This is a quick note in response to Timur Kuran’s comment on BBC the other day (here) in which he reminded us that the corporation was the distinguishing institution that underpinned European economic growth and allowed it to overtake the Islamic Ottoman Empire (Islamic law did not encourage such unlimited liability concepts).
I would like to refine this debate by pointing out that there are no societal risks from large companies like Walmart or large railway companies. Should they go bust, someone will always come by and pick up the ruins if there is any value left in them. Consumers don’t lose anything either, since they aren’t buying the services any longer. A few jobs are lost but that’s the natural part of creative destruction (what I call creative replacement in BFN – see online notes).
On the other hand, and here is the key, there is a big difference between banks and typical service providers like Walmart. A few weeks ago I discovered that banks had unlimited liability till the early 20th century when I suspect the Keynesians, the likely ‘do-gooders’, allowed them to avail the limited liability provisions applicable to ordinary corporations.
Till then they were constrained in growing "excessively" large or taking unnecessary risks because owners were directly and entirely responsible for consequences of bad decisions. Today, the owners (ordinary shareholders) may lose a bit of their "skin" but ordinary customers lose a lot, while those who take bad decisions (CEOs, etc.) flourish and receive even fatter salaries. The banking system is simply not suitable for getting access to corporation law.
It appears to be absolutely necessary to revert banking to the unlimited liability model of the past, when it worked without creating the huge societal risks it now does. It is NOT possible to prudentially regulate banking beyond a point. The best remedy is to have the owners increase their "skin in the game" and take unlimited liability for their bad decisions. That way small investors will shun banks or demand a higher risk premium for equity. Either way, that will shrink the bank size and encourage good decisions.
Once this is done, there will no longer remain any tension between the successful institution of corporation and banks that are "too big to fail".
Here's an interesting video. When currencies fail due to government failure, people revert to barter. Since barter is expensive, people prefer valuable but easily transferable commodities in lieu.
Till the late 1980s, virtually everyone smoked and so cigarettes were liquid and accepted in place of currency. They had the property also of divisibility (one cigarette at a time), and so could be used like coins. They were not heavy to carry around (although they were somewhat bulky). They were not very durable, getting destroyed in water, so they were only used as a temporary last resort, when the 'normal' currency had become worthless.
Today, however, cigarettes are frowned upon. Not many people own cigarettes, and not many will accept them as "coins". What will be the temporary currency of a society should government currencies break down, particularly when one can't mint gold coins privately particularly when the government forbids it.
This website lists the key properties of money:
Portability: Ideal money must be portable. That is, it has to be convenient for you to bring it along to wherever you want. Obviously, cattle fail the portability test and was not the favoured form of money.
Divisibility: Ideally, money should be easily divisible to cater for all types and sizes of transactions. Again, cattle obviously fail the divisibility test.
Durability: Physical money should be durable. If not (i.e. can decay), it cannot be a reliable store of value. Tea fails the durability test.
Sufficiently rare: Obviously, money has to be sufficiently rare. If not, you will have to haul a massive quantity of it for transactions. Seashells fail this test. On the other hand, it cannot be too rare. Otherwise, it will be impossible to sub-divide it further for tiny transactions.
Fungible: Any commodity that functions as money ought to be fungible. That is, you can trade or substitute it for equal amounts of like commodity. Someone asked whether diamonds is a suitable commodity for money. The answer is no because diamonds are not fungible. Since each diamond is unique, they cannot be substituted or traded easily. Therefore, it cannot be conveniently used for transactions.
Un-consumable: Oil cannot function as money because because it is a consumable commodity. Obviously, it is not a good idea to consume your money! It’s pragmatic value is far too great to function as money.
We are informed that:
Over the course of time, many commodities (e.g. tobacco, cattle, grain, cooper, seashells and tea) at one time or another functioned as money. But eventually, gold and silver became money for most civilisations and societies in history.
This doesn't solve our problem. We are talking here about a situation when a currency has failed but the government has not stabilised enough to allow alternatives to be produced. So what would you be willing to ACCEPT in exchange for something of value today?
I won't accept:
- fashion goods because I can't assess their value
- technological stuff (e.g. blank DVDs) because they depreciate so quickly
- books because they take a lot of space
- batteries because you can't store for long and can't tell if they are charged
But I would accept:
- ordinary lead pencils for day to day transactions (but their value is too low)
- certified jewellery in lieu of bigger items (like car/house), although there is a cost to verification of the quality of the jewellery
Can't think readily of other alternative "currencies". Any thoughts?
Research notes on cigarettes as money: