Op-Ed; Opinion

Basic Income as the Core of the Economy

by George Spilkov

Outline of a framework for Basic Income at the core of an economic model based on free maSMITH_MARXrket economy

Adam Smith predicated his vision for a free market economy on the understanding that some constraints must be set in place to ensure all members of the society are self-sufficient and also, that they exchange only the surplus produce of their labour. He even went as far as to insist on division of labour being “designed” depending on the size of the market.

“When the market is very small, no person can have any encouragement to dedicate himself entirely to one employment, for want of the power to exchange all the surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men’s labour as he has occasion for” – Adam Smith, “The Wealth of Nations”, Ch.3

But then Karl Marx (“The Capital”) convincingly explained that the condition for self-sufficiency cannot be satisfied, because workers have lost the means of production and are no longer self-sufficient. They depend for their survival on specialized division of labour that is imposed on them.

Is that the end of Adam Smith’s free-market or could such ideas be saved by the introduction of Basic Income? I believe the answer is “Yes, Basic Income can be the solution” and for the rest of this text I’ll try to explain why and how.

What is a human being to a business? For many businesses a human being is perceived as ‘a consumer’ at the output end of the businesses and as ‘a worker’ at the input end of the businesses. Therefore, it is in the best interest of the businesses to charge the humans as much as possible when they are consumers while paying them as little as possible when they are workers. The end result of such duality is, the humans suffer, businesses make profit; wealth concentrates, the people lose completely their self-sufficiency. Even now, we are making great strides in Intelligent Automation that, thankfully, is still managing to make good use of human talent, but for how long can this go on?

The matter can get much worse for the humans. Let’s just imagine a near future world (say about 50 generations from now) where automation has advanced to levels that resemble human-like Artificial General Intelligence (AGI). In such world, workers will no longer exist in any meaningful sense, because nearly all work will be done by a super intelligent automation. The businesses will perceive most human beings only as consumers. In such future, most humans will be jobless and, majority of us will have no means of production that can make us self-sufficient.

In our current society, humans without jobs (or income) become consumers without money. Consumers without money are useless to the businesses thus can be “discarded” (it means, literally wiped out of existence). How are we going to survive then? Perhaps, some of us could survive by reverting to violent redistribution of wealth (like war for example). Such approach creates too much suffering. The correct answer is we survive together, as one species, by introducing Basic Income. It must be sufficient to ensure the existence of a wide base of consumers who, in turn, will ensure the prosperity of the businesses and the society.

Do we need to wait for a future that has a human-like AGI before we consider Basic Income? Can we introduce it today and achieve great prosperity now? I believe the answers is, “Yes, we can have Basic income today” and we can have it in a way that is independent of political or technological circumstances i.e. a way applicable to any historical period. Let’s see how it can be done.

Who decides what a ‘dignified’ living is? Perhaps, a bunch of people, called a government, makes the decision while driven by their own ideas about what is ‘basic’ and ‘dignified’? Governments change, therefore, if the amount of Basic Income is determined by some political process (e.g. government’s budget justified by some ideology) then it is likely that Basic Income will turn into another tool to exert control over the people by applying control over the amount of BI.

Much more powerful approach is to implement Basic Income by using the free market as a base for estimating BI. Let’s call it Market Driven Basic Income (MDBI). The meaning of ‘Market Driven’ is that Basic Income will be an opposing market force to the leverage businesses (and other man-made constructs) obtain over the people due to their natural tendency to treat human beings with double standards (e.g. as ‘workers’ and as ‘consumers’).

MDBI can be defined as, the ‘most common’ outgoing spending amongst human individuals when seen as consumers and taxpayers. MDBI has to be derived from metrics that ‘capture’ only transactions from a person to a business, from a person to a government and from a person to any other ‘man-made societal construct’ (i.e. those metrics should reflect only the personal outgoing spending of the human beings, not metrics like gross output or GDI, or CPI, etc.). MDBI is a figure indicated, in part, by the free consumer markets showing what most individuals purchased the most and ,in part, by any other outgoing spending the individuals have (including taxes, fees, etc.).
With MDBI in place they (the businesses, the government, etc.) may even ask payments from us for the air that we breathe, it will make no difference to any of us as long as most of us have to make such payments, because such payments will become ‘common’ therefore “highlighted” to influence the MDBI.

