Debt: The Good and the Evil

Debt causes many problems in an economic system, but some benefits as well. How can a new system be designed to only incorporate the benefits?


Let’s start with the simplest case to consider, a wholly self-contained, up-and-running Just Deserts socio-economic system. The good side of debt is that it can be used to speed up growth of production in an already-growing system. The basic idea is that funding is obtained to finance capital acquisition and operations, which produce enough benefits to cover all costs and repay the debt.

The bad side of debt is that it can be used for permanent consumption costs, growing continually, as the consumer chooses to consume more than his allocation of benefits can sustain. This means that the debtor must continually and exponentially go deeper into debt, meaning that much of his income and all of his holdings will eventually be confiscated by the debt holder. This works for individuals, for organizations, and for government organizations and entities. The organization situation is much like that for an individual, meaning the debt holder eventually collects the title to all the organization’s property. For a government organization like a nation, it does the same thing, allowing current consumption at the price of confiscation of nationally-owned property and also future income, such as taxes. Greece is the preeminent example. The time displacement of the repayment allows bad effects to be unfelt for as long as the term of the debt, and if it is rolled over, successive terms. Since people typically only have the ability to think in the short term, debt is a successful means of further enriching those already wealthy.

In some situations, personnel rotation in a government organization means those who will face the problems of repayment are not those who enjoyed the benefits of consumption. There are many ways to implement such a situation, such as a politician staying in power because voters are happy with the benefits distributed from the debt funds, being short-sighted at best, followed by the politician’s retirement before the debt comes due. Many other means of benefiting by the time difference between incurring and discharging a debt exist, and because of the flexibility such a situation provides, it is likely that no solution can be found other than outlawing or prohibiting this type of debt.

Thus, there is growth acceleration on the good side, and countless scams on the other side, along with all the pitfalls of a myopic view of life. In a Just Deserts economic system, taxes or income restrictions prevent any individual from personally amassing enough funds to make large-scale loans, meaning that there could be small debts, which do not debase someone’s life, but no large ones.

Growth acceleration can be accomplished by other means that loans from individuals; debt from other organizations which can legitimately amass large amounts of delayed benefits could happen. So can other means of obtaining funding, typically meaning some ownership rights in the organization needing or wanting the money are traded for up-front funds. This is the stock market, plus all types of individualized arrangements made between a producing organization and a funding organization. In a Just Deserts economic system, there would be funds in possession of insurance organizations and pension organizations, as well as possibly specialized organizations, the equivalent of today’s mutual and hedge funds, except with necessarily more diverse ownership. Thus, debts for growth acceleration would not be interfered with.

Debts for temporary consumption needs, such as necessitated by temporary disability, or for replacement of productive capacity, such as necessitated by permanent disability, would be handled by insurance funds. Once started, these insurance funds would exist to replace lost benefits for someone suffering from a disability, either temporary or permanent. They would be paid into as part of a mandatory deduction from working wages and salary. The usual objection to such insurance funds is that they drive workers and employers to use a black market, where possible. Whether this is palatable depends on the regulations against it, and the results on the workers who have to choose whether to use it or not. Having high fines and fees prohibiting it, and a very low level of benefits for those who use it might reduce this objection.

Once again, this can be described as a myopic viewpoint. Someone who avoids taxes and insurance withholdings gains possibly in current consumption levels, but risks later problems. Since people do not see later problems as clearly as they do current ones, the black market can burgeon. But with education and experience, it might be reduced substantially in a Just Deserts socio-economic system.

Debt for the purpose of raising current consumption levels would not be possible in a Just Deserts socio-economic system. No organization would have the right to grant such debt. Thus debt in a Just Deserts system is somewhat simplified, compared to contemporary systems.

Now enlarge the domain being considered. Suppose there are external actors, individuals, organizations or governments, outside the Just Deserts system boundaries. They are not constrained by the rules and regulations of the Just Deserts system and can provide debt to those individuals, organizations and government bodies within the system.

