led to extensive problems in societal coordination, along multiple dimensions. All too often, the rigid rules of non tradable sectors get in the way of mutual respect and mutual assistance, instead of creating efficiency. It's time to experiment with defined equilibrium settings, so as to make non tradable sector markets more accessible for all citizens.

Good Deflation and the Monetary Human Capital Role

Why does the form of deflation we call "good" (since it translates into more affordable product and more output), not function as the same clear positive, for the economic value of human capital as time based product? After all, if the cost of high skill services could be gradually reduced and made more widely available, much as tradable goods have become, "small" wages would hold more real economic value. Likewise, smaller aggregate wage levels would gradually allow the productive agglomeration costs of real estate to be modified in many areas as well.

There's a problem however, for good deflation in terms of time based service product. Alas: What tends towards cumulative inflation rather than good deflation, is how many individuals meet their ongoing expenses and asset costs as those costs currently exist. Unlike forms of product separate from time (which of course aren't human), time based product costs are attached to our human responsibilities to pay bills on an ongoing basis. While we are appreciative if we can access someone else's time, good deflation for time product may nonetheless feel like the bad deflation which impacts labour value during depressions, if that time value happens to be our own.

Our time is also scarce in relation to most goods. Consequently, in order to meet the human capital costs others posses, many seek to raise their own time value. This sets up a chain reaction, whereby others still need to increase the value of their time, so as to access important forms of time based product. This extensive internal inflation process runs exactly counter, to the good deflation which tradable sector activity has contributed to prosperity in recent centuries.

All this holds, regardless of one's monetary compensation for their time units in the form of labour or skills arbitrage. It certainly matters for the time arbitrage I've suggested as an alternative, which would need to be crafted so as to directly address the internal inflation problem. That's why it would be necessary to define new organizational settings for services, learning patterns, infrastructure, housing and other building components so as to make good deflation for time value a reasonable possibility.

Consider how infrastructure and real estate costs have proven relatively amenable to good deflation in tradable sectors. While limited aspects of tradable sector activity needs locations in areas with high real estate costs, much tradable sector production has far more flexibility and mobility. However, in order to accomplish this, many aspects of organizational capacity are integrated into single sustainable settings which have at least a relative degree of independence from place and geography.

Conversely, too many aspects of high skill services have been excessively place dependent for productive agglomeration, which only contributes to the difficulty of achieving good deflation in non tradable sectors. This coordination problem helps to explain why the high skill work of our most prosperous areas is no longer a simple matching process in terms of employment, given the relative few who now manage wealth in lieu of others. Since non tradable sector high skill knowledge does not scale as does tradable sector activity, it needs a horizontal organizational approach which encourages greater marketplace capacity and productive agglomeration which goes well beyond our most prosperous areas.

A new institution is needed which could place productive agglomeration for non tradable sector knowledge use into a combined organizational framework. In these defined equilibrium settings, individuals would not suffer the extreme losses in purchasing power, that would otherwise accompany good deflation in time based services in a completely open equilibrium. Of course, open equilibrium would still apply for tradable sector activitiy, since most individuals can still access and contribute to the good deflation of tradable sectors. However, the closed non tradable sector equilibrium would make it realistic to pursue good deflation as an important time based services goal.

Valuable though good deflation would be for time based product, there are other reasons to utilize symmetrical time value as a mass produced services commodity. Time arbitrage would allow time based product to function as a basic human capital building block, instead of simply another societal cost which places uncertain demands on the earth's resource capacity. One of the main problems of inflationary time value, is the fact there is no time based services steady state to rely upon, when time value exists solely in a dependent relationship with earth's other resource capacity. By bringing good deflation to time value, we could create a steady state for applied knowledge which allows us to more precisely determine the productivity of our own efforts, in relation to the productivity relationships of our other institutions.

Does Price Taking "Deserve" Production Rights?

Symmetric matching of mutually held work priorities, is also a price taking process for the economic time which individuals and groups actually have at their disposal. Yet it would be difficult to spontaneously coordinate a wide range of services generation as a measurable production constant, without production rights for the use of knowledge.

The fact many of our institutions hoard knowledge, is a costly process that withholds productive activity and economic vitality from the marketplace. It's not so much that price taking (instead of price making) would mean participating individuals "deserve" production rights, but the fact that a relative production constant for services generation wouldn't be possible, otherwise. If information "wants to be free", there are certainly valid economic reasons. For instance, as Scott Sumner wrote in "Let's Transfer More Technology to China":

The beauty of information is that use by one person does not preclude use by others.

Why, then, do societies too often pretend it's not possible to allow the use of knowledge to take place on such terms? Even though knowledge hoarding seemed to be more a domestic issue in the latter part of the 20th century; increasingly, the protectionist impulse is (yet again) beginning to rear its ugly head at the global level.

In a recent post, I suggested that a new form of institution could potentially adhere to a price taking promise, which might ultimately make time value a more representative component of monetary policy. Fortunately, it's still possible to restore the benefits of price taking as an organizational standard - much as what existed in recent centuries of tradable sector dynamism. When institutions are willing to accept prices which coordinate existing resource capacity among multiple providers, societies remain able to get things done without extensive debt, and the costs of doing business also remains within reach of the average citizen. Whereas price making - when carried too far - is notorious not just for the economic exclusion which can lead to massive societal inequality, but also extensive political risk.

Given present day general equilibrium expectations, it's not always a simple matter to be a price taker, especially when the majority prefer to be price makers. Still, equilibrium corporation settings could make price taking a viable option for those who participate, by coordinating as many non tradable sector factors as possible in locally defined equilibrium settings. It's possible to agree to meaningful work at a standard low wage, when others have done the same in ways which mutually sustain and otherwise reinforce the group for having done so.

At the very least, such a system could provide an apt example, how non tradable sector markets might come within reach of a broader range of income levels. Individuals and nations alike have become burdened by the costs of getting many basic things done - a burden which is entrenched in government budgets as well. Price making, while an understandable reaction to high costs of doing business, is nonetheless a reflexive response which only makes the societal burden more extensive. With a little luck, more production rights and more price taking in general, could eventually create more affordable outcomes for all concerned.

Output Capacity and Redistributional Flow

The redistributional flows of fiscal policy depend on reliable output, over time. But how would we know that - just because properties or assets can be assigned specific value for purposes of taxation - the assigned value is a true connection to the assumed output associated with the property?

This conundrum was uppermost in my thoughts, when I first read Progress and Poverty by Henry George in 2015. I found myself grappling with his land taxation ideas again, upon reading a ProMarket interview with Glen Weyl (coauthor of Radical Markets) which I followed up with a Russ Roberts interview. Henry George's work provided some of the inspiration for Radical Markets.

One of my concerns with Weyl's land use suggestions in the interviews, is that some forms of land use aren't actually capable of generating sufficient output for revenue potential - at least not in a straightforward way. Imagine three basic designations for land use: residential, government and commercial. Their approach to "output" is quite diverse! For that matter, private ownership of residential property in the present, is more closely associated with consumption, than production.

What does this reality suggest, for property as a complete form of taxation? After all, the only land (presently) with internally derived output capacity, is property set aside to create product which is readily separated from the scarcities of time and place. Other property usage is too caught in the complexities of general equilibrium flows (such as mortgage deductions), to serve as reliable means of complete taxation. Said another way, property which is utilized for tangible goods, exists in easily measurable form which is also simple to tax. When property is used for purposes which rely on the natural scarcities of time and place (physician time, hospital rooms), total land taxation of these institutions would only pull them further away, from what are already constrained output requirements, given the reality of today's operational costs.