Think about it, the more they (various political and economic man-made constructs in the human society) charge us (the human beings), for the goods and services they try to sell us or impose on us, the more they’ll have to pay us as Basic Income. The less they charge us the less they’ll have to pay us.

Finally, to transform MDBI into Basic Income (BI) some adjustment may need to be made using the formula,
BI=MDBI+DI,
where, DI is a certain amount of Disposable Income. It drives the direction of the economy and determines its minimum speed.

The free market ideas of Libertarianism (laissez faire capitalism) imply that three components must be in place in a free market; a free transaction, a free producer and a free consumer. We must ensure the existence of free consumers before we can talk about true laissez faire free market for human consumers. BI, defined by using MDBI, ensures the existence of free-consumers. On the free market, the freedom of the consumer can truly be measured only by the amount of Disposable Income (DI) a consumer has. The consumer freedom is the disposable income a human being can afford to waste on (or invest in) whatever they like without affecting their normal life (think of DI as gambling money of sort that drive the economy).

Also, the DI adjustment to BI is necessary because the businesses will begin to create a gap between prices of products affecting the MDBI and the next-up version of the same products. Therefore, the amount of DI adjustment should be set to breach about 80% of that gap. If the gap is allowed to exist the economy will stagnate without the DI adjustment.

What is the meaning of the ‘most common’ in the definition of MDBI? I am sure statisticians may have a very good answer to that question. My guess would be, first, apply some good clustering algorithm to determine the categories of people’s outgoing spending and then find out which of these categories are common for, let say, 80% of the people.

Why would people want to work if BI is defined as previously described?
Well, the incentive to work will come from linking the Minimum Wage (MW) to the Basic Income using the following formula,
MW= K * MDBI,
Where, MW = is the minimum wage;
K = is a multiplier to represent the incentive for people to get a job. (For optimal results I recommend K=2)
That makes the total minimum income for a working person equal to =BI+MW =BI+2*MDBI or expressed otherwise = (1+K)*MDBI+DI.

The presented model will outperform in simulations any other model. It will create a vibrant and agile economy generating optimal wealth while allowing dignified existence (defined by the free market) of all members of the society and will encourage people to seek employment. It will provide sufficient income(capital) to the lower end of the wealth ladder that will stimulate attempts for new small enterprises and business ideas.
The proposed model protects the human beings from any economic or political man-made constructs (systems of rules) regardless of the historical period or the technological development.
Market driven Basic Income could be implemented within 1-2 years, because much of the data necessary to determine the MDBI is already available in some form. It is just a matter of interpreting the data for the purposes of BI and also making small adjustments to the existing laws.
In a long term, perhaps, people can declare their outgoing spending by using a ‘spending card’ of sort which logs all outgoing payments (something like ‘electronic receipts and costs logger’).
For the remaining of this text, let’s try to predict some of the expected effects of introducing MDBI and the model’s sensitivity to influences.
What will be the reaction of the government and businesses to the market driven approach to BI?
MDBI avoids government involvement in determining its amount thus making BI independent of political or moral ideologies. It will make the government feel less oppressive to the people.
It is in the government’s best interest to keep the MDBI as low as possible. That means the government will seek to apply high taxes to a small groups of people and entities (i.e the rich) instead of smaller taxes to a wider groups of people (i.e. the poor).
MDBI may incentivize the government to extend the free social services (like free educations, medical care, etc.) in the hope that it will reduce the outgoing spending of the people thus reducing MDBI while allowing the government to be in control and work for the people.
The government will have to adjust its budget policies not to some ideological dogma about what people should or should not do. Its budget policies will have to be directed towards ensuring the funds for Basic Income Guarantee defined by the market preferences of the people and the economic and technological realities of the current, or any other, historical period.
Introducing Minimum wage (MW) linked to the BI will cause the businesses to respond by providing cheap goods that will cover the common needs (so they will pay lower wages), and then there will be a version of the same goods but at a higher price. Such response does not matter to the people, because if the people choose to use their DI for the more expensive goods then those goods will eventually become ‘common’ and therefore will affect the MDBI.
Some businesses will have to restructure their capital into new types of businesses. Those businesses that cannot remain competitive will have to close. Jobs will be lost. However with the newly found spending power many people may decide to start their own businesses. Other businesses will flourish because people will be able to purchase more of their products. That will create jobs.
Many companies, for example, like McDonald’s , will flourish under the new MW and BI. They will have higher labour costs which they will transform into cost per burger. However, the new relative cost per burger will be less compared to the new purchasing power of their customers. People will purchase more burgers and the profit for McDonald’s as absolute value will not change much. Also, their client base may increase if the product they sell is desirable and competitive.
After the introduction of BI the Supply and Demand principle will continue to work but without the leverage the businesses currently have over the human beings.
Finally, let’s look at a hypothetical worst case scenario involving MDBI where businesses actively act, hypothetically, against the idea of linking BI to MW. Let say most businesses decide to close in order to protect their wealth, resources and the means of production that they own and control. That will create massive unemployment and shortage of resources. Most unemployed people may rely only on BI for their survival. If most businesses close it will cause artificially created demand resulting in empty shops and insane prices. Consumers will stop purchasing thus driving BI down. However, people need at least, food, water and shelter. They will be willing to spend their entire BI to cover those needs. If no business is willing to provide those in sufficient quintiles then the government must temporary revoke the sanctity of ownership for the very wealthy. That means, moving wealth down the wealth-ladder to those who are willing to provide products on the market to cover at least the basic human needs for sustenance and shelter. That will restart the economy.
Such hypothetical scenario is the only time when the government must interfere with the private wealth generated by the free market.
In all other cases the government does not have to do a thing (apart from figuring out ways of collecting relevant amount of taxes to cover the BI as indicated by the free market).
Since the model does not discriminate against human age and circumstances it will allow for healthy young adults to accumulate somewhat more capital (disposable income) over the early years of their lives which they may chose to invest in projects/businesses or specialized education when they become more mature and experienced.
For people with addictive habits the government will continue to provide advice, help and control (if necessary) related to the use of their BI.
Given enough time the proposed market based model for BI and MW will reduce the wealth gap and will redistribute wealth to resemble a Gaussian curve of distribution (i.e. most wealth in the hands of most people a.k.a. it will create a strong middle class). Also, it will create agile economy that fully utilizes the human potential. It will make it more difficult for businesses and governments to exert economic, political and behavioural control over the human beings thus making the society more democratic. It will create diversity thus strength in the face of adversity.