There are always two polar extremes in dealing with any behavior that is considered undesirable by some authority. One is to involve a chain of actions, such as detection, confirmation, punishment. The other is to arrange the situation so that the natural consequences of the behavior are so negative that it is discouraged. The latter arrangement does not work well when the natural consequences are not immediate, or not definite. Then the typically myopic individual can not rationally weigh these consequences, and therefore can make decisions based mostly on immediate effects. With organizations, one can expect they are run under rational considerations, but decisions within organizations can be made by individuals seeking personal benefits in the short term, as opposed to organizational advantages in the long term. The same holds whether the organization is a private one or a governmental one. Thus, in the absence of a magic wand that transforms everyone into a rational person able and willing to weigh long-term consequences, and to put the organization’s benefit in front of personal benefits, only regulation will work.

Regulation can have just as many horrible consequences as depending on individual rationality and organizational altruism. If governmental organizations involved in regulations were all full of rational, well-educated individuals with the best interests of the nation at heart, they would work well. The real trick in designing a socio-economic system is to make one that works with venal and stupid people in it. Clearly one major avenue for improvement is to properly train and educate children, but even that can be subverted in the interests of personal benefits and even to further some misunderstandings of how both education and government work. So, no magic wand.

Regulation is made easier by transparency. So is the detection of misdeeds by regulators, if the transparency is so thorough that private individuals, or organizations constituted to serve as checks on mis-regulation, can obtain the same data as the regulators. Rather than make transparency something that is only in effect in special instances, it could be the default situation unless there were compelling reasons to deny it. In the financial arena, this would mean that any individual, organization, or government body that went outside the nation where Just Deserts was the system employed, and violated the principles of it, would be obvious and visible to any organization that chose to inspect the pertinent records. If transparency is the standard, the next level of deception involves maintaining false records that are visible, and a set of other records that are hidden. This would allow debt money to come into an organization, but it would not allow it to be used, as the transparency of most records would show off the entry point of the illegally sourced funding. In other words, it could be put into a hidden external account, but could not be brought into the nation and mingled with internal funds without leaving a trace.

The other difficult situation, besides relations with external non-Just Deserts nations, is the transition from any other system into a Just Deserts one. Specifically, this means that if there were a nation with a large international debt, what would happen to this debt when the nation worked through the transformation of itself into a different system, a Just Deserts one. For example, consumption levels might have been higher in that nation for previous times than could have been justified by the level of production there. This means that some external actors have loaned money to the nation so that it could have an average consumption level higher than otherwise possible. Does the nation repudiate this particular amount of debt, or does it decide to lower consumption levels and pay back the debt? Usually debt is not repudiated unless the debtor is willing to assume there will be no more debt in the future. This is the situation with a Just Deserts nation, so repudiation would not have the same theoretical effect as it would in a nation that was bound and determined to have inflated consumption levels until the dam burst and economic collapse occurred. There are good arguments to be made for both honoring the debt and dishonoring it, and such decisions would have to be made in the framework of the whole transition, by whichever rational, non-myopic, and altruistic people can be found within the nation to make such weighty decisions.

Children and Their Training

The best economic system is one with moral people. Two solutions exist for improving a system: making people more moral and introducing means for rendering most immorality ineffective. These means exist.

There seems to be a common tendency to pick one economic system and claim it is the best system, for various reasons. However, there may be no best system at all. What system works best depends on how one defines ‘best’, but also on some external factors. One obvious factor is the level of technology. If the society has extensive and verifiable data collections on almost all transactions and actions within the economy, then it can be controlled in a more delicate way. So, technology level is a large determining factor on which economic system might produce the most manufactured goods, or provide the longest lifetimes to its members, or some other social benefit.

But technology level is not the only factor which can determines how different economic systems would score against a metric to measure which one was best. The members of the society do also. If there are few educated members, specifically few who can master the art of starting enterprises, managing them, rallying support from diverse people, estimate outcomes, and do many other managerial tasks, then the society is doomed to only have few or none of the companies or agencies which could drive progress or even which could exploit technology to produce a good score on a metric. Management talent is one factor, but engineering skills are another. Without the ability to handle technological solutions to problems, such as building long-lasting infrastructure or developing manufacturing capabilities, the society would be short-changed in exploiting what it might have.