Weyl was concerned about landlords with large property holdings. Nevertheless, if these individuals are fully taxed on land, so too are countless more who don't receive the same benefits of scale. Consequently, for the latter - whether individual property owners or small landlords, there's not much profit involved in ongoing and often extensive maintenance costs. Profits that aren't consumed by the upkeep of traditional building structures, mostly accrue once land ownership begins to scale up. How would the typical single property owner give back land tax value, and have anything left over for property upkeep?

Again, there's a lack of output for redistributional flow as well. Owners of private residential property, tend to be legally bound (unfortunately) to not use residential properties in ways that generate actual output. Rather, land ownership costs have increasingly become the costs of access to productive agglomeration. In other words, while ownership of private residential property is supposed to be capital enhancing, much of this marketplace serves as a user fee for productive economic engagement - one influenced by regional, national and global factors, as well.

By far the most confusing aspect of land valuation (based on Weyl's suggested system), would be the completely taxed land parcels which are utilized for institutional purposes that already benefit from redistributional flows. Hospitals and schools in particularly are mostly organized as dependent secondary markets, many of which would not even be in operation, were it not for tax based revenue. And yet hospitals already need to rely on price making (markups), since the time and place specificity of their product limits the output they can generate, in relation to the value of their buildings and property. How does one fully tax them, based on the often valuable land where they happen to reside? Ultimately, long term taxation potential is contingent on output, and whether that output represents what the property can generate via internal means.

In spite of these problems with total land taxation, what's helpful in this renewed dialogue, is how everyone involved can reconsider aggregate resource capacity, with what is essentially a blank slate approach. This is really important, for decentralized approaches will be needed, to address the growing shortcomings of fiscal flows in today's centralized economies.

A blank slate approach, for instance, makes it reasonable to ask: What are the most important purposes our tax systems can serve? Can we create multiple versions, instead of one size fits all infrastructure requirements? How might we arrive at mutually desirable ends, if and when taxation turns out to be insufficient? When do we actually create new wealth which is actually viable as a revenue source for redistribution? Hint: When resource use or product are time or place dependent, they can be utilized more effectively at the source, but their output revenue can't be redistributed, unless extensive markups are involved. It's all about potential circles of sustainability, and today's governments need all the help they can get, given the growing fiscal burdens of the present.

Economic Perspectives: What's Still Missing?

If our present economic framework is "too narrow", where might the fault actually lie? The real measure of economic value, perhaps? Scott Sumner takes issue with a recent article from The Economist, "Economists focus too little on what people really care about", and highlights this quote:

The measuring rod itself often causes trouble. Not every dollar is of equal value, for instance. You might think that if two economists were forced to bid on an apple, the winner would desire the apple more and the auction would thereby have found the best, welfare-maximising use for the apple. But the evidence suggests that money has diminishing marginal value: The more you have, the less you value an extra dollar. The winner might therefore end up with the apple not because it will bring him more joy, but because his greater wealth means that his bid is less of a sacrifice. Economists are aware of this problem. It features, for example, in debates about the link between income and happiness across countries. But the profession is surprisingly casual about its potential implications: for example, that as inequality rises, the price mechanism may do a worse job of allocating resources.

Scott Sumner responds:

This is quite misleading, as it implies that the effectiveness of the price system depends on each person placing equal value on a dollar...That's not to say the price system is perfect; there are issues such as externalities and monopoly to consider. But the specific issue of diminishing marginal utility of income is not really a problem of the price system. A better argument would have been that the distribution of income that results from the price system might not be optimal. Then you could have an intelligent discussion of the pros and cons of redistribution of wealth.

Nevertheless, "optimal" in what sense? Part of the problem for pricing, is that discretionary income and non discretionary income are utilized for very different purposes at the outset. In particular, non tradable sector pricing has not only been more closely aligned with non discretionary price making, but also the time scarcity circumstance that result. If price making requirements leave little discretionary income, some individuals may view money as the only relevant measuring rod that matters for their decision making processes.

Perhaps a broader economic perspective would consider the dichotomy between non tradable sector activity and tradable sector activity, given how these sectors affect general equilibrium conditions. What makes the differences between tradable and non tradable sector activity, so important for price outcomes? While price aggregates may be more relevant for economic stability than monetary aggregates, the long term trajectory of a price level still needs to reflect whether the relationship between actual output and aggregate consumption capacity, might actually be shifting. These changing patterns are important, given how nominal income levels also reflect the degree of economic participation in both production and consumption processes. Importantly, non tradable sectors and tradable sectors continue to travel a very different trajectory, given the differences in their approach to output levels. This variance distorts the relationship between price aggregates and marketplace capacity.

Here's another way to think about price relationships as a measure of value: In recent centuries, the good deflation of tradable sector activity during this time has greatly increased the value of a given dollar for disposable income in general. Indeed, the good deflation of tradable sector production processes, has made some less inclined to view money as a measure of value. Consider George Selgin's response to Scott's post for instance: "Going somewhat further, I would say that the whole idea of money as a "measure of value" is a throwback to pre-subjective thinking that we'd be better off without."

However, the bad (internal) inflation of non tradable activity over time, has made these pricing aggregates less responsive to subjective valuations - especially for lower income levels. Hence the apple in the above discussion was a confusing example, as it is representative of good deflation processes and subjective value.

Interestingly enough, George Selgin's earlier emphasis on a production norm is relevant, here. How so? Locally defined production norms for non tradable sector activity, could generate decentralized environments that encourage good deflation in services, housing and physical infrastructure. These new consumption options would gradually increase the marketplace value of time, so that a larger portion of monetary representation could become discretionary. By bringing subjectivity and discretionary choice to non tradable sector activity, price levels could become a more reliable tool for monetary stability, and provide a better measuring rod for economic activity, as well.

Is a Different Form of "Middle Class" Possible?

Much about life has changed, due to a transitioning middle class which has also migrated toward higher income levels in recent decades. In a recent Project Syndicate article, Mohamed El-Erian notes the consequences of income polarization:

From the anchoring role in society of the middle class to the agility and resilience of mid-size firms, the middle has long been regarded as consistent with both individual and collective wellbeing. Yet, in recent years, the middle has become less stable, less predictable, and more elusive.

One can't help but notice how tradable sectors sometimes respond to income polarization, given this state of affairs. Consumers are increasingly frustrated when they can't locate goods of medium range quality. In recent years, I've purchased plenty of household products which functioned so poorly they promptly went in the trash. With a little luck, perhaps local 3D manufacture will eventually recover some basic design features that permit everyday household items to work properly.

Nevertheless, tradable sector quality issues remain a minor quibble, compared to non tradable sector production issues - issues which affect the life of anyone with a small income, at a more fundamental level. What of Mohamed El-Erian's hope that a strong middle could "be reclaimed if policies adapt quickly enough"?

Alas, it's not so simple. A strong middle has been possible for centuries in advanced nations, due to tradable sector dominance. Tradable sectors ensured reliable, measurable growth in output which also translated into gains in aggregate income. However, long periods of tradable sector dominance encourage societies to devote more resources to human capital investment, which can result in excess debt formation and input requirements that detract from aggregate output. Once non tradable sector dominance comes to the fore over extended periods - such as has recently been the case - there's less aggregate output to provide sufficient revenue for a full range of income levels. At this point, excess human capital requirements (knowledge production input) in relation to actual output, becomes a drain on national debt levels and aggregate productivity.

If this weren't problematic enough, both tradable and non tradable sectors have come to rely on core and peripheral employment. While core employment is all but necessary for many to fulfill life's essential obligations, chances are that future core employment on present day terms, may not extend beyond 25 percent of workplace requirements. This would leave approximately 75 percent of a given population, poorly equipped to meet the production and consumption demands of today's non tradable sectors.

