Stimulation or austerity: the catataxic debate

Gold CoinMost Western countries are having the same economic debate at the moment: austerity or stimulus? Britain’s coalition government, Germany and the Tea Party in the USA want more austerity. The logic is simple. If you have too much debt then you should stop spending. But the counter argument goes like this: government cutbacks depress the economy, recessions mean less tax revenues which mean more cutbacks. The result is an ever decreasing spiral like the one in Greece where the economy is shrinking 5% a year. So governments should be spending to stimulate the economy and worry about balancing the books later when the private sector is booming again. Rubbish, say the fans of austerity, you can’t spend your way out of a debt crisis…

This “stimulus versus austerity” debate can be recast as an example of catataxis. It hinges around the fundamental concept of money which has three main functions: a medium of exchange, a unit of account and a store of value. These three functions form three different “levels” and the stimulus vs. austerity debate is a conflict between these levels. Let’s look at each of the three in turn.

The first function of money is as a medium of exchange. It acts as a physical token that is exchanged when a transaction takes place. In this sense, money can be cowrie shells, gold bullion, coins or notes. In a prison, cigarettes are often a medium of exchange. It also does not need to be that ‘physical’. If you transfer money between two bank accounts through a BACS transfer, then some digital tokens are being exchanged between two computer systems. Likewise, air miles are a form of money which can be exchanged for seats on an airplane.

The second function of money is as a unit of account. It acts as a common yardstick for measuring the value of different things. In a barter economy, you can exchange two sheep for three goats. In a monetized economy, you might say that both were worth six shillings. Money as a unit of account tells you what things are worth. In our example, a sheep is worth three shillings and a goat worth two.

The third function of money is as a store of value. This arises because you don’t spend money the instant you get it (unless you are my daughter, Flora). There is a timing difference between transactions. Having sold your sheep for six shillings, you may not spend the money for a couple of weeks. While it is in your pocket (or under your mattress) it is a store of value. The money is worth something while you hang on to it.

These three different functions give us the three different levels. The first is physical, the second is conceptual at a mathematical or accounting level. The third is at conceptual level one higher than that. The store of value is not about numerical equations but about the crystallization of confidence; the distillation of belief. Catataxis is level confusion: the conflict between these different interpretations of money.

If you view money at level one as a physical medium of exchange, then you want your economy to have as much of it as possible. That means that more physical exchanges can take place. In other words, more trade and more growth in the economy.

If you view money at level three as a store of value, then you want your economy to have as little of it as possible. The less there is, the more valuable it is. By restricting the supply of money you keep its value.

A good illustration of the difference between these two views is the “shopping in Vietnam” example. You can pay for your goods in a shop in Vietnam in US dollars, but you will get your change in Vietnamese dong. The shopkeepers would prefer to hoard the dollars as they see them as a better store of value but the medium of exchange is dong – that’s how you get the change.

Some would argue that the US dollar is not a very good store of value. When Nixon broke the link between the dollar and gold in 1971, gold was worth $35 an ounce. Once the link was broken, the US government was free to create as much money as it liked. This “freeing up” of the physical medium of exchange led to a period of spectacular global economic growth. More money, more exchanges (more trade). But now, 40 years later, gold is worth $1,900 per ounce. In other words, the dollar has declined in value by 98% (many currencies have fared worse) so its role as a store of value has been damaged.

The stimulus vs. austerity argument, in effect a debate about whether the money supply should be expanded or contracted, is a catataxic debate. A conflict between the level one and level three views of money. It is also a debate between creditors and debtors. Creditors (people who are owed money) favour level three. They are concerned with the store of value and want their money to be worth something when they are paid back. Debtors (people who have borrowed money) favour level one. They want a lot of economic activity so they can earn the money to pay back their debts. If the value of money falls in the process so much the better – that means less to pay back in real terms.

Normally, the debtors are many and the creditors few. So the populist position is to be on the side of the debtors and let the money lenders take the punishment. This was true when the economy first began to be monetized in 1190 with the terrible massacre of the Jews at York (see the novel Holy Warrior for a graphic description of this appalling event). It is still true today. Maybe the current trend for “banker bashing” is a reflection of this.

Phillip Coggan in his excellent book Paper Promises points out an interesting irony in US politics this time around. The Tea Party is a populist, grass roots movement that is pro-austerity. They favour level three and are concerned about the store of value. Wall street bankers, who would normally be level three advocates, are the ones calling for stimulus at level one. So the traditional positions of the banker and the populace have recently become inverted in the USA.

Costa Concordia: catataxic catastrophe

How sad that on the centenary of the Titanic disaster of 1912 another huge cruse ship should sink. It may be insensitive to be grandstanding and pontificating at a time of tragedy, but one of the causes of the Costa Concordia disaster is catataxis. As cruse liners have ballooned in size, the safety systems have not scaled up appropriately. In this case, more of the same is not just different but also deadly.

Cruise ships have been a boom industry and as a result the ships have got bigger and bigger in order to achieve economies of scale. Today’s ships are twice the size of a decade ago and can carry 6,000 passengers and 1,800 crew. That’s the size of a small town and four times bigger than the Titanic. Since most passengers want a nice view from their cabin, there are more and more decks stacked above the waterline. At the same time, the ships need to be able to get into traditional old ports (where tourists like to go) rather than to anchor offshore and be ferried in on small boats. That means they need a shallow draught. Both factors mean that ships are becoming increasingly top heavy: there is a lot more above the waterline and too little underneath.

A second factor is the lifeboat problem. This technology has not really changed since the time of the Titanic. When the top heavy Costa Concordia heeled over, that put half the life boats out of action because they could no longer be lowered into the water. Every passenger is (in theory) allocated a berth in a lifeboat matching their cabin allocation. It is a logistical nightmare to try and shepherd 7,800 people to their allocated lifeboat seat. Just picture this. A typical movie theatre has say 250 seats. Now imagine 30 cinemas stacked on top of each other in a sky scraper with every seat full. You randomly distribute tickets with seat numbers in a different cinema to all the members of all the audiences. Then you blow a whistle and tell them to find their new seats in the new auditoriums. Result: utter chaos. Now imagine doing it in the dark, at sea with the rooms gradually tilting over to one side…..

This lifeboat issue is such a logistical problem that the International Maritime Organisation advises Captains to try and use the ship itself as a “big lifeboat” and return as fast as possible to port for evacuation. In other words, the best advice available about lifeboats is to try to avoid using them at all.

Both the ship design and the lifeboat problem are problems of scale. Andrew Linington of Nautilus International, a maritime union, says “The alarm bells have been ringing with many of us for well over a decade now. These ships are floating hotels – skyscrapers, really. The design has been extrapolated from that of smaller ships. We believe a lot of basic safety principles are being compromised to maximise the revenue”

A big ship is different from a scaled up small ship. That is catataxis. If you just inflate the ship design like a balloon it becomes top heavy. Logistical problems with large numbers of passengers grow exponentially. More of the same is different.