Economics / theory

@matthewslater . One for you (others - please chip in!). We have been developing our thinking about federation with the Credit Commons whitepaper as a foundation (thank you!).
I'll describe that in the growth thread, but I have a technical/economics question that I thought needed to live in a thread of such.
Q: How do you envisage 'exchange rates' working in a multi-layer Credit Commons network?
(I have some ideas, but would like to hear your thoughts in the first instance, if that's OK).

Sorry if the white paper wasn't clear enough about this. Each sovereign entity has the right to determine the value of its own currency, while the community has the right to determine how much they want to trade with it (i..e. set the balance limits.) The aim is to keep exchange rates stable but entities might need to adjust them if they can't balance their trade.
In a system denominated in GBP we would aim to maintain exchange rates 1:1 exchange rates both internally and against the pound where needed.

This makes sense - and perhaps it was my reading that was inadequate..

But it raises questions for me. For a LETS, or a local group in a 'mom and pop' type economy, this seems fine - stakes will be low, and everyone will be an amateur.

But for a network of b2b networks (where we're aiming) - say a UK-wide network of regional B2Bs with second, third, even fourth tiers (frankly, I imagine more tiers than this, and also no neat hierarchy - networks will be members of a number of other networks, and will not want to accept strict scale hierarchy if economic viability is at stake), this will be a serious matter.

Rates may need to be changed at short notice, and such changes will impact different business differently (whether in credit or debit, whether primarily an exporter, using the internal network to produce goods, or primarily an importer, adding value to imported goods for the internal market).

Further, while price setting by individual businesses in a b2b network is obviously a norm, the inevitable competitive aspects this brings into play are mitigated by the close communal inter-relation between members of the network.
In the case of a second (or higher) order network, the competitive devaluation motive certainly comes into play (and arguably should not be over-constrained) - but in this case, with a much lower communality.
This is not far off being how hard-currency issuing nation states interact; in theory, they all know that collaboration leads to common benefit, but in practice states in trouble resort all too often to beggar-my-neighbour tactics.

So I see two issues that will need to be met (not for a while, perhaps, but I am a firm believer in building to allow later refinements for foreseeable problems).

1. higher order groups are likely to lack expertise/confidence/reliable guidance on when and how to modify their exchange rate (little and often, infrequent and large?) - this may leave them prey to a number of alternatives, each of which carries further risk (they are not mutually exclusive, and so could also interact):
   • offers of 'expert' help - which could give rise to a new class of 'financial consultants', with concomitant conflicts of interest, insider knowledge etc.
   • internal division over rate changes, where the voting members are representatives of first order networks - not themselves 'principals' - leading to governance issues and loss of trust.
   • calls for a centralised 'wise' authority (a central bank / finance ministry) - which would undermine self-governance.
2. Rise of an arbitrage market based on exchange rates. Although it is hard to see how this could be carried on by organisations that are not members at some level, and further, how it could be achieved without detection, if there is any substantial gain to be made, smarter people than me will certainly figure out a way. The first line of defense against this would of course be strong and clear rules against speculation on currency, with low tolerance and and expulsion as a penalty, but again, if there is sufficient money to be made, the network will be large, with thousands or millions of members in various tiers - attempts will be made.

Scandals arising from any of these conditions could be used as excuses for State intervention (whether well-intentioned or deliberately destructive) 'to mitigate obvious risks'.

The first problem is more important, but also more difficult to address. I think we should develop some conversations about both, though, so that when we need it, there will be some wisdom in the community.

In case your response to this is - blimey, dream on, mate, we'll be lucky to get anywhere near these problems! - I say that the only point in trying any of this work is to end up having to confront this order of problem. Toy economies trading home-made jam are wonderful - I ran one for years (with others), and it was an amazingly valuable experience. But it died because it couldn't become economically meaningful in people's lives, which in the end was because it was never going to have these problems.

Yes I would be very happy if these problems ever came up! The danger is designing and putting resources into designing too far ahead when we may be crossing bridges we will never come to and the near future needs most attention.
1) I would anticipate some guidelines on exchange rate setting. You are right that importers and exporters will have conflicting interests, but if the aim of all is to return to balance, rather than to maximise their account balance, I think their interests will overlap. Also if groups feel that some parties are benefitting more than others from exchange rates then they can arrange their own compensation.
2) If we build a credit commons system which allows members to be in multiple groups that would allow arbitrage, but otherwise not. Multiple group membership presents a number of challenges
- multiple currencies per user,
- multiple possible payment pathways,
- a more involved user interface.
- It complicates the politics of each group maintaining a balance
- group balance limits have less power if trades can follow multiple pathways. There's a system that takes this multi-group membership to the logical extreme. Its called Ripple, which is a fine system but it has no way for groups to achieve a balance of trade because there are no groups any more, only a mesh of connections. For more on that see http://matslats.net/ripple-reciprocation-credit-commons

Answer 1: I don't think we should do much more in the way of designing than we perhaps are here - scoping out possibilities and structural/mitigatory approaches.
The intent will be to make sure we don't build tools that cannot be extend/refined in ways that enable these approaches should thy become necessary.
I certainly wouldn't build any particular tools in advance - just make sure that the architecture of the system makes their introduction possible.