Therefore a different kind of "middle class" response might become necessary, if citizens are to remain in anything resembling a normal life - at least in advanced nations. Instead of hoping that lower income levels might somehow be amended, a more productive response would be to target good deflation in a broad range of non tradable sector activity, so that small wages can go much further than is now possible. Hence a simple question: How might the benefits of good deflation, become associated with non tradable sector production?

One way to think about good deflation for time based product in particular, is the creation of a steady state for time based services, so as to maintain input and output for knowledge based production at the same, measurable level. Even though time arbitrage wouldn't actually create good deflation, neither does it generate internal inflation. This steady state process for inputs and outputs, would eventually reset service sector output levels at a higher level. Gradually, aggregate output would become easier to measure, and general equilibrium conditions could return to a normalcy capable of restoring a wide range of tradable sector options in the marketplace. One reason this approach could prove so beneficial, is due to the fact that costs for non tradable sector production have outweighed the societal benefits of tradable sector good deflation, particularly since the Great Recession.

Targeted good deflation strategies for non tradable sector activity, would help those who can't always meet the expansive expectations of present day middle class status. What's more, a decentralized steady state services sector, could help to restore the full monetary representation which has been compromised by human capital valuations in today's non tradable sector activity.

Debt as a Factor in Output and Productivity

When does debt serve as an actual point of wealth origin, whereby it contributes to output, productivity gains, and long term growth? The answer often depends on whether debt instruments function by shifting (redistributing) wealth, or as direct means to increase output. For example, tradable sector activity provides more debt assisted wealth origin, than non tradable sector activity. Presently, debt as financial intermediation tends to inhibit long term growth, as much of it is utilized to shift ownership patterns instead of generating additional aggregate output.

In a recent Econtalk with Russ Roberts, Arnold Kling stresses the importance of financial intermediation in the economy, yet downplays the significance of macroeconomic theory (he describes financial intermediation as any institution which issues debt). While my readers won't be surprised that I consider macroeconomic theory the more important factor, Kling's argument provides an apt reminder of the importance of financial intermediation for macroeconomic outcomes. However, just as the complexities of finance don't negate macroeconomic theory, neither do intangible production factors (which he frequently highlights) negate the reality of aggregate supply and aggregate demand.

Financial intermediation serves as a point of wealth origin, only insofar as it increases aggregate output, rather than simply shifting the ownership of resource capacity. Indeed, one might have a more instinctive feel for aggregate supply and demand realities, if they could more readily discern when and where financial intermediation stalls aggregate output. Wealth claims are a non linear process, in which secondary markets can create a "nesting" effect which blurs the correlation between price levels and seemingly apparent productivity gains. Could this have some bearing on the fact that Arnold Kling has his doubts about the validity of aggregate supply and aggregate demand? Productivity can be deceptive, for - like inflation - while its particulars are discerned at the microeconomic level, its totality is measured at the macroeconomic level.

The processes by which financial intermediation rearrange wealth, are closely aligned with secondary market activity. Financial intermediation - while it is still capable of generating real progress - is too frequently utilized instead as claims on already existing output. Wikipedia notes other secondary market processes besides the resale of initial financial offerings, such as markets for used goods and assets. Ethanol production, for instance, is a useful way to think about secondary market goods or services which function as "nested" claims on already existing output. Also I've stressed how today's time based services function as secondary markets, since they make asymmetric claims on circulating revenue.

I should apologize if I've caused my readers any confusion re my description of government financial intermediation as secondary market activity, since the initial activity for government bonds is described as a primary market. That said, I can't help but feel the official description of a government bond as a primary market is misleading, for it encourages observers to envision government bonds as a point of wealth origin. Alas: Like other secondary market activity, government bonds more often shift resource capacity, instead of generating new output which is reciprocated at the outset. In terms of initial offerings as primary markets, I believe the primary market designation is accurate when financial intermediation applies to equity for output gains in tradable sector activity, or the one time output gains of new home mortgages.

Perhaps the most important question to ask re financial intermediation from a productivity perspective is this: Do debt instruments increase output, or do they make output claims which shift ownership patterns? While the latter circumstance is often benign, it still tells an important story about measurable economic progress - or not, of course. Presently, some official financial designations for primary market activity are confusing, for they encourage many observers to believe new wealth is being generated, when existing wealth is actually being shifted. It's too easy to forget that new government securities in particular, don't directly contribute to additional output gains in a real market capacity.

Why does it matter, whether financial intermediation serves to advance wealth, or to redistribute wealth? By discerning the difference, we gain important clues about changes in aggregate supply and demand, and more clarity re output and potential productivity gains. While redistribution of wealth is relatively benign up to a point, once economic stagnation sets in, prosperity could be lost, should redistribution take precedence over wealth creation. Ultimately, we need a better understanding whether - at a macroeconomic level - we are actively advancing wealth, or merely circulating already existing wealth.

Price Taking as a Useful Services Production Norm

How could price making processes ultimately lead to disequilibrium? Each supplier or provider expects given levels of general equilibrium resource capacity, yet not all participants have sufficient understanding where (current) aggregate capacity actually stands. Whereas price taking, with sufficient view to the resource capacity currently in use, implies a more sustainable general equilibrium.

Even though the wealth capture of price making does occur in tradable sector activity, these suppliers tend to have greater awareness of a full range of specific resource capacity in play, especially as it pertains to the product in question. Consequently, tradable sector prices are more likely to contribute to broad resource coordination or "best use" for everyone concerned. An added benefit for monetary policy, is how price taking patterns for tradable sector activity include reasonably constant price levels over time. This in turn contributes to their potential as a recognizable production norm, as a useful consideration for monetary representation.

Alas, the random mining of human capital in non tradable sector activity, has led to a different outcome for coordination potential - especially since the latter decades of the twentieth century. And, as the price making of non tradable sector activity came to dominate tradable sector price taking, monetary policy makers responded by capping aggregate monetary representation (inflation targeting) which effectively sets limits for high skill participation, via the asymmetric compensation which today's professionals require.

While the Baumol effect of price making for skilled time product is understandable in some settings, it creates problems elsewhere, when local income conditions lack the additional benefit of global wealth. Increasingly, professionals avoid such settings as well, which often limits pragmatic knowledge use where it is needed most. This disequilibrium of sectoral imbalance, and its exacerbation due to tight monetary policy, has led to what is essentially the equivalent of human capital dumping on a wide scale, not to mention the lost sunk costs of educational investment.

Nevertheless, there remain arguments in favour of non tradable sector price making, particularly given its capacity for spontaneous national coordination of time product. With a little luck, governments could continue to support this form of knowledge use, so long as they recognize that other means of knowledge use generation will become increasingly necessary in the future. At least since the turn of the century, asymmetric compensation has proven insufficient to integrate millions who continue to invest in human capital, with hopes of full economic participation.

It's the economic connections to time and place which make it difficult to determine the full extent of human capacity at a general equilibrium level. Once price making for human capital reaches a certain threshold in a services dominant economy, societies find it more difficult to maintain general equilibrium potential for all citizens. Even though local price making is rational for time based product, the aggregate pricing effect creates a disequilibrium of reduced production and consumption. And as central bankers have become more focused on combating the inflation implications of price making, monetary representation becomes less effective for all economic participants. What can be done?

First, we can make peace, with the fact today's professionals can only coordinate time based product with others up to a point. From here, we can begin the process of recreating time based product, via the price taking means of time arbitrage. Such an approach would make it possible to generate new wealth which builds stable connections for the valuable product of time and place. Best, doing so would establish service generation patterns which more closely follow the stable production norm patterns of tradable sector activity.