In a world where “Space is the final frontier” we should try to create economic and political constructs that rise above simplistic views about our human nature, constructs that see our species as one sentient organism capable of reaching the stars and making the Universe our playground.

About Guest Contributor

Guest has written 10 articles.

The views expressed in this Op-Ed piece are solely those of the author and do not necessarily represent the view of Basic Income News or BIEN. BIEN and Basic Income News do not endorse any particular policy, but Basic Income News welcomes discussion from all points of view in its Op-Ed section.

18 comments

  • godenich

    1) Smith laid out a broad foundation of economics that was accessible to the lay reader in the Wealth of Nations. He failed to solve the diamond/water paradox. Much of his work has lasted the test of time.
    2) Marx neither was able to solve the diamond/water paradox, but rather pointed out the flaw with the diamond/water paradox in relation to the Labor Theory of Value.
    3) That lasted until Menger*, Jevons and Walras solved the diamond/water paradox and became founders of the marginalist revolution.

    A) Smith viewed money given to the poor as a necessary charity.
    B) Marx viewed it as a right of those unable to work.
    C) Menger and Rudolf Habsburg, both influenced by Smith, acknowledged a minimal subsistence for citizens as a responsibility of the state.
    D) Later, Hayek endorsed a minimum income for food, shelter, clothing and fitness to work(health) for citizens in successful economies that could afford it.
    E) Rhys-Williams and Friedman advocated for a negative income tax to help those at the bottom of the economic totem pole (below some poverty line) to raise themselves out of poverty.

    None of the above recommended that the state give money to citizens that didn’t need it and only Marx recommended that the state take over the means of production. All the others held property as nearly a sacred right and essential ingredient to a successful economy.

    * Carl Menger (1840-1921) | The Concise Encyclopedia of Economics
    http://www.econlib.org/library/Enc/bios/Menger.html

    • Reality Check

      Wow, that is amazing, makes you wonder why then we live in the world as it is today since so many said so much!

    • Judy Plummer

      Did any of the names you mention linked Basic income given to an individual human to the spending habits of the other people in the society?