Answer 2: "if the aim of all is to return to balance". I have heard you say this before - and of course I understand it as feature of the system. But I don't believe it in terms of 'behavioural economics'.
By way of a counter example, the equivalent feature of the current system is that all players seek to accumulate wealth. But this doesn't hold true for a large chunk of the population - we all know spendthrifts and the like, whose behaviour in no way matches the 'proper' game theoretical model (including businesses - Hi!).
So I doubt that it is safe to assume that this mode will be present across all participants.

Answer 3: The issue of multiple memberships is interesting. For individuals, who might be members of several orgs of very different character and business model, multiple membership is vital, imho.

But if we have a model where individuals are always contained by orgs which are the legal bodies that are the network members, I can't see this being a problem - individuals won't have large accounts, and will be in the context of their colleagues at all times.

For businesses it may be that limiting each business to only one network within a federation can work, but I am not certain - I can very easily imagine edge-cases where this would be very restrictive.

I agree with you that the Ripple approach seems weak/risky - MC's superpower is converting mutual trust into actual credit, and without known membership networks of Dunbar number size (ish), trust will be weaker, in which case MC may not provide significant value in competition with fiat markets.

But some items on your list of objections seem to me to in fact be answers: if multiple currencies and user interfaces, plus complex payment pathways are simply not worth the effort, then businesses will stick with one network - which keeps things simple.

On the other hand, I don't think we should outlaw multiple membership. I see no way to police such a rule in any case. If businesses feel they need such, they will find ways to subvert any rules (ie form another business with a different name, using spouse as a director). At the same time, if using different modes meets cost/benefit tests they will accept the overhead of multiple accounts/currencies etc - in just the way that they currently accept taking payment by card, by PayPal, in bitcoin, by cheque and in cash.

In this area again, I would argue for total transparency and permissiveness over secrecy and tight rules - if a business is in several networks, then all balances should be visible.

In a wider point about multiple networks, I certainly don't see any value in insisting on a 'single interface to rule them all' approach.

I think the business model for this group (for some future development of it) is to be the Linux Foundation of MC - the acknowledged core architects who develop the social/technical/legal 'kernel' that ensures basic functionality, compatibility and security - offered as a 'white-label', with many different 'distros' built onto it, to suit different environments (legal, cultural, linguistic, business mode, geography, protocol varieties, specialist markets - all might make different choices). This should be an open market, with equivalents of Red Hat, Ubuntu and Raspbian.

Further, I cannot imagine a successful system that doesn't end up with several competing federations which interact weakly, if at all. for instance, we can imagine a strongly ethical federation - which might insist on a variety of 'badges' - fair trade, not-for-profit, full transparency of supply chains, cruelty-free etc, that chooses only to interact with a federation that is more permissive in limited ways (use of infrastructure, basic utilities services perhaps).

The theory is that it is the interest attribute of the money that has the psychological effect on creditors and debtors.

In a mutual credit there is no incentive to accumulate because there is no interest.

We use balance limits and possibly gamification to defend against these tendencies.

On the subject of reputation I also liked Art Brock's Threebles design. Unfortunately the web site not longer works, but I found this short paragraph

Threebles (from 3ble - Triple Bottom Line Economics) are a currency which incorporates a triple-credit-rating so Social, Natural and Financial Capital can all be included in the function of money. Threebles are being launched through local trade exchanges in networks of businesses who are socially or environmentally responsible. Contact us to bring Threebles to your community.
The idea is that the three ratings correspond to your credit limit, your demurrage rate, and your membership fees...

I have been pointed at Duniter - a blockchain with some interesting characteristics. Perhaps most interestingly for us, it refers to https://en.wikipedia.org/wiki/Social_credit, which was highly influential in the 1930s, but seems largely forgotten.
This proposes a UBI like mechanism, justified on the basis that although value is created on the basis of labour, the productivity of this labour is amplified by the cumulative wisdom creation of all previous humans - and that the dividend on this work accrues naturally equally to all living humans.
I am very interested in any comments on this!