Introduction
Economics, despite its mathematical veneer, remains more of a philosophy than a science. Its theories often rest on logical frameworks and assumptions rather than the rigorous testing that defines scientific disciplines. Unlike physics or biology, economics cannot easily rely on controlled experiments to validate hypotheses; instead, it extrapolates from historical data and simplified models of human behavior. This approach, while useful in constructing narratives, fails to produce the predictive power and reliability expected of a true science.
This chapter begins by exploring the history of economic thought, identifying the shortcomings of previous schools. Then, we outline how we can approach economics experimentally. The proposals we advocate suggest using the power of debt-free fiat money for constructive experiments to reshape our understanding of how economies can work better. We see no utility in experimenting with the current system because we feel it is an economic dead end. By embracing this new paradigm, economics can move beyond speculation and become a practical, evidence-driven discipline that serves humanity.
History of Economic Thought and its Shortcomings
Classical Economics
Classical economics, which emerged in the late 18th and early 19th centuries, stands as the foundation of much of modern economic thought. Rooted in the works of thinkers like Adam Smith, David Ricardo, and Jean-Baptiste Say, this school of thought revolved around the idea that markets, if left free from government interference, would naturally regulate themselves. The self-regulating nature of markets was seen as a function of the “invisible hand,” to use Adam Smith’s analogy, where individual self-interest would harmonize with societal benefit. These ideas were built on an unwavering faith in the efficiency of markets, the flexibility of wages and prices, and the inevitability of equilibrium. While revolutionary for its time, classical economics would ultimately fail to account for the complexities of real-world economies, especially in times of crisis.
One of the cornerstones of classical economics was its belief in the self-correcting mechanisms of supply and demand. Say’s Law, summarized as “supply creates its own demand”, captured the idea that all goods produced would eventually find buyers, provided prices were allowed to adjust freely. In this framework, any temporary surplus of goods or labor would be resolved through adjustments in prices or wages. For example, if unemployment arose, classical economists argued that wages would fall until employers could afford to hire more workers, thus restoring full employment. Similarly, excess goods would see their prices drop, stimulating demand and clearing markets. This elegant theory hinged on the assumption that both wages and prices were entirely flexible.
However, real-world markets revealed a significant flaw in this assumption: wages and prices are often sticky. That is, they do not adjust easily or quickly to changes in supply or demand. Wage stickiness challenged the classical idea that labor markets would always clear. Employers rarely reduce wages during economic downturns, not only because of contractual obligations but also to avoid damaging worker morale and productivity. Workers, in turn, resist wage cuts because they directly impact on their standard of living, making it socially and economically unfeasible for wages to fall as freely as classical theory suggests.
Prices in goods markets exhibit similar rigidity, though for different reasons. Changing prices often involves labor-intensive processes. Businesses must reprint catalogs, replace price tags, and communicate adjustments to customers, a costly and time-consuming endeavor. Additionally, firms are hesitant to reduce prices out of concern for their reputation or fear of triggering competitive price wars. These factors, collectively referred to as “menu costs,” create a natural resistance to frequent price changes, particularly downward adjustments. The stickiness of both wages and prices disrupts the self-regulating mechanisms of classical economics, leading to persistent unemployment and inefficiencies that the theory fails to address.
Adding to this oversight, classical economists misunderstood the nature of unemployment itself. They saw it not as a systemic failure but as a matter of individual choice. In their view, unemployment represented a voluntary decision by workers to trade labor for leisure. This perspective assumed that anyone willing to work at the prevailing wage could find employment. The concept of involuntary unemployment, where people are willing to work but unable to find jobs due to structural or cyclical factors, was absent from their framework. This idealized view of labor markets further distanced classical economics from the realities of industrial economies, where widespread unemployment could persist despite workers’ willingness to accept lower wages.
The consequences of these assumptions became starkly evident during economic crises, such as the Great Depression. Classical theory predicted that falling wages and prices would quickly restore full employment and market equilibrium. Instead, the global economy remained mired in a prolonged slump. Wages and prices failed to adjust as they theorized, and millions of workers faced unemployment, not out of choice but, because businesses were unwilling or unable to hire them. The inability of classical economics to explain such crises exposed the limitations of its reliance on market flexibility and self-regulation.
Another critical shortcoming of classical economics was its overemphasis on supply-side dynamics. Say’s Law assumed that producing goods would inherently generate the demand needed to purchase them. Yet, during downturns, this principle faltered as consumers, facing reduced income or uncertainty, cut back on spending regardless of available supply. Classical economists underestimated the importance of aggregate demand as a driver of economic activity, a flaw that later schools, particularly Keynesian economics, would address more directly.
Classical economics also suffered from its long-term perspective. Its adherents dismissed short-term disruptions as temporary inconveniences, confident that markets would correct themselves over time. This “long-run” view offered little comfort to those suffering through prolonged periods of unemployment, poverty, or economic instability. As John Maynard Keynes would later critique, “In the long run, we are all dead.” By focusing on theoretical equilibrium rather than the realities of human suffering and systemic failure, classical economics failed to offer practical solutions during times of economic upheaval.
Despite these flaws, classical economics laid an important foundation for the study of markets and the development of economic theory. Concepts such as comparative advantage, the division of labor, and market efficiency continue to influence modern thought. However, its inability to grapple with sticky wages and prices, involuntary unemployment, and the critical role of aggregate demand ultimately rendered its framework inadequate for addressing the complexities of industrial and post-industrial economies. These gaps would pave the way for the rise of alternative schools of thought, most notably Keynesian economics, which sought to address the shortcomings of classical theory while reimagining the role of government in stabilizing the economy.
Keynesian Economics
Keynesian economics emerged in the wake of the Great Depression as a revolutionary departure from the classical tradition. Rooted in the work of British economist John Maynard Keynes, particularly his landmark 1936 book, The General Theory of Employment, Interest, and Money, this school of thought sought to explain the persistent unemployment and economic stagnation that classical economics could not. Keynesianism rejected the assumption that markets were inherently self-correcting and introduced a framework in which government intervention played a central role in stabilizing economies.
At the heart of Keynesian economics lies the concept of aggregate demand, the total spending by households, businesses, and governments. Keynes argued that economic activity depends not on the supply of goods and services but on the willingness and ability of people to spend. When aggregate demand falls, businesses cut back on production, leading to layoffs and further declines in demand. This downward spiral, Keynes contended, could not be resolved simply by allowing wages and prices to adjust, as classical economists believed. Instead, he argued for active fiscal and monetary policies to stimulate demand and restore economic stability.
Keynesian economics introduced a new toolkit for managing economic cycles. Fiscal policy, particularly government spending, became a primary mechanism for addressing recessions. Keynes advocated for deficit spending, governments borrowing and spending more than they collected in taxes, to boost demand during economic downturns. By increasing public investment in infrastructure, education, and other areas, governments could create jobs, inject money into the economy, and reignite growth. On the monetary side, central banks were encouraged to lower interest rates to make borrowing cheaper and spur private investment.
This approach revolutionized economic thought and policy, explaining phenomena like involuntary unemployment and prolonged economic slumps. Keynesian principles dominated economic policy in the post-World War II era, underpinning decades of growth and stability in industrialized nations. The notion that governments could and should play an active role in smoothing economic fluctuations marked a dramatic shift from the laissez-faire ethos of classical economics.
However, Keynesian economics was not without its shortcomings. While it provided a compelling framework for addressing demand-side problems, its reliance on government intervention introduced new complexities and vulnerabilities. One of its central assumptions, that governments would act responsibly and intervene only as needed, proved optimistic. In practice, deficit spending often became a political tool, leading to persistent budget deficits even during periods of economic growth. Keynesianism provided a justification for spending but offered less guidance on when and how to curtail it, leaving economies vulnerable to inflationary pressures.