Time arbitrage would eventually allow a rebalancing of services generation to take place. Since time value in relation to itself does not generate inflation, services generation on these terms would eventually make it simpler for monetary policy to fully represent all economic actors, as central bankers (finally) become less inclined to continue their irrational fight against sectoral imbalance. Even though there will always be a certain degree of non tradable sector inflation via professional price making, other citizens have a more sustainable option for knowledge use, via the price taking of a services production norm.

Does Money Still Function Well as "Half of Every Exchange"?

So long as money is mostly representative of tradable sector activity, prices serve as a fairly good measure of societal coordination. However, when time is arbitraged in the marketplace with no direct relationship to its existing aggregates, and time based services become more prominent in relation to tradable goods, total societal coordination eventually becomes less effective.

While listening to a podcast between David Beckworth and Steve Horwitz re monetary disequilibrium, I was reminded of some of the implications, when Horwitz stated that money is "half of every exchange". Even though this representation is perfectly suited for tradable sector activity; alas, it has only proven a partial solution for the introduction (and consequent dispersal) of knowledge use in the marketplace. A different set of dynamics comes into play, for money as representative of the non random nature, of economic time.

Since human capital investment makes additional claims on (all) existing resource capacity, the result in total factor productivity terms, has been additional input requirements in relation to aggregate output. These demand requirements translate into additional claims on existing revenue, such as what also occurs in recessions. As a result, monetary disequilibrium is no longer limited to recognizable recessionary conditions.

Which means today's increased dominance of time based service activity, includes disequilibrium effects which extend beyond the recession conditions Horwitz referred to in his podcast with David Beckworth. Recent recessions are increasingly a result of monetary tightening on the part of central bankers. This almost imperceptible tightening, may also represent an attempt to manage a gap which continues to grow, between the monetary value of finite time, versus that of "infinite" resource capacity. Presently, monetary tightening continues at an almost imperceptible level, even though economies may appear as normal or in recovery.

Inflation targeting in particular, is a blunt tool for central bankers to respond to the Baumol effect, which adjusts the value of time based services to to tradable sector income, in prosperous areas. The Baumol effect helps to explain the difficulties of adopting a productivity norm (as explained by George Selgin), which could take the good deflation of tradable sector activity, into account. The inability to do so, helps to explain the constituencies which oppose today's fiat monetary systems.

Yet interestingly enough, consider why the Baumol effect is actually a natural outcome, of the fact that money has functioned as half of every economic exchange! Since money has to coordinate for both "infinite" resource capacity and "finite" or limited time, policy makers are increasingly faced with a need to adjust nominal income as if time aggregates could somehow remain in a constant relationship with other resource aggregates. Yet this is not possible in general equilibrium settings. Fortunately, however, it is possible to account for time constraints in relation to other resource capacity, in alternative equilibrium scenarios.

Decades earlier, the monetary expectations of non tradable sectors, weren't so problematic. After all, tradable sector dominance included a domestic (national) monetary framework which was easier to understand. For centuries, time based product demands could readily be coordinated via the expanding revenues of tradable sector output. Whereas now, the production norm which would have worked well for a tradable sector dominant economy, is difficult to implement at general equilibrium levels, given the revenue requirements of non tradable sector dominant economies.

Meanwhile, aggregate output as measured by all resource capacity, continues to pull away from the finite limits of time aggregates - not to mention their representative asset formation, as banks become anxious to unwind balance sheets. When money has no choice but to "stand in" for more direct forms of coordination for time based product, the random and growing nature of total resource capacity, introduces elements of political and social uncertainty, for the continuation of knowledge use throughout the marketplace.

Even though spontaneous coordination of time based product (at national levels) remains desirable, limits to growth in this form of knowledge use dispersal, are becoming evident. It's important to maintain fiat money for spontaneous national coordination of time and knowledge value, but with a caveat: make room for local coordination of time based product, in which a unit of time functions as half of every time based exchange.To make this possible, a new institution would allow money to further back these transactions, as newly generated commodity wealth. Time value would finally receive the formal recognition that it deserves, as a basic economic activity.

Indeed, time arbitrage could gradually contribute to a productivity norm for time based services at equilibrium margin. Margin equilibrium adjustments would gradually decrease total factor productivity imbalances. This would allow the gap to grow - undisturbed by monetary tightening - between the valuations of total resource capacity, versus aggregate time value.

By allowing money to reinforce time value in relation to itself as a commodity good, no policy maker need be compelled to shorten (or tighten) the gap between time aggregates and other resource aggregates, in order to fight the Baumol effect. Doing so, is only unnecessary constraints on long term growth. Instead of attempting to manage the distance between finite time value and "infinite" resource value, it would be more conducive to allow money to assume an additional function, as commodity wealth for economic time value.

Notes on the Evolution of "Hunter Gatherer" Domain

While today's versions are decidedly more modern, societies still "hunt and gather" for economic sustenance. There's just one problem: the redistributed bounty of hunters and gatherers has become distorted beyond recognition. How does one know where wealth sources actually reside? Too much knowledge - for instance - is dedicated to obfuscating the details of redistribution, instead of serving any obvious purpose for societal benefit.

Even as recently as the 19th century, land use was central to economic activity. For Henry George, land value appeared to be the most reasonable means to coordinate production and service formation. Like others of his time, Henry George believed governments needed a more significant economic role, and he felt it made more sense for land to be government owned. However, he believed that land was the only thing that needed to be taxed, and taxation should be a simple process as well. From Progress and Poverty, (p. 408, 50th anniversary edition) (1879):

The best tax by which public revenues can be raised is evidently that which will closest conform to the following conditions:
  1.  That it bear as lightly as possible upon production - so as to check the increase of the general fund from which taxes may be paid and the community maintained.
  2.  That it be easily and cheaply collected, and fall as directly as may be upon the ultimate payers - so as to take it from the people as little as possible in addition to what it yields the government.
  3.  That it be certain - so as to give the least opportunity for tyranny or corruption on the part of officials, and the least temptation to law-breaking and evasion on the part of taxpayers.
  4.  That it bear equally - so as to give no citizen an advantage or put any at a disadvantage, as compared with others.

Henry George was concerned about forms of taxation which lessen the producer's reward. Alas, the simple version of taxation he imagined never came to pass, and the U.S. tax system in particular is convoluted beyond belief. However, even though land taxation might have been sufficient for the obligations of a simpler government structure, how would it have fared once governments took on more responsibility for service formation and entitlements?

By the time the National Monetary Commission convened (1908-1912) , doubtless the role of land was already seen as only a partial contributor to wealth - given an increasingly globalization which had not yet been disrupted by the first world war. There was plenty of wealth beyond land (and national borders) which the U.S. could "hunt and gather", and the pending Federal Reserve system likely took this into account. George Selgin (in the above linked post) notes that Federal Reserve notes were made "obligations of both the Federal Reserve banks themselves and of the United States government."

According to Selgin: unfortunately, the Federal Reserve was created in a way that even though money could continue to expand, it was not elastic. This greatly concerned New York senator Elihu Root, who argued that the monetary base would not be as responsive to the public's actual demand for money, as before.

For that matter, not everyone afterward remained convinced that the quantity theory of money was an important consideration for economic activity. Even today, some believe the only thing standing in the way of (government provided) needed services is the political will to make it happen...why shouldn't governments which print their own money be able to do what they want? Hence the quantity theory of money is also an "inconvenient" factor, for those who don't consider traditional production important as a "starter point" for services production, in the current monetary configuration.

Not only is traditional production primary in this setting, the income it generates also defines output capacity for asset formation as well. Monetary flows are ultimately subjected to the realities of two very different dimensions. One is based on finite time aggregates, the other consists of random sets of material resources. Civilizations eventually run into constraints, when they rely on what appears as an open checkbook of material wealth to support time based and services based options.

None of this is just a matter of budgets, which presently do not distinguish the difference between finite time aggregates and random material resources. While time based coordination takes place in finite and fixed sets of possibilities, material resource sets will expand so long as they prove capable of meeting the resource requirements attributed to time value. Time based coordination now needs to directly contribute to the process, since other resource capacity is struggling to meet service income demands in general equilibrium.

Knowledge use systems would utilize a production norm which separates time backed services endeavor from materially backed asset formation and infrastructure maintenance. The best part about this is that growth can occur not just from traditional production but also services production. A simple way to think about the process is time backs time, while material resources back material resources. Budgets would consist of time aggregate balances, alongside the normal monetary budgets of material resource use.

The hunting and gathering of new wealth potential is still possible. But doing so requires the ability to anchor time use potential, alongside what can otherwise turn into indeterminate material wealth capacity. Knowledge use systems would seek the tax simplicity Henry George once imagined, albeit in slightly different terms. Time coordination would provide the role of what would otherwise be taxation and/or subsidies for services. Land still provides a shared focal point for ownership capacity. The ideal is to not end up with indeterminate flows from material wealth to skills use wealth. Why not create alternatives to tax systems that are means to hide who gets the benefits? If "wealth" from legal obfuscation is lost, it is doubtful anyone would really miss it.

The Problem With Zero

Imagine for a moment, regime change at the Fed. Not just any regime change, but one that would include the adoption of NGDPLT. What next? Even though nominal targeting has a wide variety of advocates, that's where the agreement ends. How so? Agreement would need to be reached in terms of a growth level trajectory. Hence even though there would be agreement regarding a monetary policy rule, by no means would the process be complete. In terms of economic outcome, a zero to five percent growth level is a vast difference, which represents a wide set of expectations for future potential.

As Scott Sumner recently noted, many opinions would come into play, and any resulting growth target would not be lightly determined. Can the present stagnation be overcome? What might ultimately happen to economic access, should group consensus settle on either zero level growth or a close approximate? Due to present circumstance and political gridlock, a no growth future remains a possibility. Indeed, much of the present interest in NGDPLT comes either from a no growth or a low growth consensus.

Whether a monetary no growth future would also mean less economic access, however, depends on political and supply side factors. Consider why a stronger growth trajectory continues to be needed, for instance in the present. Instead of sufficient monetary printing, the Fed has tried to "make do" with a bloated balance sheet. As George Selgin indicated in comments to the above linked post, the Fed is supplanting more productive economic endeavor. The means are not only extremely inefficient, but government and supply side intransigence are major factors in this scenario.

Even with a nominal target rule, the good intentions of a zero or low growth path might still lead to bad deflation. How so? The production norm which was advocated by George Selgin in his book "Less Than Zero", would respond to the good deflation of lower price levels, which have been a gradual result of traditional manufacture and production.

Unfortunately, other areas of the economy still present a deterrent to the benefits such a standard would hold, as their relative price points have instead moved higher over time. Without (reasonably equivalent) gains in innovation to bring down costs in services formation and building components, a zero growth path would still mean lost economic access for a growing percentage of the population over time. What's more, zero growth in these circumstance could possibly bring about bad deflation, by cutting into production potential at arbitrary levels to make up for the difference in price points.

If primary equilibrium actually reflected the production advantages of a falling price level from traditional manufacture, a present day zero growth path would not be problematic for the maintenance of economic access. But there have been few falling price levels or technological gains in sectors such as housing, healthcare and education. How much economic potential would be lost, should a low growth level target fail to take into account the lack of a falling price level from non tradable sectors?

Without substantial innovation in non tradable sectors, there would be losses for both production and consumption in this marketplace, with some degree of knock on effects in tradable sectors as well. In other words, far more than labor force participation levels are at stake. Presently, it is impossible to know the full impact that non tradable sectors actually have on equilibrium price levels. Real supply side reform needs to occur in non tradable sectors, before a (potential) zero growth trajectory could be safely considered.

Another problem with pinning down an "ideal" growth rate, is the interminable problem with data interpretation. Regarding economic statistics, Diane Coyle wrote in a recent post that some things really haven't changed very much. She references an updated version of a 1950 book from Oskar Morgenstern, "On the Accuracy of Economic Observations":

Morgenstern also notes the strong incentives many 'creators' of economic data have to give misleading responses to survey questions. What's your income? What price do you charge for this service, oh oligopoly provider? What is the level of your GDP, oh Greek government? "'Strategic' considerations play havoc with reliability."

None of this is to suggest that a better context for growth needs to be determined before a nominal target is a reasonable proposition. On the contrary. However, some of the confusion now coming from the Fed, appears as though inflation targeting mostly serves as a cover for the fact they are not in agreement about future economic potential.

At the very least, agreement regarding a specified rule would set the stage for the kinds of discussions regarding growth which need to follow. Ongoing directives for growth potential need more support: not just in terms of theoretical framing, but also the pragmatic perspective of populations as a whole. After all, George Selgin had the right idea for a productivity norm. However, it needs more precise application in terms of services and other non tradable sectors, both for economic access and marketplace vitality.

Time Value in Relation to Medium of Account and Exchange

Money holds importance both as a medium of exchange, and as a medium of account. However, this relation also needs a better correlation with aggregate time value than is presently the case. Why so? While money will suffice for the exchange of all traded goods, time is the other, somewhat forgotten constant. One generally cannot buy goods or interact with resource potential, without the focused intent of time value.

Just the same, time value is not recognized for the same necessary position (much as money) it holds in terms of resource representation. Time aggregates are the stage, where the stories of human capital and knowledge use have a place to unfold. Without that relation, it is too easy for any society to fall out of balance in terms of nominal income and the other resource aggregates which make up a general equilibrium. In an earlier post from 2012, Nick Rowe writes:

Scott Sumner argues that it is the medium of account function that matters. My view is different...Demand and supply of the medium of account determine the equilibrium price level. Demand and supply of the medium of exchange determine whether the economy is in a boom or recession.

I agree with Scott Sumner that the medium of account matters most, because it is the sole component of monetary policy which is capable of expressing time aggregates in concrete terms, even if it is not presently being used to do so. Distortions in the service economy have - over time - meant time aggregate claims (in terms of preexisting medium of account) which cannot always be honored. Think of recent college graduates coming into the marketplace, who might not be able to collectively extend the present terms of a given medium of account equilibrium, in time value terms. Without a doubt there are central bankers aware of this phenomenon and its potential effects on nominal income.

Time aggregate subsets do not have a chance to clear and function in relation to other time aggregates, because many of them are exogenously determined in ways that do not allow normal coordination processes. As a result, price signals for high skill services value are generally determined by associations, instead of supply chains, customer demand and resource capacity in the marketplace. Even though price clearing in broad equilibrium still assists wage clearing in standard production settings, the lack of a marketplace for time value, has prevented the group coordination which would allow normal time/price setting to occur for knowledge use.

An increasing inability of (medium of account) primary equilibrium to transform human capital investment into knowledge use potential, explains why credit - which had a secondary role in monetary policy - now holds an arbitrary primary role. Not because inflation targets or interest rates work better, but because they are capable of obfuscating the now uncertain values of time aggregates and monetary policy as a whole.