There is also a different human factor. This relates to the difference between moral people and immoral people. Moral here is used to represent someone whose behavior is governed by principles, which are known, and immoral refers to someone who seeks to constantly pursue his own advantage, through any means possible. Immoral people pride themselves on deception, finding loopholes in legal regulations, bribing law-makers and law enforcement individuals, and other nefarious deeds, all the while proclaiming their own moral standards.

These predilections, toward virtue and vice, do not come principally from genetics, but from the culture of the society, and specifically what is transmitted to young children. When a child is instructed by someone they trust and respect, the information goes deep within the brain, and is largely not recallable explicitly. However, it determines what other information will be accepted by the child’s brain, as associations with prior information is how the brain accumulates knowledge. This early information determines not only what other information is accepted readily, but also how the child will behave. In essence, morality comes from early instruction and is not forgotten. Immorality is also recorded as an example of how to live. Young children are more recorders of their experiences than thinkers about what they are seeing.

Consider a political entity of any sort, composed either of all moral people, raised to believe in the same moral code and some means of enforcing it, or of some moral and some immoral people, the latter raised to think that anything they can get away with to increase their own well-being is acceptable. Any governmental system or economic system will work successfully for the first case. Moral individuals simply follow the rules of the systems. It may be that one system works better than another, and that is an interesting question to be addressed later. The second case is much more difficult, as there are innumerable ways that an immoral person might seek to distort the economic system for their own benefit.

A catalog of immoral activities might be in order. There is first nepotism of various forms. This involves someone in a position to make a selection of another person for some benefit, or to make some ruling that affects another person or to influence the benefits that will go to some other person. When the person taking the action is influenced by who the person is, meaning which group do they fall into, this is nepotism. Instead of a fair review, we get a biased review. In a society which has a substantial number of immoral people, perhaps moral in their own eyes but immoral by any independent measure, how do you invent systems, components of the economic system, which reduce the effects of nepotism? Nepotism becomes epidemic in some areas when those invited to become decision-makers are selected by nepotism, and are interested in doing more of it. Soon, by exponential growth, the whole system of decision-makers has been corrupted. How would it be possible to stop such behavior?

Only quantitative metrics have a chance at doing so, as words of a language are not defined precisely enough to stop nepotism. Subjective judgment is used for a word-based selection and subjective judgment is simply an open door for nepotism.

Seeking and obtaining protection from taxation is another common form of immoral activity. Taxation is mandatory to support those types of activities and the types of structures that need to be done by the whole population, but who exactly pays what fraction of the total needed? In an economic system where the distribution of taxation is decided upon, not by the population as a whole or a substantial subset of them, but by a few individuals, it would be very profitable to corrupt those few individuals in certain cases. If income and wealth accumulation are governed by a maximum salary law and a maximum wealth law, and the limits were reasonably related to the value of a person’s time, then such corruption would not provide a good return on the money invested in corruption. In any other situation, where income and wealth can be huge, corruption can only be stopped by having all taxation distribution question subjected to a vote by a group too large to corrupt.

In a bureaucracy, immoral activity is engendered by individuals who are rewarded based on consumption goals rather than production goals. This means that, if an increase in reward is based on how many people work for a person, rather than on the value that the entire set of people provide, perhaps divided by the costs, then individuals seeking personal benefit will seek to expand rather than become more efficient. Individuals who were raised to be moral individuals might act within a bureaucracy so as to increase the value per cost provided, but those who were not would seek the opposite. Again, the two solutions of morality training for children and quantitative metrics ameliorate this tendency.

Favoritism is another avenue for immoral activity. This exists whenever an individual or small group of individuals have the ability to divert benefits to one of several possible recipients. Examples are obvious: supply officers who choose which distributor will supply some large organization’s needs; contracting officers who choose which organization will obtain large blocks of work and further how much will be paid for the output, directly and in response to unplanned events; regulators who can approve or reject an application to sell something, provide something, dispose of something, or other material actions. The same two solutions spring up, moral people doing the choosing and quantitative metrics to force the immoral to make choices in the best interests of the whole organization rather than themselves or their favored group. The third solution, dispersing authority so that a large group reviews the decisions, is costly, and might not be as feasible as it would be with a very impactful decision such as the apportionment of tax responsibility.