Another significant shortcoming of Keynesian economics lies in its treatment of inflation. Keynes assumed that inflation would arise primarily when demand exceeded supply, particularly when economies approached full employment. This view, while useful in theory, underestimated the complexities of inflation in a modern, financialized economy. In the 1970s, the phenomenon of stagflation, simultaneous high inflation and high unemployment, exposed this weakness. Keynesian models, designed to address one problem or the other, struggled to explain or manage this dual challenge. The inability of traditional Keynesianism to account for stagflation opened the door for alternative schools, such as monetarism, to gain prominence.
Keynesian economics also placed relatively little emphasis on the structural aspects of money creation and financial markets. While Keynes recognized the importance of investment and liquidity, his focus remained on aggregate demand rather than the underlying monetary systems that drive it. This omission became more problematic in the late 20th century as financial markets grew increasingly dominant. The rise of financialization, with its speculative bubbles and complex debt instruments, created economic vulnerabilities that Keynesian tools were ill-equipped to address. By focusing narrowly on fiscal and monetary policy, Keynesianism left unanswered questions about how to manage the deeper systemic issues of modern economies.
A further critique of Keynesian economics lies in its assumption that governments can reliably control the economy through well-timed interventions. The lags inherent in fiscal and monetary policy, both in recognizing economic problems and implementing solutions, often result in delayed or ineffective responses. For example, by the time fiscal stimulus measures take effect, the economy may already be recovering, leading to unnecessary inflation or misallocated resources. Similarly, monetary policy changes, such as interest rate adjustments, can take months or years to influence consumer behavior and investment decisions. These delays make Keynesian policy tools imprecise, particularly in fast-moving or unpredictable economic environments.
Finally, Keynesianism has faced criticism for its lack of focus on long-term structural reform. While it excels in addressing short-term demand fluctuations, it offers little guidance on tackling the deeper inequalities and inefficiencies that underpin economic instability. The reliance on government spending as a solution to economic downturns can lead to an overemphasis on temporary fixes rather than sustainable growth strategies. Additionally, Keynesian economics often assumes that public debt incurred during recessions will be repaid during periods of growth, a practice that has rarely been observed in modern politics.
Despite these shortcomings, Keynesian economics remains one of the most influential schools of thought in modern economics. Its insights into aggregate demand, fiscal policy, and unemployment transformed how policymakers and economists view the role of government in the economy. While later schools of thought, such as monetarism and Modern Monetary Theory, have built on or challenged Keynesian principles, its core ideas continue to shape debates on economic policy. The legacy of Keynesianism lies not only in its successes but also in the questions it raised, paving the way for new approaches to understanding and managing economies in an increasingly complex world.
Monetarism
Monetarism emerged in the mid-20th century as a reaction against the dominance of Keynesian economics, which had shaped economic thought and policy since the Great Depression. Led by Milton Friedman and other economists from the Chicago School, monetarism sought to explain the failures of Keynesian policies, particularly in managing inflation and economic stability. Its central tenet was deceptively simple: the money supply is the primary driver of economic activity, particularly price levels, and should be carefully managed to maintain stability. While monetarism offered significant insights and became influential during the 1970s and 1980s, its narrow focus on money supply ultimately limited its ability to address the complexities of modern economies.
The roots of monetarism can be traced to Friedman’s seminal work A Monetary History of the United States, 1867–1960, co-authored with Anna Schwartz. In this book, Friedman and Schwartz argued that fluctuations in the money supply had been a major cause of economic instability throughout U.S. history. One of their most compelling examples was the Great Depression, which they attributed to the Federal Reserve’s failure to prevent a contraction in the money supply. This analysis challenged the Keynesian narrative, which focused on insufficient aggregate demand, and set the stage for monetarism to gain prominence.
Monetarism’s central framework revolved around the equation of exchange, MV = PQ where M represents the money supply, V is the velocity of money, P is the price level, and Q is real output. Friedman argued that while output Q and velocity V were relatively stable in the short run, changes in the money supply M would directly influence prices P. From this perspective, inflation was “always and everywhere a monetary phenomenon,” caused by excessive growth in the money supply. The policy implications were clear: central banks should focus on controlling the growth rate of the money supply rather than engaging in discretionary monetary or fiscal interventions.
Monetarism gained significant traction during the 1970s, a period marked by stagflation, simultaneous high inflation and high unemployment. Keynesian models, which assumed a trade-off between inflation and unemployment (the Phillips Curve), could not explain or address this phenomenon. Monetarists, on the other hand, attributed stagflation to the erratic expansion of the money supply and argued that stable monetary growth would restore economic stability. This view resonated with policymakers, particularly in the United States and the United Kingdom, where monetarist principles influenced the Reagan and Thatcher administrations.
Despite its initial success, monetarism began to falter as its limitations became apparent. One of its most significant shortcomings was its oversimplified view of the money supply’s relationship with economic activity. While the equation of exchange provided a useful framework, it rested on the assumption that the velocity of money, the rate at which money circulates in the economy, was relatively stable. Velocity is highly variable, particularly in financialized economies. During economic downturns, for example, businesses and households may hoard cash rather than spend or invest, causing velocity to plummet and weakening the link between money supply and economic activity.
Monetarism also underestimated the complexities of modern financial systems. While it focused narrowly on central bank control of the money supply, it overlooked the role of private banks in creating money through lending. In a modern economy, most money is created not by central banks but by commercial banks issuing loans. This process is driven by credit demand and is influenced by factors such as interest rates, regulations, and economic expectations, none of which are directly controlled by central bank policies targeting the money supply. Monetarism failed to account for this dynamic, leading to an incomplete understanding of how money enters and circulates in the economy.
Another critical weakness of monetarism was its reliance on the “k-percent rule,” which proposed that central banks should increase the money supply at a fixed annual rate, regardless of economic conditions. While this rule was designed to eliminate the uncertainties of discretionary monetary policy, it proved impractical in a world where the demand for money fluctuates. During periods of financial instability, for example, a rigid money supply growth rate may exacerbate economic problems rather than mitigate them. The Federal Reserve’s attempts to implement monetarist policies in the early 1980s highlighted these challenges. Efforts to target the money supply often missed their mark due to shifts in the financial system, leading the Fed to abandon strict monetarist policies in favor of targeting interest rates.
Monetarism’s focus on inflation control also came at the expense of broader economic goals. By emphasizing price stability above all else, it neglected other critical aspects of economic health, such as employment, income distribution, and financial stability. This narrow focus often led to policies that prioritized reducing inflation at the cost of higher unemployment and slower growth, disproportionately harming low-income households and exacerbating inequality. For example, the sharp interest rate hikes implemented by Federal Reserve Chairman Paul Volcker in the early 1980s succeeded in curbing inflation but also triggered a severe recession and widespread job losses.
In addition to these practical shortcomings, monetarism faced theoretical criticism for its failure to address the deeper structural issues underlying economic instability. While it provided valuable insights into the relationship between money supply and inflation, it offered little guidance on managing speculative bubbles, financial crises, or the long-term impacts of financialization. The rise of complex financial instruments, shadow banking, and global capital flows further diminished the relevance of monetarist policies, which were ill-suited to navigate the intricacies of modern financial systems.
Despite these flaws, monetarism made lasting contributions to economic thought and policy. Its emphasis on controlling inflation through monetary policy influenced central banks worldwide and helped establish the importance of price stability as a cornerstone of macroeconomic management. However, its inability to account for the complexities of money creation, financial systems, and broader economic goals ultimately limited its effectiveness. As economies became increasingly interconnected and financialized, the oversimplified models of monetarism proved inadequate, paving the way for alternative approaches to address the challenges of the 21st century.