Hence, Nick Rowe is right, regarding the medium of exchange role for money, but only in the sense of what is presently occurring, as opposed to what is normal for money as a tool for economic endeavor. While money as medium of exchange is certainly more important than the role of money as credit, monetary policy still needs the anchor of understandable time value relationships. When money is primarily viewed as a medium of exchange, it quickly becomes susceptible to pretzel logic and political struggle. In this context, money can quickly lose its meaning as a tool of societal economic coordination.

Granted, I have just moved this discussion into the realm of what "is" and what "should be". However, it is important to distinguish that what "should be", is an understandable nominal income context. Even though wage patterns will remain distorted in primary equilibrium in the foreseeable future, it is possible to begin remedying these distortions in local settings.

Knowledge use systems are one way to achieve this internal coordination, because they could maintain internal transmission structure for time aggregates, nominal income, local services and asset formation. Credit in such systems would be relegated to secondary roles (in favor of incremental growth), so that monetary policy once again has a chance to work through normal means.

Key to all this is the ability to create a unique production norm in service formation, as skills sets would function in relation to actual time use potential - instead of the indeterminacy of other resource aggregates. After all, it is the uncertainty between the two which has led central bankers to disregard the primacy of nominal income as the anchor that it needs to represent.

Knowledge use systems would be capable of measuring accurate service formation, which in turn would make it easier to once again determine the medium of account. Total "wage flexibility" (i.e. skills set valuation) is realized by the coordination of time as an equal beginning point of economic activity. Even though total wage flexibility for knowledge based work is not possible in primary equilibrium, the fact that it can be approached on these terms in knowledge use systems makes targeted growth possible.

Time Value: An Evolution From Labour Value

Time value needs a more careful economic assessment in the near future. How so? Labor value is what institutions still need (to some degree), and labor in the traditional sense is closely associated with the needs of primary equilibrium. However, labor definitions are insufficient as indicators of human capital value, in what some refer to as the second machine age. This holds particularly true, given the fact time value needs to remain a central component of GDP.

One way to think about this: the time aggregates of populations as a whole, have to overcome at least two present day problems in the marketplace - a shrinking labor force participation rate, and the fact that new small business formation has been on a gradual decline. And as Ryan Decker recently noted, small businesses remain a more important part of any local economy, than is often realized.

The economic value of personal time, could potentially capture elements of GDP which are otherwise difficult to represent through the gains of the digital realm. If this is difficult to envision, time value would be closely associated with efforts to generate a (continuous) local group value growth trajectory, in terms of knowledge use and other local investment safety nets. A base monetary compensation would emerge from local group cooperation, which also reflects the ways in which a group becomes responsible for a wide variety of activity sets in a given environment.

This is also an alternative equilibrium, which would utilize a production norm somewhat differently from how it might be envisioned for primary equilibrium. How so? Unique price levels for local non tradable settings, would "float" as direct correlation for local asset formation and time based services. Populations would improve "income" capacity by directly tapping into innovation to improve their own living conditions.This would directly affect locally owned assets so that a community benefits from good deflation, instead of seeking price inflation to improve local living standards. On the other hand, any desire for a production norm or zero inflation in primary equilibrium, has to contend with the fact not all populations find benefit through good deflation for non tradable factors such as services wages or asset formation.

A psychological adjustment is also needed, in order to overcome the tendency to discount time value of those not presently economically engaged. So long as no one is convinced (regarding the worth of underemployed or unemployed), the economy will remain fragile and resources in danger of being lost. Without the "blessing" of societal monetary compensation for personal effort; in the future it would become increasingly difficult to serve, assist or otherwise help one another if one is not already gainfully employed within primary equilibrium.

Fortunately, the societal divisions of the present could still be mended. What's more, the process could contribute to economic activity which is not bound by the limits of government backed services formation. But first, think how time value is already recognizably different from earlier definitions of labor, and what that implies regarding the potential of time value in the future.

As labor gradually shifted from agriculture to manufacture, labor was increasingly thought of as a component which contributed to a final product, but was not directly correlated with that product in any time based sense. In other words, it became possible in recent centuries to diminish time aggregates from specific product formation without any noticeable effect on product quality. For centuries, time aggregates could be shifted towards knowledge use work without problematic debt loads on the systems that compensated knowledge use indirectly. This also became part of the standard definition of increased productivity.

Now, productivity needs a broader definition set as well: one that is capable of accounting for the contributing factor of direct knowledge use compensation. Not only are psychological considerations necessary for the restoration of time value, so too is the idea of productivity as a potential continuous trajectory for local group gains.

Think how labor value contributes to product in the standard institutional sense. People using machinery to create a ditch, does not necessarily mean the ditch is the desired end product. Rather, the product might be part of a project for an improved system of water flow. In traditional labor, one's primary time use is mostly subordinate to the plans of single institutions. Whereas time value is horizontally coordinated in knowledge use systems, by allowing a single institution to take on the functions of many. This means individuals would need to manage and be personally responsible for their time in a management capacity, even if one's time is used in relatively simple ways. Time arbitrage - as determined by ever changing product definition - would be structured based on both group and individually coordinated decisions.

Here's a way to think about time value as it relates to local group activity, versus individually matched time value. There are two sets of base group projects in the course of a given year for a "full" knowledge use system. These two sets are what represent time arbitrage coordinates beyond matched activity for personal needs. First, the services set is representative of what often occurs through taxation in primary equilibrium. Whereas, local assets include one's personal investment and responsibility for initial production capacity. As a result: in the latter, the entire group benefits from innovation gains through machinery and other technology that is utilized for both building components and infrastructure.

Hence time value comes into play not just when personal time is most desired component of the end product, but also as it relates to local group investment for for base production needs, and the production needs of ongoing projects. When matched time closely relates to local group projects, this is where machinery and automation have a chance to augment time value, instead of detracting from or otherwise taking personal time value out of the picture.

Likewise for investments in machines that local citizens might choose to augment ongoing healthcare needs. Indeed, one's cooperation with others to increase innovation and decrease costs, would play a large role in the flexible (internal) price points which result. This is where consumption definitions (and even certain price levels) become possible on the part of consumers, because the institutional function becomes internalized in local production and services structures. In normal equilibrium it is more difficult for the consumer to affect greater productivity in the same sense.

In knowledge use systems, time value becomes an important arbiter of outcomes - not just for the more immediate association of time value as end product between local citizens, but also for the indirect value of time as it relates to group investment of both time and resources. Machinery and other technology are considered by citizens for local group projects when that technology is capable of contributing to outcomes which are capable of freeing the time of all participants for more purposeful economic pursuits. Instead of local communities being limited by monetary budgets for pressing needs, the main limitation would simply become that of the time local citizens actually have at their disposal.

Time value grows as it contributes to the knowledge which reinforces and adds meaning to local support systems. In other words, one does not need to assign a certain monetary value to time value, because the coordination value of time proves capable of distributing knowledge and information where it is needed most. What's more, quality of life is gained by the fact that the group organizes in a way that neither innovation or technology is a threat to "jobs" or status.

Why is it not possible to think of time value through similar means in primary equilibrium? Monetary transmission in terms of asset and service formation does not operate smoothly across a wide variety of local equilibrium settings. This can also lead to problems for production norm application in national macroeconomic context. Resource sets do not always align well with time aggregates. As a result, time value needs monetary representation which can reimburse one's time use efforts over lengthy periods.

Locally coordinated equilibrium allows skills sets to become interchangeable, and reimburses time value throughout the entire socialization process. No one needs to become indebted in their youth or as they prepare for high skill levels, because they are compensated for sharing skills and knowledge sets with others as they move through the educational continuum. This allows time value to closely align within local economic settings - even as these communities remain connected with the tradable goods economies of primary equilibrium.