There would seem to be no more effective way of stemming immoral activity than the teaching of children a moral code. When only very few individuals seek to be corrupt, or who think nepotism is the right thing to do, dissuasion and detection can be effective at low cost. If everyone but a few believes in the same moral code, and believes it should be universally followed, anyone violating it has to be extremely careful in how they conceal their immoral activity. If the moral code teaches children not just to be moral, but to be suspicious and aware so that immoral activity is likely to be noticed, then most of the struggle to produce a Just Deserts economic system will have been won. There are other tools that are fitting for this struggle, dispersion of the most important decisions among some electorate, quantitative metrics that actually relate to the effectiveness and efficiency of the tasks being performed, and a maximum income and wealth law incorporated via taxation or caps on salary and stronger caps on unearned income. Perhaps more will be devised, but these need to be developed in more detail so that it is possible to see if they can work in both the best case of a moral population, and in the not-so-good case where there are substantial numbers who disregard morality in favor of personal or group benefit. This will be a challenge, but perhaps a greater challenge would be finding a pathway to the gradual implementation of the system. It is not worthwhile to invent a system which has no method by which it could ever be tried.

Centralization and Decentralization

Centralization of decision-making has obvious advantages but also some serious catastrophic failure modes. How can the degree and extent of centralization be managed in a socio-economic system?

In designing a new socio-economic system, hopefully free from some of the built-in catastrophes of previous inventions, one important question relates to the centralization of decision-making. The opposite is decentralization, but there is actually a continuum of alternatives lying between these two extremes. The continuum extends in two dimensions, both in the degree of decentralization, meaning the level in a governmental hierarchy where decisions are made, and the scope of decentralization, meaning the number of different decisions that are being considered for centralization. The oversimplified answers are to centralize everything to the highest level or to decentralize everything to the lowest level, and like all simple solutions to complex problems, they are designed to ensure the built-in catastrophes will happen. To minimize them, something different is needed.

What goes wrong with centralization of decision-making? The same problems exist with any monopolization of control. The person or persons at the top, making the decisions, don’t make them well, and then everyone affected suffers from the choices. The first reason that centralized decisions might be poorly made is uncertainty. If the information necessary to make the best choice is not available to the decision-makers or their subordinates or advisors, then they are forced to make an arbitrary choice. If the decision-making were decentralized, there would be many different choices made, and after a period of time, the results of these different choices would be available for comparison. The best could be evaluated, and more information used for future iterations of the decision-making. This would imply that decentralization might be a good temporary expedient to use until the data was in and the best choice was clearly visible, but the counter to this is that conditions change, and therefore what constitutes best might change, meaning evaluation via decentralization is needed again. The conditions might not be the thing that is changing, but the alternatives might be, as new ones are devised and made available for widespread use. Thus, in a stable, unchanging situation, centralization might be a good decision from the single point of view of efficiency, but not otherwise.

The second problem with centralization of decision-making is the drive to uniformity when uniformity is not the best solution. It is easy for a centralized decision-maker to do some sort of evaluation and make a choice that will be implemented everywhere. However, this is based on the assumption that there is a universal best choice. What is best for one area or for one group or for one time might not be best for another area, group or time. This is referred to as the local conditions situation. For centralization to work well, there would have to be knowledge of how local conditions affect the outcomes of a certain decision, and that local knowledge would have to be available to the centralized decision-makers. Efficiency takes a hit here, as the evaluation of a set of alternatives would have to be done considering the variations in local conditions. Uniformity has a great appeal, as do all simple solutions, but it is often a totally false assumption that uniformity would produce the best results in all conditions. Even what is defined as best may differ when different locations, groups or times are considered, and if the definition of best varies, then uniform solutions cannot hope to achieve this local best except in fortuitous circumstances.

The third problem is actually a set of problems collected under one label, and the label is corruption. It is so much easier to have corruption in a centralized system than in a decentralized one, as a monopoly of control can be exploited by the individual making the decisions at the center of power. Corruption does not simply mean that the decision-maker takes some benefit in order to make a decision favoring a particular party. This is only one of the many facets of corruption, and perhaps the most well-known and appreciated one. However there are more. A centralized decision-maker can have a different agenda that the one appropriate to his position. The centralized decision-maker might have his/her own interests at stake, and therefore seek to have some benefits received for making a particular decision. The ways in which this could happen and even be disguised are manifold. But the agenda the centralized decision-maker has might not be oriented around maximizing his own benefits. After all, benefits are asymptotic in that more and more of something often produces less and less enjoyment and appreciation. They are psychological individuals who feel good about counts of things, but for many individuals, they obtain their enjoyment other ways and tilt their decisions according to these ways.