Austrian Economics
Austrian economics traces its origins to Carl Menger’s seminal 1871 book, Principles of Economics (Grundsätze der Volkswirtschaftslehre). This work laid the foundation for a school of thought that would emphasize individual decision-making, subjective value, and the centrality of markets in coordinating economic activity. Menger’s contributions to the Marginal Revolution, alongside contemporaries William Stanley Jevons and Léon Walras, revolutionized economic theory by shifting the focus away from classical concepts like the labor theory of value toward a subjective understanding of value based on individual preferences and marginal utility.
Menger’s approach was methodical, even painstakingly so. In Principles of Economics, he devoted the first 50 pages to defining what constitutes a “good.” He followed this with another 50 pages exploring the distinction between a “good” and an “economic good.” After nearly 100 pages of meticulous theorizing, Menger concluded that public education and potable drinking water were not economic goods. This conclusion, while consistent with his theoretical framework, strikes modern readers as both absurd and disconnected from reality. One might argue that any theory that dismisses public education or access to clean water as lacking economic utility has fundamentally flawed premises. Had Menger considered the implications of such a conclusion, he might have reevaluated his framework. Instead, he doubled down on the abstract nature of his approach, laying the groundwork for a school of thought that often prioritizes theoretical purity over practical relevance.
The Austrian school gained further prominence through the works of Eugen Böhm-Bawerk and Friedrich von Wieser, who expanded Menger’s ideas on value and capital. However, it was in the 20th century, with economists like Ludwig von Mises and Friedrich Hayek, that Austrian economics reached its intellectual peak. Mises developed the concept of “praxeology,” an a priori methodology that rejected empirical testing in favor of deductive reasoning based on self-evident axioms. Hayek, meanwhile, contributed significantly to theories of business cycles, monetary policy, and the role of knowledge in markets. Both Mises and Hayek were staunch advocates of free-market capitalism and vehement critics of socialism, emphasizing the importance of decentralized decision-making and the dangers of governmental intervention.
One of the defining features of Austrian economics is its unwavering belief in the efficiency and self-regulating nature of markets. Austrians argue that markets are the best mechanisms for allocating resources, as they aggregate dispersed information through the price system. They view government intervention as inherently distortive, leading to inefficiencies and unintended consequences. This faith in markets extends to their advocacy for the gold standard, which they see as a safeguard against inflation and government manipulation of the money supply. By tying currency to a finite resource like gold, Austrians believe economic excesses can be curbed, and monetary stability ensured.
However, this reliance on markets and the gold standard exposes significant shortcomings in Austrian economics. The gold standard, while effective in limiting inflation, imposes rigid constraints on monetary policy, leaving governments ill-equipped to respond to economic crises. During the Great Depression, for example, adherence to the gold standard exacerbated deflation and prolonged economic hardship. Critics argue that the Austrian preference for gold prioritizes theoretical purity over practical flexibility, sacrificing the tools necessary for stabilizing modern economies.
The Austrian school’s critique of government intervention also reflects its excessive reliance on markets to control economic excesses. While markets are powerful tools for resource allocation, they are not immune to bubbles, crashes, or systemic failures. Austrian economics dismisses these as the inevitable consequences of prior government intervention, advocating for laissez-faire policies even in the face of market failures. This approach ignores the potential for speculative behavior, asymmetrical information, and externalities to destabilize markets in ways that government intervention can mitigate. By treating all market outcomes as efficient or natural, Austrians overlook the human and social costs of economic instability.
Another fundamental flaw lies in the Austrian rejection of empirical methods. By relying exclusively on deductive reasoning, Austrian economics insulates itself from the realities of the modern economy. Mises’s praxeology, for example, dismisses empirical testing as irrelevant or misleading, arguing that economic laws can only be derived from logical axioms. While this approach has theoretical elegance, it renders Austrian economics incapable of adapting to new data, evolving financial systems, or the complexities of global markets. Without empirical validation, Austrian theories remain abstractions, disconnected from the lived experiences of businesses, workers, and consumers.
The Austrian school’s abstract nature is exemplified in Menger’s own work. His meticulous definitions of goods and economic goods, while intellectually rigorous, lead to conclusions that defy common sense. To argue that public education or access to potable water lacks economic utility is to ignore their profound societal value. Such conclusions not only alienate the school from practical policymaking but also highlight a deeper issue: Austrian economics often sacrifices real-world applicability in favor of theoretical consistency.
Despite its shortcomings, Austrian economics has made valuable contributions to economic thought. Its emphasis on subjective value, marginal utility, and the role of knowledge in markets has influenced other schools, including neoclassical and institutional economics. Hayek’s insight into the decentralized nature of knowledge and the price system remain particularly relevant in discussions of complex systems and market coordination. The Austrian critique of central planning also played a pivotal role in the intellectual debates of the 20th century, exposing the inefficiencies and authoritarian tendencies of command economies.
In the end, however, the Austrian school’s refusal to engage with empirical data, its excessive reliance on markets as panaceas, and its adherence to rigid monetary frameworks limit its relevance in addressing the challenges of modern economies. While its intellectual legacy is undeniable, Austrian economics remains a school of thought better suited to philosophical debate than to practical economic policymaking.
Neoclassical Economics
Neoclassical economics emerged in the late 19th century as a synthesis and evolution of earlier economic ideas, particularly those of classical economics and the marginal revolution. It sought to create a unified framework for understanding economic behavior, focusing on how individuals and firms make decisions to maximize utility and profit, respectively. The foundational works of William Stanley Jevons, Carl Menger, and Léon Walras established the core principles of marginal utility, subjective value, and general equilibrium, which remain central to neoclassical thought. Over time, economists such as Alfred Marshall and Vilfredo Pareto formalized these ideas, emphasizing the role of supply and demand in determining prices and resource allocation.
At its core, neoclassical economics views the economy as a system of rational agents making decisions based on preferences and constraints. It assumes that individuals act to maximize utility, while firms strive to maximize profit. Markets are seen as efficient mechanisms for allocating resources, with prices serving as signals to balance supply and demand. The mathematical rigor introduced by neoclassical economists allowed for detailed modeling of economic behavior and outcomes, establishing economics as a more systematic and scientific discipline.
While neoclassical economics provided valuable tools for analyzing markets and individual behavior, its shortcomings become apparent when applied to the complexities of real-world economies. One of its fundamental weaknesses lies in its reliance on overly simplistic assumptions about human behavior and market dynamics. The model of the “rational actor,” central to neoclassical thought, assumes that individuals have perfect information and the ability to weigh costs and benefits without cognitive or emotional biases. However, behavioral economics and psychology have repeatedly demonstrated that humans often act irrationally, driven by heuristics, emotions, and incomplete knowledge. These insights challenge the neoclassical view of markets as perfectly rational systems.
Another critical shortcoming of neoclassical economics is its treatment of market equilibrium. The assumption that markets naturally move toward equilibrium, where supply equals demand, overlooks the frequent disequilibria observed in real economies. Financial markets, for instance, are prone to bubbles and crashes, driven by speculative behavior and herd mentality rather than rational adjustments. Similarly, labor markets often experience prolonged periods of unemployment, contradicting the neoclassical assumption that wage flexibility ensures full employment.
The neoclassical focus on efficiency also leads to a neglect of distributional issues. By prioritizing aggregate outcomes, neoclassical economics often overlooks questions of inequality and social justice. Pareto efficiency, a key concept in neoclassical thought, suggests that an allocation is efficient if no one can be made better off without making someone else worse off. However, this definition of efficiency ignores the initial distribution of resources and the broader societal consequences of inequality. As a result, neoclassical models often justify policies that exacerbate wealth and income disparities, assuming that market outcomes are inherently fair or optimal.
Another limitation of neoclassical economics is its inadequate attention to time, uncertainty, and the dynamic nature of economic systems. While its models excel in analyzing static equilibria, they struggle to account for the complexities of economic growth, technological innovation, and structural change. For example, the neoclassical production function treats technology as an exogenous factor, rather than exploring the processes through which innovation occurs and affects economic outcomes. This oversight limits the framework’s ability to address long-term development and sustainability.
Neoclassical economics also fails to account for the role of power and institutions in shaping economic behavior. Its emphasis on individual decision-making assumes that markets operate independently of political and social structures. However, real-world markets are deeply influenced by regulations, cultural norms, advertising, and power dynamics. Corporations, for instance, may engage in rent-seeking behavior, lobbying for policies that distort competition or protect their interests at the expense of consumers and smaller businesses. By treating markets as apolitical entities, neoclassical economics overlooks these critical factors.
Despite these shortcomings, neoclassical economics has left an indelible mark on the field. Its emphasis on marginal analysis, optimization, and mathematical modeling has provided powerful tools for understanding many economic phenomena. However, its reliance on unrealistic assumptions and its neglect of inequality, disequilibria, and institutional dynamics limit its relevance in addressing the challenges of modern economies. While it remains a dominant framework, neoclassical economics must evolve to incorporate insights from other schools of thought, such as behavioral economics, institutional economics, and ecological economics, to remain useful in an increasingly complex and interconnected world.
The Current State of Economic Thinking
The economic thinking that dominates today’s policies reflects an intricate blend of ideas drawn from several schools, particularly neoclassical economics, Keynesian economics, and monetarism. Over decades, these perspectives have merged into what is often referred to as neoclassical synthesis or New Keynesian economics. This approach governs much contemporary policymaking, combining a belief in market efficiency with a recognition of the need for occasional government intervention. While this framework has provided tools to manage economic cycles, it also reveals significant shortcomings, particularly in its handling of inequality, financial instability, and long-term sustainability.
The roots of modern economic thought were planted during the Great Depression, a period that exposed the limitations of classical economics and its belief in self-regulating markets. Keynesian economics arose as a response, revolutionizing the field by arguing that government intervention was essential to stabilize economies during downturns. John Maynard Keynes’s focus on aggregate demand, the total spending in an economy, reshaped policy, encouraging governments to spend during recessions and create jobs, thereby breaking the cycle of unemployment and economic stagnation. These ideas dominated the post-World War II era, fostering decades of growth and stability in industrialized nations. The golden age of Keynesianism saw economies flourish as governments balanced public investment with private enterprise, achieving full employment and rising living standards.
However, Keynesianism began to falter in the 1970s. The phenomenon of stagflation, simultaneous high inflation and high unemployment, exposed weaknesses in the Keynesian framework, which had no clear tools to address both issues at once. Into this void stepped monetarism, led by Milton Friedman, which shifted the focus from fiscal policy to the money supply. Friedman argued that inflation was always a monetary phenomenon and that controlling the growth of the money supply could stabilize prices. Monetarism reshaped central banking, emphasizing inflation targeting and reducing the role of discretionary fiscal policy. Central banks like the Federal Reserve and the Bank of England became the primary stewards of economic stability, relying on interest rate adjustments and monetary control to influence growth and inflation.
Meanwhile, neoclassical economics, with its emphasis on rational agents and market efficiency, regained prominence by integrating Keynesian insights into its framework. This synthesis reinforced the idea that markets, left to their own devices, were efficient in the long run but might require intervention during short-term crises. Policymakers increasingly adopted neoliberal principles derived from neoclassical thought, advocating for deregulation, privatization, and free trade as mechanisms for fostering growth. The 1980s marked a turning point, with leaders like Ronald Reagan and Margaret Thatcher championing these ideas and implementing sweeping changes to reduce the role of government in economic life.
This hybrid approach, drawn from Keynesianism, monetarism, and neoclassical economics, has since shaped economic policy worldwide. Central banks became dominant players in managing economies, using tools like interest rate adjustments and quantitative easing to respond to recessions and financial crises. Governments turned to fiscal policy during severe downturns, such as the 2008 financial crisis and the COVID-19 pandemic, but remained constrained by concerns over deficits and debt, a legacy of neoclassical skepticism about government intervention. Globalization further solidified this framework, with the belief that free trade and open markets would drive growth and prosperity.
Yet, for all its successes, contemporary economic thinking is marked by significant flaws. One of its most glaring weaknesses is its overreliance on monetary policy. Central banks have become the primary actors in managing economic cycles, but their tools are often slow and imprecise. Adjusting interest rates takes months or even years to affect investment and consumption, and quantitative easing, while stabilizing financial markets, has largely fueled asset price inflation rather than broad-based economic recovery. This reliance on monetary policy has also contributed to rising inequality, as the benefits of central bank interventions disproportionately accrue to those who own financial assets.
Inequality, in fact, is one of the most critical shortcomings of modern economic thinking. The emphasis on market efficiency often prioritizes aggregate outcomes over distributional concerns, assuming that market-driven growth will benefit everyone. In reality, neoliberal policies, such as deregulation and tax cuts, have exacerbated wealth and income disparities. Governments have struggled to address these inequities, as the prevailing framework often dismisses redistribution as inefficient or counterproductive to growth. Rising inequality has not only eroded social cohesion but also weakened economic stability by concentrating wealth in the hands of those less likely to spend it.
Financialization represents one of the most glaring failures of modern economic systems, particularly in highly financialized economies like the United States. While financial markets are theoretically designed to allocate capital to productive uses, they have largely devolved into a vast casino where the wealthy swap money among themselves with minimal connection to constructive economic activities. The financial sector, originally intended to support industries by providing capital for innovation, infrastructure, and expansion, has instead become dominated by speculative trading, complex derivatives, and rent-seeking behavior. This shift has distorted the purpose of financial markets, transforming them from engines of growth into self-referential systems that prioritize short-term profits over long-term investment.
In today’s financialized economy, much of the activity within financial markets serves no purpose beyond generating wealth for those already at the top of the economic hierarchy. High-frequency trading, hedge fund strategies, and private equity schemes are designed to extract value rather than create it. Money circulates within this closed loop of speculation, often generating enormous profits for a small elite while contributing little to the productive economy. The result is an economy increasingly disconnected from its real foundations, where infrastructure, technology, and goods are created, and instead concentrated in an abstract world of financial instruments whose value bears little relationship to tangible economic progress.
This financialization has created systemic risks that threaten the stability of entire economies. Speculative bubbles, fueled by excessive leverage and a lack of regulation, have led to catastrophic crashes, such as the 2008 financial crisis. These crises are not anomalies but predictable outcomes of an over-reliance on financial markets that prioritize profit over prudence. Furthermore, financialization exacerbates inequality by concentrating wealth in the hands of those who control financial assets, leaving most workers and businesses reliant on an increasingly fragile system.
Perhaps the most troubling aspect of financialization is the opportunity cost it represents. Money that could be used to address pressing societal needs, such as funding sustainable energy projects, improving public infrastructure, or advancing education, is instead tied up in speculative activities that produce no real value. The financial sector, far from serving the economy, has become an end, extracting wealth from the productive economy rather than fueling it. If left unchecked, this trend threatens not only economic stability but also the broader social contract, as the gap between those who benefit from financialization and those excluded from its rewards continues to widen.
Environmental sustainability is yet another area where contemporary economic thinking falls short. The emphasis on GDP growth as the primary measure of success ignores the ecological costs of resource depletion, pollution, and climate change. While economists acknowledge externalities like carbon emissions, the proposed market-based solutions, such as carbon pricing, have proven inadequate to drive meaningful change. The focus on growth as an end remains a blind spot, as it fails to account for the long-term consequences of unsustainable economic practices.
Finally, the dominant framework relies heavily on assumptions about human behavior and market dynamics that are increasingly at odds with reality. The neoclassical model of rational actors making decisions based on perfect information fails to capture the complexity of human psychology, which is influenced by biases, heuristics, and emotions. Behavioral economics has shown that individuals often act irrationally, but these insights have yet to be fully integrated into mainstream economic models. Similarly, the assumption that markets are inherently efficient overlooks the frequent disequilibria caused by speculative behavior, asymmetrical information, and external shocks.
Despite these shortcomings, contemporary economic thinking remains deeply entrenched. Its tools and assumptions have shaped decades of policy, providing stability in many cases but falling short in addressing the systemic challenges of inequality, financial instability, and environmental degradation. As economies grow more interconnected and complex, the limitations of this framework become increasingly apparent, underscoring the need for a new paradigm that balances short-term stabilization with long-term sustainability and equity.
Modern Monetary Theory
Modern Monetary Theory (MMT) represents a groundbreaking rethinking of economic policy, built on a deep understanding of how money operates in contemporary economies. Though its name suggests novelty, MMT is deeply rooted in historical traditions, drawing from earlier schools of thought like chartalism and Keynesian economics while expanding upon their insights to address modern monetary systems.
The historical roots of MMT trace back to chartalism, a theory of money articulated by German economist Georg Friedrich Knapp in his 1905 book The State Theory of Money. Chartalism argued that money derives its value not from intrinsic properties, such as gold, but from the authority of the state to impose taxes and designate what can be used to pay them. This idea laid the foundation for understanding fiat money, which has no physical backing but is accepted because of state enforcement. Chartalism highlighted the sovereign’s role in creating and maintaining currency, a theme that resonates strongly in MMT’s framework.
MMT also builds on the work of John Maynard Keynes, particularly his insights into aggregate demand and the role of government spending in addressing unemployment and economic instability. Keynes’s observation that “anything we can actually do, we can afford” echoes in MMT’s assertion that sovereign governments face no financial constraints in issuing their own currency. MMT extends Keynesian thought by focusing on the operational realities of monetary systems, particularly the mechanics of government spending, taxation, and borrowing.
The modern articulation of MMT began in the late 20th century, led by economists like Warren Mosler, Randall Wray, and Stephanie Kelton. Mosler, a former hedge fund manager, developed many of MMT’s core principles through his practical experience in financial markets. Wray and Kelton, along with others, brought these ideas into academic and policy discussions, creating a comprehensive framework that challenges traditional economic assumptions. Their work gained visibility in the aftermath of the 2008 financial crisis, as policymakers sought alternatives to the austerity measures and fiscal constraints imposed by mainstream economics.
At the heart of MMT is its description of how money works in a fiat currency system. It argues that sovereign governments, as the issuers of their currency, are not constrained by revenue when it comes to spending. Taxes and borrowing do not finance government expenditures; instead, they serve other purposes: taxation creates demand for the currency, while government borrowing functions as a monetary policy tool to control interest rates. MMT emphasizes that the true constraints on government spending are resource availability and inflation, not deficits or debt. This perspective reframes fiscal policy, allowing for greater emphasis on public investment and social programs.
MMT’s growing prominence stems from its ability to address the shortcomings of neoclassical synthesis and other mainstream frameworks. Unlike neoclassical models, which abstract away from the realities of money creation and focus on equilibrium, MMT places monetary operations and aggregate demand at the center of its analysis. Its insights have proven particularly relevant in times of economic crisis, such as the 2008 financial collapse and the COVID-19 pandemic, when governments needed to respond with large-scale spending to stabilize economies.
Despite its strengths, MMT remains controversial, and its policy prescriptions have sparked significant debate. Critics argue that MMT underestimates the risks of inflation associated with large-scale sovereign spending, particularly when supply-side constraints are not adequately addressed. Others worry about the political implications of MMT, suggesting that its framework might encourage fiscal irresponsibility if adopted without strong safeguards. While MMT proponents counter that inflation, not deficits, is the true constraint on spending, skeptics remain concerned about the practical application of these principles in politically charged environments.
These debates, along with a more detailed analysis of MMT’s strengths and weaknesses, will be explored in the next chapter. For now, it is crucial to recognize MMT’s historical roots in chartalism, its connection to Keynesian economics, and its ability to illuminate the realities of modern monetary systems. By offering a clearer understanding of how money works, MMT challenges conventional wisdom and provides a bold framework for rethinking fiscal policy in the 21st century.
An Experimental Approach to Economics
Experimentation in economics, long considered impractical, must be pursued with creativity. Controlled economic environments, such as small-scale test zones or digital simulations, can allow policies to be evaluated in real-world conditions. Test outcomes can be tested against model predictions.
Equally critical is the reversal of the flawed micro-to-macro methodology. Instead of assuming that individual behaviors aggregate neatly into macroeconomic outcomes, we must begin with macroeconomic realities. Knowing a macroeconomic outcome and differentiating with respect to time or individuals, we also know the microeconomic outcomes. We can then analyze how individuals and businesses respond to generate the (now) known realities. This macro-to-micro approach divides any systemic errors while extrapolating microeconomic assumptions to macroeconomic results multiply inaccuracies.
The third pillar of the experimental approach is its focus on the constructive potential of debt-free fiat money. Debt-free fiat money offers the opportunity to reshape economies for the better, ensuring that money serves as a tool for collective progress rather than a driver of inequality and financial crises. Debt-free money accounting delivers more accurate measurement of money’s impact on economic activity.
The Challenge of Experimentalism in Macroeconomics
Experimentation is the cornerstone of scientific inquiry, but in macroeconomics, it faces profound challenges. The scale and complexity of national economies make it impossible to replicate the controlled environments of a laboratory. Testing a macroeconomic theory often means applying it to a living, breathing economy, where countless variables interact in unpredictable ways. Worse, the methodologies economists use to model and simulate economies are often deeply flawed, compounding the difficulties of experimentation and leaving the field vulnerable to repeated failures.
One of the primary issues in macroeconomic modeling is its tendency to oversimplify the dynamism of real economies. Many models assume the economy operates around equilibrium points, static conditions where supply and demand balance, or inflation and employment stabilize. These assumptions create an illusion of predictability and stability. However, equilibria in economies are fragile and fleeting, more like precariously balancing on a pencil point than resting on solid ground. Small disturbances can throw these models into chaos, failing to reflect the true volatility and dynamism of modern economies.
The creation of money as debt introduces an especially underappreciated source of instability that traditional models fail to address. Debt-based money introduces multiple layers of exponential growth, each with its own rate and interaction. Credit expansion grows at one rate, asset prices at another, and income distribution adjusts on yet another timeline. These layers create feedback loops that can amplify imbalances, destabilizing the economy in ways that are not captured in static or equilibrium-focused models. Any serious attempt at economic modeling must grapple with this dynamism, incorporating the exponential growth patterns and the instabilities they generate. Current models, by failing to recognize this complexity, not only miss the mark but also perpetuate errors when their microeconomic assumptions are scaled to the macro level.
Another critical challenge is the reliance on representative agent models, which treat entire populations or industries as homogenous actors responding predictably to changes in policy or market conditions. This simplification strips away the heterogeneity and adaptive behavior that drive real-world economies. For example, debt dynamics differ dramatically across households, firms, and governments, yet many models aggregate these entities, ignoring how their interactions produce emergent phenomena like financial crises or inflationary spirals. This failure to capture the diversity and adaptability of economic agents undermines the predictive power of these models, making them poor tools for experimentation.
Compounding these deficiencies are the ethical and practical barriers to real-world economic experimentation. Unlike a controlled lab experiment, testing a new macroeconomic policy means implementing it on millions of people, with potentially devastating consequences. Introducing an unproven tax system, monetary policy, or fiscal stimulus carries the risk of inflation, unemployment, or even systemic collapse. Governments, understandably, are reluctant to take such risks, leading to a reliance on historically validated theories, even when those theories are demonstrably flawed. The political stakes are high, and the fear of unintended consequences often stifles innovation in economic policymaking.
The timescale of macroeconomic processes further complicates experimentation. Policies designed to address inflation, unemployment, or growth often take months or years to produce observable effects. By the time the results become clear, the underlying conditions may have changed, obscuring the connection between cause and effect. This delay, combined with the inherently dynamic nature of economies, makes it exceedingly difficult to draw definitive conclusions from macroeconomic experiments. The absence of controlled environments where variables can be isolated exacerbates the problem, leaving policymakers to rely on approximations and assumptions that are rarely, if ever, rigorously tested.
Despite these challenges, the need for experimentation in macroeconomics is undeniable. The failures of traditional models to anticipate and address crises, from the 2008 financial collapse to the supply-demand shocks of the COVID-19 pandemic, highlight the inadequacies of the current approach. Models that assume equilibrium, ignore dynamism, and rely on simplified agent behavior are ill-equipped to handle the realities of modern economies. Addressing these deficiencies requires a radical rethinking of how economies are modeled and studied.
Artificial intelligence analysis of economics may offer insight into how we can predict economic behavior. But, a simpler method would be to abandon debt-based creation of money for the drastically simplified debt-free introduction of money. The goal of a debt-free money model is to eliminate nearly all sources of exponential economic factors. If debt-free money models can be tested against real-world experiments, we may gain confidence that the underlying assumptions are correct.
Small-Scale Economic Zones: Testing Debt-Free Money Dynamics
One of the most promising ways to overcome the experimental barrier in macroeconomics is the establishment of voluntary small-scale economic zones. These zones could provide a controlled environment where new economic systems, such as debt-free money, can be tested without risking large-scale disruption. By focusing on a small, carefully chosen group of participants, this approach not only allows for rigorous experimentation but also addresses ethical concerns associated with implementing untested theories on a national scale.
The foundation of this experiment would be a voluntary community, potentially housed in a repurposed old motel with surrounding land. The goal would be to transform this site into a self-sustaining community, where participants work together to build tiny houses and develop enterprises. The community would operate with its own digital currency. For convenience, this currency will be called the Atar, after the Zoroastrian god of fire. The Atar would be designed to simulate the dynamics of debt-free money. Each participant would earn Atars for their contributions, which they would use to pay for essentials such as rent, food, and utilities within the community.
A crucial aspect of this approach is the selection process for participants. Homeless individuals often represent some of the most vulnerable members of society, many of whom are understandably suspicious of authority and wary of institutional settings. However, communities are seeking ways of dealing with the growing problem of homelessness. With proper selection criteria, a subset of this population could be recruited to test debt-free money.
To address the concerns that this population may be exploited, participation in the experiment would be entirely voluntary, with clear and transparent communication about the experimental nature of the community. The participants would need to understand and agree to the goals of the project, including its focus on testing a new economic systems. This transparency not only ensures ethical integrity but also fosters trust and cooperation among participants.
Given the complexities of homelessness, initial participants should be carefully vetted to ensure their suitability for the program. Those struggling with severe mental health or substance abuse issues, while deserving of support, may not be ideal candidates in the early stages of the experiment. The focus should be on individuals who are stable and motivated to engage in the community’s goals. This selection process would help create a foundation for success, allowing the community to demonstrate its potential before expanding to include a broader range of participants.
Interestingly, the skepticism many homeless individuals harbor toward authority could become an asset in this experiment. By presenting the project as a chance to fight for a more equitable economic system, participants may find a sense of purpose and empowerment in their role as pioneers of a new approach. This framing transforms the community from a mere shelter into a collaborative effort to challenge systemic inequities, aligning the participants’ personal goals with the broader aims of the experiment.
The voluntary nature of the community also addresses a critical ethical barrier: the potential harm of testing unproven theories on large populations. Traditional macroeconomic experiments would require involving entire nations or regions, making it difficult to control variables and raising the risk of unintended consequences. By conducting this experiment in a small, voluntary setting, the risks are minimized, and the focus remains on creating a supportive and productive environment for participants. This micro-scale approach provides a balance between experimental rigor and ethical responsibility.
The community’s economy would be a carefully controlled microcosm designed to simulate the principles of a debt-free monetary system. A central authority, acting as a “community central bank,” would issue Atars, manage their circulation, and tax excess currency to prevent inflation. The currency would exist exclusively in digital form, allowing for precise monitoring of transactions and data collection. This design offers a unique opportunity to test concepts related to central bank digital currencies (CBDCs), taxation systems, and money supply management in a controlled environment.
Interactions with the outside world would introduce another layer of complexity to the experiment. Traditional currency (U.S. dollars, in this case) would function as a foreign currency, with grants from “foreign” external sources providing the initial funds for materials and supplies. Participants would have access to an exchange system, allowing them to convert dollars to Atars and vice versa. This dual-currency framework would simulate trade dynamics, including the accumulation of foreign currency, trade imbalances, and the impact of imports and exports.
Enterprises within the community would play a central role in fostering economic activity. Food production, for example, could be a foundational industry, utilizing innovative techniques like vertical farming to minimize resource use while maximizing output. By exporting high-value food products and importing cheaper bulk items, the community could explore trade dynamics and the flow of goods and currency. These enterprises would not only support the community’s needs but also generate data on how local economies interact with broader economic systems.
To ensure the robustness of the experiment, control groups could be established in similar communities operating under different rules or even the existing debt-based monetary system. These control communities would receive the same level of funding and attempt comparable projects, allowing for a direct comparison of outcomes. This setup would provide critical insights into the relative advantages of various debt-free monies versus traditional systems, measured through metrics such as economic stability, wealth distribution, productivity, and social cohesion.
By focusing on voluntary participation and small-scale implementation, this approach not only overcomes the ethical challenges of macroeconomic experimentation but also creates a path for meaningful innovation. If successful, these small-scale economic zones could pave the way for broader applications, informing future policy and providing a blueprint for transitioning to more equitable and sustainable economic systems.
Puerto Rico as a Larger-Scale Experiment for Debt-Free Money
Puerto Rico’s unique economic challenges and opportunities make it an ideal candidate for testing the implementation of a debt-free monetary system. While the idea may seem novel, it has historical precedent in the early 19th-century success of Guernsey, where a debt-free currency was used to fund public infrastructure projects. The key difference lies in the modern approach: in Puerto Rico, this experiment could be designed to generate rigorous data and insights, addressing the lack of documentation that limited the Guernsey model’s influence on broader economic thought. By carefully monitoring the interaction of a debt-free currency with the existing debt-based system, Puerto Rico could provide invaluable lessons for transitioning to a more equitable and sustainable monetary framework.
Guernsey’s historical experience demonstrates the feasibility of debt-free money. Faced with deteriorating infrastructure and limited resources, the island’s government issued its own currency to fund repairs and public works. This debt-free currency stimulated the local economy without causing inflation, proving that sovereign money creation could address economic challenges without reliance on debt. However, the lack of data collection during Guernsey’s experiment meant that its broader impacts on trade, savings, taxation, and long-term growth were never fully analyzed. Puerto Rico offers a chance to build on this foundation, incorporating modern tools for measurement and evaluation to provide a clearer picture of how debt-free money can work on a larger scale.
Puerto Rico’s current economic situation underscores the urgency of such an experiment. Saddled with crippling debt, the island’s government has struggled to address the devastation wrought by hurricanes and years of underinvestment. Traditional monetary and fiscal solutions have proven insufficient, leaving the economy dependent on external loans and unable to rebuild effectively. Introducing a debt-free currency, referred to this time as “Vulcans”, could provide a transformative solution. Vulcans, created directly by the Puerto Rican government without interest-bearing liabilities, would circulate locally to fund infrastructure projects, education, and enterprise development, while U.S. dollars would remain in use for external trade and debt servicing and an alternative currency.
To ensure the experiment’s success, Puerto Rico could direct Vulcans toward investments that reduce reliance on imports and build long-term economic resilience. For example, vertical farming could address food insecurity by producing high-value crops for local consumption and export, while also conserving resources through controlled-environment agriculture. At the same time, agricultural lands devastated by hurricanes could be reclaimed and rehabilitated, reducing the island’s dependence on imported food. This dual approach, combining innovative methods with traditional land restoration, would strengthen Puerto Rico’s food systems and provide a robust test of how debt-free money can support local production and self-sufficiency.
Beyond agriculture, Puerto Rico could leverage its existing strengths in pharmaceutical manufacturing to diversify and expand its export base. The pharmaceutical industry already accounts for a significant portion of the island’s economy, making it an ideal sector for targeted investment. Vulcans could fund education and training programs to develop a more skilled workforce, enhancing the island’s competitiveness in pharmaceuticals and related fields. Additionally, investments could be made in research and development, encouraging innovation and the creation of new industries that complement existing strengths. By focusing on areas where Puerto Rico already has an advantage, the experiment could demonstrate how debt-free money fosters sustainable economic growth through strategic investments.
A critical component of the experiment would be the dual-currency framework, where Vulcans circulate alongside U.S. dollars. Vulcans would be used for local transactions, such as paying workers, funding public services, and purchasing materials for rebuilding efforts. U.S. dollars, treated as a “foreign currency,” would continue to dominate external trade and debt repayment. An exchange system would allow residents and businesses to convert between the two currencies, enabling researchers to study trade imbalances, currency accumulation, and the interaction of debt-free and debt-based systems. Managing the exchange rate and controlling the supply of community dollars would provide further insights into monetary policy in a dual-currency economy.
Data collection and analysis would be central to the success of the experiment. Unlike the Guernsey model, where outcomes were largely anecdotal, Puerto Rico’s implementation would prioritize rigorous monitoring of economic indicators. Metrics such as GDP growth, employment rates, savings patterns, taxation efficiency, and trade balances would be carefully tracked to evaluate the impact of community dollars. For example, researchers could study whether the Vulcans encourages local investment and spending or whether it accumulates in savings. Taxation methods, such as transaction taxes or balance taxes, could also be tested to determine their effectiveness in managing money supply and preventing inflation.
While the absence of a traditional control group poses a challenge, meaningful comparisons could still be made. Puerto Rico’s pre-experiment economy, characterized by stagnation and debt dependency, would serve as a baseline for evaluating changes. Additionally, performance could be measured against economic models simulating the island’s trajectory under a debt-based system. Regions with similar economic challenges that retain traditional monetary systems could also provide points of comparison, helping to contextualize Puerto Rico’s results.
By framing the initiative as a voluntary and collaborative effort, the experiment would address ethical concerns. Participation in the Vulcan currency system would be optional, ensuring that residents and businesses retain the freedom to use U.S. dollars if they prefer. Transparent communication about the goals and mechanics of the project would build trust and encourage participation, particularly if the program is designed to address urgent needs like infrastructure repair, housing, and job creation.
If successful, Puerto Rico’s experiment could revolutionize our understanding of debt-free money, providing a roadmap for other regions and nations to follow. By documenting every aspect of the implementation and outcomes, the island could offer a comprehensive case study on the feasibility and benefits of transitioning to a debt-free monetary system. Building on the legacy of Guernsey, Puerto Rico has the potential to transform its economic future while paving the way for a more equitable and sustainable global economy.
An Experimental Approach to Implementing the Afriq
The African Monetary Union’s ambition to introduce the Afriq as a continent-wide currency is a visionary step toward economic integration across Africa. However, the current approach, modeled after the Euro’s introduction, has encountered significant delays and challenges. Plans are to accomplish this by 2063. We propose they start the experiment now.
The Euro relied on the Maastricht Treaty, which imposed strict economic convergence criteria on participating countries, including debt-to-GDP ratios of 60% or less and annual deficits no greater than 3%. These requirements reflected the Euro’s design as a debt-based currency, necessitating fiscal discipline to ensure its stability. For Africa, however, replicating this approach is impractical and unnecessarily restrictive, given the continent’s diverse economies and developmental needs.
A more innovative approach would involve introducing the Afriq as a secondary debt-free currency circulating alongside existing national currencies. This approach avoids the need for stringent convergence criteria and allows for a phased and inclusive implementation. By positioning the Afriq as a complement to national currencies rather than an immediate replacement, the African Central Bank (ACB) can focus on fostering growth, reducing poverty, and addressing structural inequalities while preparing the ground for eventual continent-wide adoption.
To ensure the success of this initiative, the Afriq’s introduction would begin with a group of pilot countries. The selection of these countries would not hinge on economic convergence, as was required for the Eurozone, but rather on factors that ensure a stable testing environment. These factors could include political stability, strong rule of law, robust democratic institutions, and manageable levels of foreign currency reserves. By prioritizing these foundational elements, the ACB can create an environment where the Afriq has the greatest chance to thrive and demonstrate its potential.
Unlike debt-based currencies, the Afriq would be issued directly by the ACB and the member pilot countries as a debt-free currency, spent into existence. This spending would fund projects aligned with the African Monetary Union’s development goals, including infrastructure, education, healthcare, and other public goods. This debt-free issuance avoids the burden of repayment, allowing countries to invest in their futures without exacerbating existing debt crises.
To address poverty, the ACB could fund a universal basic income (UBI) program, providing a direct boost to household incomes while increasing demand for goods and services. Education would also be a critical focus, building the intellectual resources needed for a growing economy. Investments in labor skills, transportation networks, utilities like water and energy, and the acquisition of raw materials would support the supply side of the economy, ensuring that production keeps pace with demand.
One of the central challenges in introducing the Afriq is ensuring a balance between the production of goods and services and the demand for them. With unlimited capacity to issue currency, the burgeoning union must exercise caution to prevent an imbalance that could lead to inflation or resource shortages. Initially, investments should prioritize the supply side, including education, infrastructure, and capital goods. As production capacity grows, demand-side measures like UBI or job guarantee programs can be scaled up to match the increased availability of goods and services.
To prevent disruptions during the early stages of implementation, the ACB may impose restrictions on how Afriqs are used. For instance, commercial banks could be limited in their ability to lend Afriqs for consumer spending until sufficient production capacity is in place. Loans from the ACB to commercial banks could be restricted to productive investments, such as business expansion or infrastructure projects. These restrictions would be gradually eased as the economy becomes more fully developed.
A key advantage of the Afriq as a debt-free currency is the flexibility it provides in managing the money supply. Since the Afriq is not tied to debt, traditional tools like interest rate adjustments are unnecessary. Instead, the ACB can rely on taxation to remove excess money from circulation, preventing inflation and maintaining economic stability. However, the absence of excessive financialization in the Afriq economy means that a transaction tax alone may not generate sufficient revenue without impacting consumption.
