For Halcyon Tempest
Heinlein’s “For Us, The Living” provides an interesting analysis of a number of different social quirks of the early 20th Century. His analysis of the economic institutions and structure is, naturally, of particular interest to me. Before I begin a discussion of the viability of the economic system proposed by Heinlein in the thin guise of science fiction, it is important to lay out a little bit about where he’s coming from.
The original manuscript was written in 1939. WWII was just beginning, and the US was far from entering the war. The US was still in the process of recovering from the single largest recorded economic disaster in its history. The Great Depression strongly informs Heinlein’s perspective on the structure of an economy. There are two key elements of the depression that Heinlein correctly identifies in his writing. First, the relatively large scale failure of the American banking system. During the Depression, deliberate efforts were made by both monetary authorities of the US and the private banks to maintain interest rates at relatively high levels. This was done by contracting the money supply. Contracting the money supply typically makes an economy contract - oops. Heinlein’s economist overstates the control of the American money supply on the part of the banks and completely ignores the role of interest rates, though his arguments are largely correct given his frame of reference. Second, Heinlein is correct in identifying weak aggregate demand for goods and services as a major part of the problem. It seems clear that Heinlein had either read or knew of John Maynard Keynes’ “General Theory of Employment, Interest, and Money” published in 1936. Most governments now automatically stimulate aggregate demand in a recession.
There appear to two be key elements to Heinlein’s proposed economic system. The first is the system of “heritage”. Under this system every individual in the society receives credit (effectively cash or purchasing power) to spend as they see fit. The individual is then able to work for extra funds if they so choose. Any extra funds are subject to some level of taxation. This is an idea that’s been around for a number of years under a variety of names. I’m most familiar with as either a negative income tax program or a guaranteed annual income program. The idea is almost exactly the same. All people receive a transfer of funds from some level of government. This transfer is not subject to taxation. The individual is free to work in the paid labour force for additional funds if they so choose. Any additional income earned is subject to taxation, commonly at a relatively low and constant rate. These proposals were really popular during the 1970. In Canada there was even a field trial of one; the Canadian Basic Annual Income Experiment, or Mincome Manitoba, conducted between 1975-78. The results found there was only a minuscule impact on work effort. So this part of Heinlein’s proposal would likely work on a national scale. The savings in terms of program delivery costs would be phenomenal. More money would actually reach people who needed it. These types of programs have generally been resisted political by conservatives due to the incentive to work effects – which Heinlein actually addresses. Other groups resist for more selfish reasons. Punch Line: economically feasible – politically...?
The second key element of the economic system described in “For Us, The Living” involves the funding of the “heritage” or negative income tax system. The process suggested by Heinlein is only workable under very specific circumstances. It requires that all individuals believe that prices will remain stable. Not a problem when Heinlein was writing, prices were stable and in some cases even dropping. It requires that there be significant unemployment already in the economy, as there was when he was writing. Excess productive capacity must already exist. If you consider Heinlein’s chess piece economy, the workers were unemployed until the arrival of Perry’s factory. If the workers were already employed, the result could only be inflation.
The easiest way to explain is with a small amount of economic theory. PY = MV. That’s it! It’s the quantity theory of money, currently out of favour in most economics texts – it’s too old and too simple to learn. Here’s the deal. P is the price level (CPI = 2 in Heinlein’s example), Y is the real output of the economy (63 Playing Cards), M is the money supply (100 poker chips), and V is the velocity of money (slightly more than 1). The velocity of money is the number of times a unit of currency changes hands in the purchase of goods – generally fixed by banking technology. Assume, as Heinlein’s economist does, that the price level is fixed at 2. Assume also that the velocity of money is fixed at just over 1 but less than 1.26, again as in the example in the book. It’s pretty clear now that the two sides of the equation don’t balance. The solution to this problem, if prices and velocity of money can’t change, is either to reduce production (throwing more people out of work) or increasing the money supply.
The supply of money must always increase if the economy is growing or else prices will have to fall. Deflation is almost never observed. Virtually all countries in the world have money supplies that grow at some pre-determined rate. Here’s the catch, if you’ve already balanced the PY = MV equation, adding more money can only lead to inflation. If we were to attempt to fund a cost of living “heritage” and other public goods solely out of money supply growth, we’d suffer from hyperinflation, like interwar Germany, or more recently Brazil, and a number of African nations. Hyper-inflation destroys economies.
That’s my two cents worth on Heinlein’s economic theory. He’s not entirely out to lunch. The monetary policy needs to be approached with a lot of caution, but the “heritage” system is totally workable.
Interesting Aside: The earliest reference I can find to a negative income tax plan is Juliet Rhys-Williams in the 1940’s. It seems Heinlein was once again a head of his times.