One is simply the human lust for power. The ability to control aspects of the lives of others provides enjoyment to others, and has for the entire history of humanity. This might explain the desire for the monopolization of decision-making, but it does not portray the whole spectrum of agendas that a centralized decision-maker might have. One is a hidden antipathy to some location or group. Decisions can be made which disfavor the location or locations or group or groups that the antipathy is directed toward. The more subjective the decision, the more that antipathy can be concealed.

The inverse is just as possible. Nepotism toward one’s family or friends might be fairly obvious, but nepotism toward some location or group, the opposite of antipathy, can also be easily concealed.

Furthermore, it does not have to be simply antipathy or nepotism which drives the decisions of a centralized decision-maker, it can be a preference for control of some particular aspect of the lives, of everyone affected or of some subset of the population. Decisions have side-effects, sometimes dramatic ones which in the long-term diminishments overwhelm any short-term benefits. A corrupt decision-maker can promote his preference of opinions by shifting the choices he/she makes. Over the long-term, these effects would be felt.

Self-benefit, antipathy, nepotism, and side-effects are not simply present in top-level decisions in a centralized decision-making arrangement; they can appear at any level. If decisions of a certain category are decentralized to some lower level, the exact same phenomena can appear at that level. It would not have the wide-ranging effect that a single monopolistic decision would, but it would still have a local effect. Preventing this might be seen as one justification for centralizing decisions. Local corruption is overridden by higher-level control. Unfortunately, the higher-level control is just as prone, or possibly more prone, to corruption. There are other means that a newly designed socio-economic system can mitigate corruption.

One is transparency. Transparency is easier to obtain at small local levels, where interpersonal contract is common. Knowing someone as an individual is more likely to reveal their tendency toward corruption than only hearing about a decision via some disseminated ukase. Establishing transparency at high levels of concentrations of decision-making power might be very difficult, and can be countered by having specialists at providing deceptive façades for the justification of all decisions. Investigation of such decision-making by other specialists, perhaps self-appointed ones, can be made difficult by the denial of access or simply by having a unified front of interface people, all of whom are familiar with the façades.

Thus, there are tremendous disadvantages to centralized decision-making, but there is one advantage that is similarly huge: efficiency. If the same decision has to be made thousands of times, as opposed to once, it stands to reason that the same level of attention and scrutiny to the details of the decision cannot be afforded. A centralized decision-maker can have a large staff devoted to a single decision, and even with this, the costs of making the decision once are much smaller than making it at the lowest level of governance. To make a decision properly, in a complex situation, there might be much academic or otherwise collected information and theories to be located and digested. It might be necessary to hire a specialist with a background in some certain area to review this data, and it might even be necessary to have a team appointed to do this. The costs of a decision are not the same at the lowest level and the highest level, as there is considerably more data to analyse when considering a decision that would be implemented on a very wide scale, but the costs do not scale up proportionally with size, perhaps increasing instead only logarithmically. It might well be that at the lowest levels, the cost of an objective decision are simply too high, and some subjective choices would need to be made. Perhaps the solution would be to copy some other location’s decisions, or to keep the prior decision barring some obvious failures, or to simply make a haphazard choice based on incomplete information and inadequate models and interpretations.

There are some clear antidotes to the poison of corruption and the poison of inefficiency. One is to make decisions at the lowest level where the resources would be available to make a thorough decision, perhaps not at the highest or lowest levels, but somewhere in the middle. The other would be to invent methods of ensuring transparency, and of training sufficient specialists that there is no shortage of people able to investigate decisions. Perhaps jocularly, another solution would be to raise everyone up in the society to expect corruption of various types to pop up everywhere, as well as inappropriate subjectivity. People tend to be raised in a trusting environment, without adequate warning and training for the situation that exists in the real world, and countering that some formal way might provide another mitigation for the problems of centralization and decentralization.