      Imagine, people as being like the surface-landscape of a weather system of sort and Basic Income being as the rain-water falling on the surface. It stimulates everything to grow. Then imagine, people spending their wealth as being like the rain-water getting concentrated down (in ponds, rivers, oceans, underground caves, etc. representing our banks, businesses, governments, and other social structures)

      If we want a rich and fruitful landscape, we must have a good mechanism to evaporate the concentrated water (i.e. UBI, minimum wage and taxes) back into the sky so it will fall again on the entire surface as rain to create new opportunities for growth.

      If we do not have such mechanism, the water will stay concentrated (i.e. concentrated wealth) at the low places of the landscape, leading to a landscape consisting of a vast desert and a huge ocean surrounded by a very thin habitable zone around the edges of that non-evaporating body of water.

      That is why, linking Basic Income to the spending of the other people is the right thing to do. It means, the faster the water drains from the surface to the low places then the more rain must fall, leaving the surface always sufficiently moist to allow great prosperity for all.

      Did any of the names above linked the Basic Income, given to an individual citizen, to the spending habits of the remaining citizens in the society?

    • Hornet

      @Judy Plummer
      Interesting how visualising Basic Income as part of a weather system puts the rich and their wealth beneath the rest of us . Usually it is visualised above the rest of us.

      I liked the climate visualisation but have one minor correction, Taxes are collected for the benefit of the government not necessarily for the benefit of the people. Basic income, and minimum wage is what can ensure that sufficient “rain” falls everywhere. The true challenge is to have ironclad laws that will give the government no opportunity to compromise the sufficiency of the Basic Income.

      I also liked the article because it looks at Basic Income in an unusual way. It is universally applicable to any group of people from a small tribe to a whole country.

      My only concern is, with the growth of human population and the limited natural resources more and more wealth must be used for basic human survival. That may slowdown the innovation in big enterprises like building ships, heavy machinery, power plants and other huge structures. But then again, innovation will suffer in any society that has too many people and not enough wealth for all. One of those will have to be reduced or the other one increased.

  • Lee Irving

    “None of the above recommended that the state give money to citizens that didn’t need it ” If you remove the benefit of the money from those who don need it via taxes did they have it in the first place?

    • godenich

      Yes, they have it, can spend it and may not be able to pay it back at tax time if they didn’t need it in the first place. This creates a moral hazard and adds time and cost inefficienies to process both intentional and unintentional offenders (tax evasion, tax loopholes, courts, jail time, etc). Given the choice between preprocessing and postprocessing, preprocessing avoids the above obstacles[1].

      [1] The Negative Income Tax and Basic Income are pretty much the same thing
      http://www.adamsmith.org/blog/tag/basic-income/

  • Raoul

    @godenich:
    I’d argue that the distinction between giving people money who need it, and giving everyone money and taxing the people who don’t, is one to make based on efficiency of delivery of benefits and of collection of taxes.

    • godenich

      I agree with you, in principle. These are my thoughts on the subject:

      The IRS* is (in)famous for keeping track of every individual’s income since the Revenue Act of 1943 greatly increased the efficiency of Employer Withholding with payroll deductions. Employment and termination of employment, signaled by presence or absence of payroll withholding cash flows to the IRS, may be made available and processed by Social Security* expertise to get checks out. In this sense of basic ‘income’, It could be initially rolled out to citizens in working age group 16-64 and funded by reshuffling existing welfare budget expenditures. Like Zwolinski mentioned in a recent article, the level of benefits can be ratcheted up as funds in the existing welfare budget are reallocated to the task.

      * As a side note, decentralization of social security and IRS functions to the state level may be an efficiency consideration, also. I’m an advocate of pushing federal government functions down closer to the state level for more accurate public accountability purposes.

  • Rich

    How do you decide what citizens need and do not need?

    • godenich

      An individual citizen’s poverty level(~$12K) measured against their employment may be a sufficient guideline. Below is my strawman for working age group 16-64 which would be funded by existing ~$1tn welfare expenditures for unemployment insurance(UI) and other areas of the budget (reclamation of ~$110bn of tax loopholes, excess in ~$1tn national security expenditures, etc) to fund and encourage entrpreneurship with a business payroll subsidy(EITC) to permanently stimulate employment, especially relating to small business.