To address this, the ACB could implement a combination of transaction taxes and an idle money tax (a tax on bank balances). The idle money tax would target unspent Afriqs held in accounts. A flat tax on balances would result in higher total taxes for those with the higher balances. To ensure consumption is not hampered, most of the tax money should come from the balance tax. The Afriq would not have a physical currency. It would remain totally digital. This simplifies the problems that can arise from attempts to avoid taxation.
Circulation of Afriqs outside of the union would not be subject to transaction taxes. The purpose of the taxes is to remove excesses, not to fund the government. If the money is outside the union, their circulation does not impact the union economics. When it returns, it may be subject to “sanitation” through the central bank and transaction and balance taxes.
This dual tax approach allows for precise control of the Afriq supply while maintaining the economic activity needed for growth. Adjustments to UBI levels or tax rates could stimulate or cool the economy as needed. The ACB would need to have the authority to adjust those tax and UBI levels within some bounds or an independent agency could be formed to determine those levels.
Commercial banks would play a vital role in the Afriq economy but would not create Afriqs through loans as they do in debt-based systems. Instead, they could access either interest-based or interest-free loans from the ACB to fund lending activities. This ACB provided lending would be phased out as Afriq levels circulate more widely. The goal would be to have commercial banks acquire their Afriqs from savings or investment activities.
This system ensures that all Afriqs in circulation originate from the ACB, maintaining control over the currency’s supply and stability. To address potential limitations in commercial lending, public banks could be established at regional or local levels. These non-profit institutions would operate under the same terms as commercial banks, providing liquidity for productive investments and setting upper limits on interest rates to ensure affordability.
Introducing a new currency into the international market carries the risk of speculative attacks, where traders attempt to profit by destabilizing the currency. Unlike debt-based currencies, the Afriq is uniquely equipped to withstand such attacks. The ACB’s ability to issue unlimited Afriqs ensures that any speculative demand can be met without incurring interest payments or creating financial strain. Dumping Afriqs into the foreign markets will increase import prices but inflation should be able to be controlled nearly immediately through monetary policy. (Monetary policy in this case is not interest rate adjustments but taxation adjustments). This inherent stability protects the Afriq from the vulnerabilities that plague traditional debt-based currencies.
Over time, it is expected that the Afriq would supplant national currencies. As a debt-free currency, the Afriq’s stability and volume would naturally outcompete debt-based systems. This transition would be gradual, allowing countries to adapt at their own pace while preserving monetary sovereignty during the early stages. The ACB’s careful management of the currency’s introduction and growth would ensure a smooth transition, fostering economic integration without the disruptions often associated with currency unification.
As the initial small-scale experiment with the Afriq proves successful, additional African countries can be invited to join the monetary union. This phased approach allows the African Central Bank (ACB) to refine its processes, address unforeseen challenges, and build confidence in the Afriq’s stability and utility. Countries seeking to join would need to meet the same requirements as the original pilot members, emphasizing political stability, rule of law, and robust democratic institutions. However, the requirement for substantial foreign reserves could be relaxed as the union grows and matures.
In the early stages, foreign reserves might be necessary to fund the procurement of external expertise, technology, or raw materials. However, as the union demonstrates success and expands, these needs would increasingly be met through normal economic channels. The Afriq, as a stable and widely adopted currency, would facilitate trade and investment, reducing reliance on external reserves. Member nations could access the goods and services they require through established trade relationships within the union or with external partners, leveraging the Afriq’s growing strength and acceptance.
This gradual and inclusive process would foster a sense of shared purpose and mutual benefit among member nations. By prioritizing stability and sustainability, the ACB can ensure that each new member contributes to the union’s overall success while benefiting from the opportunities provided by a debt-free currency system. Over time, the Afriq’s adoption across the continent would create a unified economic landscape, driving growth, reducing inequality, and reinforcing Africa’s position in the global economy.
By introducing the Afriq as a debt-free secondary currency, the African Central Bank can create a powerful tool for economic development immediately while avoiding the pitfalls of the Euro model. This innovative approach prioritizes inclusivity, stability, and growth, providing a foundation for a more equitable and prosperous continent. Through careful planning, rigorous data collection, and balanced implementation, the Afriq experiment could serve as a model for the future of monetary policy, not only in Africa but around the world.
Using Modeling as an Alternative to Experimentation in Economics
The scientific method traditionally relies on controlled experiments, where a test condition is introduced while a control remains unchanged, allowing for direct comparisons. This method has produced remarkable advances in fields like physics and chemistry, where experiments can be isolated and repeated under the same conditions. However, in macroeconomics, applying this approach at scale is often impractical. Real-world economies are too vast and interconnected for direct experimentation to be cost-effective or risk-free. Implementing large-scale economic changes without first understanding their potential consequences could result in unintended disruptions, making large-scale real-world testing an impractical approach for refining new policy ideas.
Using modeling offers an alternative in the form of predictive models that are continuously refined through comparison with empirical data. The Standard Model of particle physics has reached an extraordinary level of accuracy, with some calculations aligning with real-world measurements to within one part in a trillion. However, such extreme precision is not necessary in economics. While physics deals with fundamental constants, economic systems are shaped by complex human behavior and external shocks, making absolute precision unattainable. Instead, the goal of economic modeling is to provide reliable directional guidance, allowing policymakers to make informed decisions based on the probable effects of a given change.
By constructing a model that reflects the core mechanics of an economy, predictions can be tested against real-world data without requiring direct experimentation. This approach allows for an iterative process where the model’s forecasts are compared to actual economic performance, and adjustments, both to the model and to policy, are made to improve its predictive capability. Unlike a controlled experiment, where variables are isolated, economic modeling accommodates the full complexity of an economy, incorporating interdependencies that would be impossible to replicate in a laboratory setting. When a policy change is introduced, real-world measurements are collected and analyzed to determine how closely the results align with the model’s projections. Any discrepancies lead to refinement, ensuring that the model evolves to reflect economic realities more accurately.
The process begins with small-scale changes that are carefully measured against predictions. Because no real-world economic system can be placed in a perfectly controlled scenario, the model itself serves as the control by simulating what would have happened without intervention. This is similar to how climate models predict temperature changes by comparing actual atmospheric conditions with modeled projections of what the temperature was in previous calculations. In economics, when a policy is implemented, real-world outcomes can be evaluated against a modeled baseline, providing insights into whether the policy’s effects are unfolding as expected. Over time, as more data is collected and fed back into the model, its ability to anticipate economic shifts improves, reducing uncertainty in decision-making.
By treating economic models as predictive tools rather than rigid theoretical constructs, the discipline can move closer to the empirical rigor found in the hard sciences. While perfect accuracy will never be achieved, the ability to estimate the effects of policy changes within a reasonable range allows for informed economic planning. Modeling provides a structured way to test and refine ideas without the risks and costs associated with large-scale, real-world economic experimentation. Through continuous refinement, models become increasingly reliable, helping guide policymakers in navigating complex economic transitions with greater confidence.
Summary
This post critiques traditional economic theories for their reliance on abstract models and assumptions, rather than empirical testing. It highlights the limitations of classical economics, particularly its belief in self-correcting markets through flexible wages and prices, a notion often contradicted by real-world wage and price stickiness. The post advocates for a paradigm shift towards treating economics as an experimental science, emphasizing the potential of debt-free fiat money to facilitate practical experiments aimed at improving economic systems. By embracing empirical methods and moving beyond speculative models, the author envisions a more evidence-driven discipline that better serves societal needs.