Update: Pete Boettke has an excellent post regarding the riots in Baltimore, which indicate how there is no time to waste, to start turning things around. Much as I stress the need for real work in rural areas, the same remains equally true for urban areas which have remained forgotten for too long. In terms of knowledge use, services creation and production potential, both rural and urban areas need to be able to utilize some of the same methods to regain economic access and vitality.

Money and Time Value in Dual Equilibrium

Those who have patiently kept up with this blogger, know that I offer suggestions for economic activity in a porous, dual equilibrium. New local economies could provide a counterpoint to traditional organization, by combining business, services and educational elements under a diverse umbrella of ongoing activity. They would be porous in the sense of utilizing the same currencies, global resource opportunities and knowledge possibilities as the economies which surround them. Also, they would be porous in terms of economic integration, i.e. the skills capacity of all who wish to fully participate.

Knowledge use systems which begin at lower income equilibrium, would be accessible initially on a time use basis. Many could gain entry with little more than a portfolio of skills potential, which would be monetarily compensated when time use is matched with others. This compensation provides a "working base" which allows lower income levels to fully optimize their time choices. Time use accountability is often unnecessary or even impractical in middle to high income equilibrium, where income structures allow individuals to augment time use with the bounty of random resource wealth. True, time flexibility is not always an option for upper income levels, but this is due to both regional valuations and local consumer restrictions.

What then, would be "non porous" in local economies which adopt knowledge use systems? Coordination for both services and production processes would remain locally organized - hence decentralized from the broader economic environment. Local economies would make service potential and local investment opportunities for all citizens the first priority, and diversity of product options would be key to growth and stability. Investment in terms of organization and recording of activity remains local, so as to remain monetarily attached to time use as a base monetary component.

Why so "stingy" about local investment only? Otherwise it would not be possible to maintain an accurate and effective production norm, between services time use and related business activities. Without the incentive which ties together group innovations and personal rewards, the monetary link with time use would fall away - just as it already has in today's middle to upper income equilibrium. Fortunately, the time link is not necessary at upper income levels, because income capacity can substitute for aligned incentives and ongoing broad innovation.

Also, without the local investment designation, it would not be possible to take advantage of local factors in work and education integration, which can contribute to total factor productivity. The services to wealth norm that each local economy could generate over time, would sometimes determine how rigorous their tests might become for entry and local knowledge use capacity. Even though this implies exclusion to some degree, there would be countless variations of local services to wealth production norms to choose from. That really matters. For in the present, economic access continues to drift towards the high or low skill set options which a mid to upper income equilibrium can offer.

While locally generated knowledge can be freely offered to other communities with similar systems, there would be no direct competition with middle to upper level equilibrium, in consumer based terms. Before anyone partakes of these services offerings, they would need to be a part of a local economy and actively participating in skills arbitrage, for a given length of time until one understands and utilizes the system well.

In particular, a recent post about knowledge product, was able to get into some of the nuts and bolts as to how such an equilibrium might work in monetary terms. An equilibrium which directly accounts for time use, would rely on decentralized grassroots efforts. Otherwise, centralized efforts create problems caused by services that are filtered through taxation and government subsidies at multiple income levels. When ultimate responsibility shifts outside a system, so too the decisions as to how interpersonal relationships "must" take place.

It would be far more efficient, to allow direct monetary formation for knowledge use and skills set product at local levels. To be sure, knowledge use systems are not strategies for successful regions whose populations have good access to local services. Their populations benefit from the additional resource capacity of international markets, which makes it unnecessary to anchor consumption needs to specific forms of time use. However, time use systems could be a good option for regions and populations whose services, knowledge use potential and populations are woefully underrepresented.

These systems rely on incremental growth. This mean creating services and asset formations which - instead of requiring loans - become investment opportunities in one's own environment. Eventually, local investment strategies can also contribute to the monetary base which compensates time use. In other words: services as they evolve, also need to develop in ways that further compensate time use. Only consider what has happened to Cuba, as it emphasized skills sets as "adequate" for the general population for far too long. Unfortunately, the former wealth that Cuba once held, has continued to fall away.

Skills sets and diverse forms of wealth generation need each another, in order for both to flourish. But often the delicate balance which exists between the two, is not well understood. Cuba - for instance - is a polar opposite in skills valuation from the circumstance in the U.S. Here, many in the healthcare establishment have tremendous access to international and domestic wealth flows. Whereas, healthcare providers in Cuba are so impoverished, they do not even have access to the limited privatization and business formation which has been allowed for the elite.

Cuba also has a form of dual currency which has further impoverished its people. Little if any porosity exists, between time use skills sets and the limited business formations which the Castro regime have allowed to exist. If a dual equilibrium exists, in order to work effectively it must anchor time use to local economic capacity in both business and services formation. Otherwise, sustainability between one's time use and resource potential in the environment, will eventually break down.

Thus the two nations provide a dramatic contrast for compensated time value. Skills sets might either be "over rewarded" so as to destabilize business formation and economic balance, or else become a low value commodity such as has occurred, in Cuba. While skills time value is extremely low in Cuban healthcare, here is just a brief example of the opposite extreme in the U.S. from "The Innovator's Dilemma", HT Miles Kimball:

...if governments were forced to report on their financial statements the liabilities they face resulting from contractual commitments to provide healthcare for retired employees, nearly every city and town in the United States would be bankrupt. There is no way for them to pay for what they are obligated to pay, except by denying funding for schools, roads, and public safety, or by raising taxes to extreme levels."

How can dual equilibrium frameworks overcome the compensatory skills set extremes which have occurred in Cuba and the U.S.? Both countries currently pose all or nothing scenarios in this regard. Neither the separation of skills sets from business activity in Cuban currency, or the single representation of skills sets in a middle to upper class equilibrium, are able to serve the needs of a population in any overall sense. Oddly, limitations imposed by U.S. government on skills sets, are somehow reminiscent of the limitations on business activity in Cuba. In both instances, the governments personally gain from the arbitrary limitation.

Previously I have suggested that skills utilization can take place without access to international monetary flows in regions which do not have adequate skills representation. However, in this post I particularly needed to stress that this process cannot occur in isolation from business activity. Otherwise, existing wealth and assets only deteriorate over time, because new wealth formations are needed to maintain those which came before.

This is why the recognition of time use as a finite component among other resources, is key. If the vast economic difference between finite time use and random resource use is not recognized, the good fortune of monetary windfalls cannot remain in place for infrastructure and maintenance needs when they are most urgent. Services, knowledge use and business formation all have important roles to fulfill in economic activity. But before they can work well together, the delicate balance which exists between them, needs to be acknowledged.

Knowledge Product and the Aggregate Demand Factor

Why do we need more growth than we presently have? And, what could be a reasonable way to achieve a revitalized economy with greater participation - if it were possible to do so? Often, discussions regarding growth get bogged down, in political spats over government preferences versus the wish lists of Main Street. Much of which boils down to: If only citizens would just allow government to take care of X or Y! Or, if government would simplify taxation and allow deregulation where needed, Main Street would prosper!

But is the gridlock between Washington and Main Street really this simple? Neither of these scenarios quite reflect the circumstance at hand. Neither "solution set" really addresses the middle skill levels which are gradually declining, or the individuals who find themselves with too little economic access. More is at stake, however. Not only is a significant portion of the population short on needed services, but the kinds of coordination people actually need from their governments, has been on short supply as well.