      WF: ~160mn workforce of ~320mn population
      FPL: ~$12K Federal Poverty Level (Zero-growth FPL for Family of 4 is ~$24K)
      MW: ~$27K Median Wage
      ZeroToFPL: ~45mn number below FPL
      FPLtoMW: ~35mn (WF/2 – ZeroToFPL) number between FPL and MW
      Minimum = ZeroToFPL X FPL = $540bn (labor unemployment subsidy – UI)
      Maximum = Minimum + (FPLtoMW X FPL)/2 = $750bn
      Tapering = $750bn – $540bn = $210bn (business payroll subsidy – EITC)

  • Those ideas are not without merit. The proposal does not seem to penalise spending.

    Link between UBI and individuals’ spending means that you get paid more if the rest of the people spend more, so in a way, nobody gets left behind to live in misery. When the other people spend you get more to spend too. In some way this feels close to the idea of Basic Income.

    I have two remarks to make
    First. It seems to me the model will make it more challenging for businesses with employees to generate profit.
    The business owners will have the opportunity to prove they truly are the innovators, the visionaries and the real job creators without penalising the remaining of the population.

    Second, people with significant shares in business, may see no incentive to register their purchases as individuals, because that may increase the cost for their businesses. So, it is likely that high-end purchases will not be reported. It presents a technical issue but it is not without possible solutions.

  • Basic Income Org.,

    For universal basic income simply network http://www.GRB.net.

    John

    • Gregg Addams

      Resource based economy is a communism in disguise.
      Managing GRB is power, therefore, CORUPTION is inevitable!

      1* Why do you need nature to set the maximum value for everything on the planet? Just chose a number to represent all there is. Why do you link it to something?
      2* Why do you force people to invest?
      3* How do you measure “ecosystem impact charge”?
      4* Information companies (like law firms, business consultants, Microsoft or Google) have no “ecosystem impact”. How do you charge them?
      5* What happens when (if) we start mining asteroids?

      I say, the link makes little sense.

  • Robin Barry

    I like the idea of a basic income, but at a level that discourages laziness. The ideal level would be such that 50% like it and 50% don’t. The level could be decided by a referendum for voters in the area concerned rather than leaving it to be promoted by any particular party. The referendum could be run at the same time as each General Election.

    • Andre Coelho

      Dear Robin,

      Basic Income is about trust. Basic Income pilot studies have shown that true lazy people amount to less than 2% of all receipients. With a financial “pillow”, it is likely that more people work more on things they consider more meaningful, and less on jobs they consider degrading, unfulfilling and/or useless. Putting Basic Income to the popular will is of course the right thing to do, since the idea is to promote democracy, but political organizations in each region cannot be overlooked, as they are part of that region’ social reality.

      Best,

      André

    • Hornet

      @Robin Barry
      Many people believe that if a good basic income is chosen by a vote, it will result in increased prices and rapid inflation. To prevent harm to people from such eventuality basic income should be linked to the other peoples spending as the article describes.

      Political voting on economic issues like Basic Income is never a good idea. In a free market economy, your vote is determined by how much money you spend on the free market. People’s spending must determine the level of Basic Income.

      Political voting on Basic Income will divide the society into those you call “lazy” that want more Income (like the unemployed, disabled, and low-paid workers) and those that want less Basic Income (business owners, share holders, high earners).

  • Joop Böhm

    “The world has enough for everyone’s need, but not enough for everyone’s greed.” ― Mahatma Gandhi. spoke, and I think he was right.

  • Peter Wilson

    This is a very interesting concept with some very elegant inbuilt checks and balances. At least to someone of no economic training.

    Some issues spring to mind though:

    1. Market manipulation is rife by coroporations and Gov’t alike which distorts the true value of BI so that would have to be addressed. (e.g. QE, Opec oil dumping)

    2. Spending is too easily masked by multi-layered offshore companies based in secret jurisdictions outside state access or control. (e.g. buying of expensive real estate in London through shell companies) So determining spending at the higher level could be difficult or impossible in many cases. This would have the effect of reducing BI.

    3. How would BI be maintained through war or sanctions caused by external powers at state/corporate levels? An example could be the likes of TTIP where Gov’t policy can be challenged in secrets courts and penalties applied in State Dispute Settlements where a corporation thinks it’s income is under threat.

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