July 18, 2005
How to do Hayekian Private Issuance
Robert Murphy defends Hayek's proposals for private issuance against Mises and Rothbard. Such is of course welcome but bemusing; as it does not take into account modern developments in the financial cryptography world, it seems quaint and historical. This is now a solved problem, and I suppose if I'd thought about it I would have written a paper on it!
Private issuance of monies by corporations is easy and within reach of all. The technical problems are solved, as are the economic interests and the value feedback equations. I know this because I - or my company - have been issuing for two (oops not
four) years now, and even though our scale is tiny, it still works so efficiently that I cannot see a circumstance where the company would choose not to issue.
Corporate issuance works like this:
A company creates a contract that redeems for any service the company offers. Not gold, not a basket of Walmart items, etc etc. It redeems in its own services and units. All commercial companies have some sort of service or good, by definition, although I grant non-profits sometimes do not. This of course means we need an external unit of account, but that's no problem.
Then, the corporation pays all its people in the issue. Every month their paychecks come in the corporate unit. As this is a digital operation, it is painless and quick.
Finally, all purchasers to the company are instructed to pay all invoices in the corporate issue. In order to get their corporate units they contact the employees and arrange a trade. Purchasers might have gold, dollars or some other unit, and employees often need exactly those things. A trade is arranged, the value moves from the employees to the purchasers, and then back to the company as the invoice is paid.
All else is evolution. How does the company pay for bills in local national currency? Simple - we post a bill on the notice board (perhaps virtually) with an offer of X+1% in the corporate unit to get it paid. Maybe we need to up the number to 2% the next day, but soon enough someone will decide to do take the profit.
How do buyers find sellers? In our small scenario by word of mouth. But markets would no doubt spring up once a threshhold is reached, and a market is nothing but a mailing list or a chatroom.
How does a big purchaser deal with lots of little sellers? Someone stands in as an intermediary, of course, a process that we have seen arise in recent times. How do profits get taken? How do shares dividends get paid? Taxes, etc etc - all the same way. These are all bills.
How is accountancy handled? This is perhaps the best bit. The system is its own accountancy system. Everyone has their own books for their own transactions (a la Triple Entry Accounting in FC++ #2) and the need to keep a separate book of accounts disappears.
How is bankrupcy handled? Perhaps testament to the power of this system, it works as well in times of lean payments as it does in boom time. That's because of the strong recording capabilities of the digital payments system means that what was liquid converts seamlessly into debt, thus relieving everyone of the need to account for their position. In fact, we originally floated the new issue in a time of quasi-bankrupcy, and within a single weekend, every employee had converted their notes, their promises, their deferred invoices into corporate issue. Because it was so much easier and so much clearer.
Is it efficient? On a small scale, for users, it can be about as much work as dealing with the average invoice, per transaction. As scale ramps up, it reduces to about the same order of cost of getting a coffee out of a coin-powered machine.
For the issuer, it has one final magic component - it raises long term financing on floating terms. Nominally at zero percent, the costs of holding and converting and indeed financing the working capital are worked out in the exchange rate between the corporate rate and local units. Your employees are your investment bank; it's painless and obviates the need for a CFO until you've added another two zeros to the revenues. Yet another saving.
Posted by iang at July 18, 2005 12:21 PM
farmer co-ops ... at least back in the 50s worked somewhat that way .... the farmer's co-op grocery store, gas station, hardware, etc ... carried people on account until harvest ... at which time things were settled up.
Maybe it would make sense to go even beyond goods and services and accept one's own issue as a tender of any debt towards the issuer.
Are you thinking here that 'tender of any debt' is closer to what it's for? Or are you thinking about a particular debt that isn't covered in the general nature of commerce arising out of a company's goods and services?
I am not sure that I understand your question correctly, but I obviously do not mean that the issue should be an obligation to be accepted as a tender of any kind debt. If that were the case, then company A holding the issue of company B could choose to give B-units instead of goods and services, when B wants to redeem their A-units for goods and sercvices. Mutual debt cancellation should be, in my opinion, an option requiring the consent of both parties.
What I was alluding to is that it makes sense for the issuer to accept their issue as a tender of any kind of debt (without explicitly promising to do so). Following the previous example, if B wants to buy back their own units for A-units from A, there's no reason for A to refuse (B-units held by A are a debt of B towards A; A should accept its own units as a tender thereof).
Have I answered your question?
Right, I think I follow. That is the case. To re-iterate: The contract of issue does not oblige the issuer to take own issue for any debt, be it goods, services or indeed other debts. This lack of obligation operates as the check against the holder of the issue.
But it makes a lot of sense; reputation provides the balance that forces the issuer to take his own issue, and the lack of obligation provides us a test of the reputation on an ongoing basis.
Ones own issue *is* ones own company, just like a nation's money is its best representation of its own economy. The USD is the best single measure of the economy of the USA, and the ability of the people (and government via taxes) to deliver value into the future; the same applies to a corporate issue, it is a great single metric of the corporation as a living breathing microeconomy to deliver value in the future. In this sense, as money reduces all value questions into one number, so the float of issue reduces much of corporate value into a single number (it can replace and absorb the debt side of the balance sheet but it can't replace the shares of course).
It would be an extraordinary event if a company didn't take its own issue for anything it could, as its credit rating - ability to pay more employees - and its very reputation is enhanced every time it absorbs and retires units of its own issue. So an offer to exchange A for B is just sweet!
(As an aside, I personally do this with Paypal - I don't "do" Paypal myself, but I pass Paypal across to anyone I know who holds Systemics issue and uses Paypal to buy stuff on eBay. That's an example of a market solution arising...)
yes you are right - in broad terms communities do this, and they are called "community currencies." I think the difference between what CCs have done in the past and what the new way is:
* digital issuance allows a much greater reach of audience over the net or hypothetically through tokens (handwaving there), so we can create a different set of communities other than purely narrow, geographic ones.
* Cryptography provides for much greater security against external attacks.
* We now know how to put in place strong open governance regimes that permit unregulated issuers to be safe.
* Finally, the marginal or running costs are zero, effectively. Capital and up-front costs are still present, but they are surmountable and with community help, can be reduced quite substantially.
Speaking of agriculture and communities. There's an interesting initiative lead by an English gentleman (his name is Matthew Hayes) in Hungary: the Open Garden Foundation (http://www.nyitottkert.hu/index_eng.html).
Right now they are running a planned economy, which obviously won't scale (I'm wondering how much they are aware of the similarities between their initiative and the way Soviet agriculture was run -- their survey form evoked warm and fuzzy memories of my childhood in the USSR :-); communal farms would send us *very* similar things to Leningrad to find out what the needs of a city-dweller were -- and those evil, irresponsible city-dwellers shamelessly inflated their needs causing both shortages and overproduction (at the same time!)).
I think, that by making the promises within the system transferable and tradeable, efficiency can be improved, and the system can be made scaleable, while preserving all its benefits. I'd like to talk them into adopting a more XXIst century approach. :-)