Knowledge use systems could provide ways to work with these issues, and in the process allow individuals to find greater meaning in their lives. What's more: decentralized options are needed in service capacities, which have yet to evolve from narrowly conceived definitions. I like that Megan McArdle looked at services potential in this recent EconTalk episode on the future of work. However, a framework for greater economic inclusion was still somewhat missing in the podcast. In order for knowledge and skills product to achieve liftoff, they need broader applications than what are allowed in the present.

And even though digital means exist to augment knowledge use capacity, digital potential is still somewhat in the position of the steam engine before it gained broad societal application. To be sure, digital technology has found its way into some production measures, but it has yet to be harnessed for activities which still rely on earlier and far more expensive channels of operation. As a result, digital has not really been allowed to contribute to the good deflation which can result from well organized production. Equal time use for services in local community, allows just that kind of organizational possibility.

Today's lack of societal coordination, has some bearing on the fact that central bankers are dragging their feet. They remain unconvinced that aggregate demand needs to be thought of in terms of the growth trajectory of the twentieth century - including the years of the Great Depression. Even now, inflation targeting focuses on interest rates and a consumer led economy, in what has become an incomplete marketplace in terms of both services and living provisions.

Herein also lies a great source of confusion, as to the practicality of GDP - let alone the fact this confusion makes it more difficult to envision the economy in monetary terms. Who (supposedly, anyway) needs a growing GDP if people don't want a lot of "stuff" - and after all - said stuff is transforming into digital realities?  However, it is the ways in which we relate to one another and work to find coordination as a society, which need greater representation in GDP.

Presently these functions are not only too indirectly represented, they are captured and patronized by special interests. People need knowledge use as a direct resource component, which counts in a monetary sense. Because our services are viewed in fiscal terms, intense struggles take place over the norms of what should have been ordinary human interaction, capable of arbitrage at individual levels.

By applying time use equally with matched participation, knowledge use becomes a product in its own right. This is important, because formerly limited services provisions which were available on fiscal terms (reallocation and debt) become possible in a direct, hence monetary sense. This allows individuals to become a direct part of the coordination processes governments struggle to provide, but often fail miserably in the knowledge based economy of the present.

With more services provision on the positive or monetary side of the ledger, knowledge use systems would become a recognizable production norm, capable of accurate measure and evolution over time. By including everyone in services capacity, good deflation becomes possible for the first time on service based terms. The fact that services become easier to monitor and generate, also allows people to engage in innovative production of goods and product which they actually want, rather than the asset formations previously thought necessary to secure a tax base for services.

This frees governments and communities to create housing based on consumer desires, because they no longer have to rely on resource intensive forms of housing to generate a service base. Because knowledge use would be matched directly through monetary means, people would be free to consume product that matches their income potential. That is, instead of being forced to rely on government subsidies, for the high degree of regulation a services tax base so often requires.

True, individuals do not have knowledge and skills capacity to the same degree. Just the same: automation, algorithms, group flexibility and a diverse knowledge option base are capable of assisting group formations at community levels. What's more, in decentralized services provisions, the recipient would play a much larger role in knowledge use options than is presently allowed.

Only remember how many of us don't want advice, so much as we desire corroboration. Just the fact of creating economic access through knowledge use, changes everything. It also allows the aggregate demand factor to be conceived in mutual production and consumption terms, for knowledge use in a monetary framework.

Some Thoughts on "Home Grown" Wealth Generation

How could wealth generation be represented, in communities which are in the process of creating knowledge use systems? That is, what kinds of wealth are possible to imagine, in places where people are actually able to live, given the resource potential of the present? After the "lament" of my last post, it's appropriate to take a more positive approach in this one! However, these concepts are very much "work in progress".

Some who are particularly interested in locally generated wealth, may also want to listen to this weeks' Econtalk which discusses the future potential of strong towns - an interesting podcast which is a timely "add" for thoughts here. However, debates regarding "permanent" town structures (rather than Walmarts with 15 year lifespans for instance) serve as a reminder that flexible building components are especially important now. The marketplace may remain in a phase of experimentation for decades, until new forms of social wealth are reliable enough to engender more permanent community structures for the future. As much as I miss the "glory days" of retail, they're probably not coming back any time soon.

Even though many individuals would consider living and working closer to one another again, the terms on which anyone can realistically do so, are not yet established. While greater population densities can also mean greater wealth, the age of the auto scattered both time preferences and aspirations to the winds. By no means will it be an easy process, to find common economic ground in our time use preferences - even though that needs to happen. How can knowledge use systems overcome the reality of next door neighbors who no longer know each other's names?

New economic pathways can be generated through equal time use. To be sure, major differences in skills capacity is a valid argument. Just the same, organizational capacity can harness skills capacity which otherwise would be missed. This additional input is very much needed, for knowledge use based on merit (and increasingly, privilege) is turning out to be a limited form of wealth generation. As a result, millions around the world are gaining education at this very moment for the limited slots where skills can still be reimbursed through earlier wealth formations.

What's more, merit based knowledge use is difficult to adapt successfully (sustainably) to the degree it is needed in lower density population areas. This can sometimes lead to "brain drain" in developing nations, even if only in the sense of villages which are expected to "sacrifice" prime skill sets for the greater good of more prosperous areas. Whereas when time and education are combined with cooperative endeavor in equal time use, new wealth is possible not just in the cities, but in the villages as well. This could benefit nations regardless of where they presently stand in educational terms. What's more, such efforts might at least address the problems nations experience with groups which remain opposed to Western education.

Equal time access for aggregate knowledge gain, opens the door to immense wealth creation otherwise not possible. It also reopens the door to social elements of economic life which have largely been lost - especially for those not presently engaged in knowledge use work. When people experience social reciprocity in workplace environments, they also gain the ability to provide reciprocity for others in their personal lives. What's more, knowledge work would provide ways to remain engaged as individuals age and become less competitive in physical tasks. Many could remain in knowledge use environments, who otherwise would struggle to maintain physical labor for long stretches of time.

Time use arbitrage provides ways for people to tend to the services they need at all levels. It serves to make taxation unnecessary for what would otherwise represent municipal operational costs, among other benefits at all age levels. This basic income base also makes it possible for local participants to further engage in other aspects of local wealth creation. Why might this be important?

Local investment options in ongoing projects would mean additional income for those who seek it. By aligning additional income with (local) production windfalls and random resources, the time use base has a chance to remain inclusive and meaningful for the entire community. This matters, because the finite nature of time is readily diminished by changes in compensation. Whereas differences in compensation from random resource use are quite relative, in terms of one's ability to thrive. While the value of the shared hourly base may gradually rise, it would need to do so according to positive (i.e. innovative and cost cutting) changes in local resource adaptations, instead of attempts to keep up with rising costs. Income capacity need not become an issue, so long as a local production norm is maintained for basic environment components.

Admittedly, this is one aspect of the community wide system that I'm still trying to frame in the appropriate context. Changes in local land value - on the other hand - would gradually rise according to the worldwide marketplace they remain a part of under any circumstance. In the sense that time scarcity would be considered endogenous to the system, land use values remain exogenous to the system except in terms of how they might be affected by overall coordination.

How to think about basic and interchangeable building components for local living and working environments? These represent building "shares" in both a literal and figurative sense, for all residents to invest in. What's more, innovation in these areas could become every bit as substantial, as innovation in the digital realm of recent decades. Individual participation and investment in local building components, could especially prevent problems with the existing base wage structure.

Once building components are given over to ongoing innovation and the good deflation of productive gain, living quarters will no longer be out of reach for lower incomes. Incremental ownership options would also bring basic living expenses and services access within reach of any income, with little more than a full time commitment in time arbitrage. It is this affordability in living options, that makes it possible for individuals to exchange skills sets on equal terms - thereby generating completely new wealth, in the process.